Archive for April, 2016

(the second edition of The Pipeline: A Picture of Homebuilding Production© was published in January 2016)

The Pipeline 2nd Edition Book Cover (VBW)

The Pipeline: A Picture of Homebuilding Production© tells the story of how RB Builders learned the principles of homebuilding production in the turbulent years following the end of the period known as the “Age of Homebuilder Entitlement”.  It is a story told in the exchanges of dialog between team members, senior management, and RB Builders’ trusted, results-based advisor/partner.

The result is a deep understanding of a production system with an enduring visual image, the elements of which are crafted to the specific conditions, requirements, and parameters of the homebuilding industry, and a realization that improving performance on the velocity side of the ROA equation is the best path a homebuilder has to achieving sustainable competitive separation.

The book is about the specific application of underlying principles and disciplines of production that are universal – physics rooted in the laws that govern all production systems.  It is about using the tools that work for homebuilding production, without regard to the consulting religion from which they come.  It makes the connection between operating performance and business outcomes.

In keeping with the first edition, The Pipeline: A Picture of Homebuilding Production©, Second Edition uses the Pipeline game™ to demonstrate – to let builders experience – the principles and disciplines of homebuilding production, in what is at once a production simulation and business game;  however, the Pipeline game™ introduced in the second edition of the book uses resources and an operating statement aligned much more with a homebuilding enterprise.

In addition to the new version of the game, the second edition gives an in-depth examination of both the advantages and challenges of vertical integration in the homebuilding supply chain, in terms of both operations and business outcomes.

Next:  The Pipeline, 2nd Edition:  What Others Are Saying

 

The Pipeline: A Picture of Homebuilding Production©, Second Edition is available through the publisher’s bookstore, and from any of the main booksellers (amazon.com, barnesandnoble.com, or booksamillion.com).

https://www.virtualbookworm.com/collections/business/products/the-pipeline-a-picture-of-homebuilding-production

It is always carried in-stock on amazon.com:  http://amzn.com/1621378047

 

Pipeline Seminar™ at the Builder Technology Summit

Posted April 23, 2016 By Fletcher Groves

The most intense, demanding, interactive, challenging homebuilding production management learning experience on the planet is coming to the 2016 Builder Technology Summit, October 3-6, 2016, at the Talking Stick Resort, in Scottsdale, Arizona.

2016 Builder Technology Summit E-Header

BuilderMT has sponsored a number of the public, open-enrollment channel of Pipeline workshops™;  in turn, SAI Consulting has presented Pipeline Principles and Disciplines™ and Pipeline game™ overviews at BuilderMT’s user conference.

The collaboration between BuilderMT and SAI continues with a one-day Pipeline seminar™ at the Builder Technology Summit.  If you have been wanting a taste of the Pipeline experience, this is a good opportunity.  You can attend this Pipeline seminar™ regardless of whether you are a BuilderMT licensee/user.

Pipeline seminars™ (and the longer Pipeline workshops™) transfer in-depth knowledge – they create an intuitive, instinctive understanding – of production principles and disciplines specifically related to homebuilding production management.  They don’t just inform builders’ thinking, they reform it;  they challenge and change the way builders think about production, test their understanding of how production systems work, reinforce how their daily operating decisions drive business outcomes.

Using exercises from the RB Builders: Lessons from the Pipeline© business case study, as well as the progressive series of production/business scenarios known as the Pipeline game™ and the deep-dive discussion groups known as Velocity Accelerators, Pipeline workshops™ and seminars™ simulate homebuilding production in the real business world, in an environment of variation and uncertainty, where operating decisions produce economic results.

Clark Ellis of Continuum Advisory Group will be joining me in the trenches (SAI and Continuum Advisory Group have a strategic alliance, and Continuum co-facilitates Pipeline workshops™).  You can register to attend just the Pipeline seminar™ ($495), or register to attend both the Pipeline seminar™ and the Builder Technology Summit (early registration, open through June 30, 2016, is $1,095, regular registration is $1,790).

Come.  Participate.  Learn.

 

More information:  http://buildermt.com/index.php/company/builder-technology-summit/

Register here:  http://buildermt.com/index.php/company/builder-technology-summit/pipeline-seminar-registration/

 

Channels: The Ever-Expanding Presence of Pipeline Workshops™

Posted April 17, 2016 By Fletcher Groves

The principles and disciplines that apply to homebuilding production grew out of decades of work by SAI on behalf of individual homebuilder clients, designing their production and business systems, mapping their business processes, measuring performance, assessing capabilities, implementing team-based performance compensation.

In turn, that client work led to the publication in 2013 of The Pipeline: A Picture of Homebuilding Production©, which integrated all of the “pipeline-thinking”.

Pipeline Game (staged logo 4)

The publication of the first edition of that book led to the ongoing series of open Pipeline workshops™ sponsored by BUILDER (and, variously, by BuilderMT and Continuum Advisory Group) that began in 2014, as well as the in-depth sharing of pipeline-thinking at the 2014 and 2015 Housing Leadership Summits and the 2014 BuilderMT User Conference;  and, the first of the series of Pipeline workshops™ revealed the need for a second, expanded edition of The Pipeline – published in 2016 – to codify the enhancements to the Pipeline game™.

It has now come full circle.

In the skull sessions between Hanley Wood Media (and, sometimes BuilderMT), Continuum Advisory Group (now a Pipeline workshop™ partner), and SAI Consulting, the concept of workshop “channels” emerged – the idea of Pipeline workshops™ developed to meet the specific needs of diverse participants in the value stream.

Initially, we identified five distinct channels:

(1)  the original, open, sponsored Pipeline workshops™;

(2)  Pipeline workshops™ conducted privately for builders of sufficient size;  if necessary, delivered on a division/market basis;

(3)  private Pipeline workshops™ sponsored by manufacturers, distributors, and suppliers for the benefit of their builder customers;

(4)  open, non-sponsored Pipeline workshops™ for the benefit of manufacturers, distributors, and suppliers, to give them insight into the current production operations of their builder customers and the direction of the homebuilding industry towards solutions;  and

(5)  private Pipeline workshops™ sponsored by builders for the benefit of their suppliers and subcontractors.

Over the course of the next several months, we will deliver one or more private Pipeline workshops™ onsite to larger builders;  through Hanley Wood Media, we will deliver a shorter Pipeline seminar™ to a select group of CertainTeed’s builder customers as a pilot that will lead to more events in that channel;  we will deliver another Pipeline seminar™ at the front-end of the 2016 Builder Technology Summit (formerly known as the BuilderMT/Sales Simplicity User Conference).

And, of course, in mid-October, we will do our sixth open, public, sponsored Pipeline workshop™.

 

Welcome to the most intense, demanding, interactive, and challenging homebuilding production management learning experience on the planet.

Pipeline workshops™ and Pipeline seminars™ are designed to transfer in-depth knowledge and create an intuitive, instinctive understanding of production principles and disciplines specifically related to homebuilding production management;  they are intended to not just inform builders’ thinking, but to reform it – they challenge and test their understanding of how production systems work, and how daily operating decisions drive business outcomes.

Using exercises from the RB Builders: Lessons from the Pipeline© business case study, the progressive series of production scenarios and business games known as the Pipeline game™, and the deep-dive discussion groups known as Velocity Accelerators, Pipeline workshops™ and Pipeline seminars™ simulate homebuilding production in the real business world, in an environment of variation and uncertainty, where operating decisions produce economic results.

The imperative behind Pipeline workshops™ and Pipeline seminars™ is simple:  a builder that generates a Gross Margin of 24% and turns its inventory twice a year will be outperformed – by better than a two-to-one margin – by a builder that generates a Gross Margin of 18%, but turns its inventory four times a year.  It will be outperformed in terms of Net Income;  outperformed in terms of Net Income Margin;  outperformed in terms of Return on Invested Assets.

That is the comparative performance picture of two builders – one with cycle time of 180 days, one with cycle time of 90 days – that are exactly the same size, when the real measure of size is the amount of work-in-process each has to carry.

These two builders have exactly the same resource overhead, exactly the same working capital requirements, and exactly the same risk profile.

Come.  Participate.  Learn.

More:  www.buildervelocity.com

Part V: Groves and Shinn: The Debate Over Costing

Posted April 9, 2016 By Fletcher Groves

(published on EFA® every year since 2012, previously titled “The Debate Over Costing”;  incorporated and republished every year, here as the last in a five-part series) 

NAHB COA (capture)

On the BUILDER discussion group on LinkedIn, I had this exchange with Shinn Consulting’s Emma Shinn, on whether costs on the NAHB Chart of Accounts Income Statement should be allocated according to the rules of absorption costing or the rules of variable costing.  The matter of how the NAHB Income Statement Income Statement allocates costs was the subject of an April 2009 post on Escape from Averageness®.  It was also the subject of a series of posts in January 2012, summarizing the results of a CFO survey we conducted on the NAHB Income Statement preceding the 2012 International Builders Show (IBS).

Here is the exchange, in its entirety:

Emma:  “I do respectfully disagree with your assessment of the NAHB Chart of Accounts – the purpose of the Chart is to provide a structure for collecting financial information in an organized and meaningful way.  It provides builders the capabilities to produce reports that are meaningful and that will guide them in their decision-making process.  In no way does it deter or hinder the contribution margin analysis you talk about.  In fact, it facilitates such analysis as it provides the classification of cost and expenses in a way that facilitates the identification of the variable and fixed components.  The contribution margin analysis does not deter from the analysis of the traditional income statement and the valuable information it provides to the builders.  The contribution margin analysis does provide an expanded view and I agree with you in that builders can benefit from also looking at the income statement from this point of view as it refines further the behavior of fixed vs. variable cost and expenses.  However, your assessment of the NAHB Chart of Account is unfounded and could not be farther away from the reality of what the purpose of the Chart is set up to be.”

Fletcher:  “Emma, you don’t have to take my word for it. As part of the survey, we asked CFOs for insight related to the structure of the NAHB Income Statement (i.e., line item accounts in series 300-900), as it relates to cost allocation (variable v. absorption) and management tools (breakeven, CVP, etc.).

“This an excerpt from one CFO:

“’I am intimately familiar with both the strengths and weaknesses of the NAHB Chart of Accounts.  It was a great tool for benchmarking our performance with other builders and to industry standards.  It was interesting to benchmark our company, but the statements produced utilizing the NAHB Chart of Accounts were of no use when it came to making pricing decisions.’

“The thoughtful examination of any managerial accounting or cost accounting textbook validates this CFO’s statements.”

Emma:  “Once again, I respectfully disagree with that assessment.  There is nothing in the chart of accounts that prevents a company from preparing a statement utilizing other analytical tools.  The income statement you call the ‘NAHB Income Statement’ is the standard income statement presented in any accounting principles class.  If you want to do further analysis for specific managerial considerations, that is always highly encouraged.  However, I again say the NAHB Chart of Accounts vs. the charts of accounts I normally encounter in my reviews of builders’ operations facilitates further analysis;  it does not preclude the analysis.

“Accounting, in my view, is primarily a management tool and we continue to encourage builders to view it as a very powerful means to help direct their management decisions.  That is not to take away the role accounting also plays in reporting results to third parties, such as lenders and investors.”

Fletcher:  “Emma, the NAHB COA Income Statement has a lot of attributes.  However, there is a difference between what something ‘does not deter or hinder’ or ‘does not preclude’, on the one hand, and what it positively, proactively enables, on the other.

“That may be all our differing views are about.  However, here are two of the specific points made on the matter, posted on SAI’s Escape from Averageness® weblog in April 2009:

“’The NAHB COA Income Statement treats Indirect Construction Cost as one of the costs that is deducted from Revenue to determine Gross Profit (the only difference between Gross Margin and Gross Profit is the inclusion of Indirect Construction Cost).  But – do Indirect Construction Costs vary according to Revenue?  Probably not.  For the most part, they are non-variable costs that will most likely be incurred regardless of the Revenue produced.

‘The NAHB COA Income Statement treats Selling Expenses (including Real Estate Commissions) as an Operating Expense, as a part of overhead.  Anything allocated to Selling Expense, therefore, should be a non-variable cost.  Is that the case?  No.  The bulk of Selling Expense is a variable cost.’

“Emma – some of the CFOs in the survey were very out-spoken on this issue, and the shortcomings of absorption costing are well-documented.”

 

(this issue is addressed in every Pipeline workshop™;  after all, builders are in business to make money.  Learn more here:  http://buildervelocity.com or http://saiconsulting.com/buildervelocity-pipeline-workshops/)

 

(published every year on EFA® since 2012;  updated, incorporated, and republished, here as the fourth in a five-part series)

NAHB COA (capture)

“The NAHB Chart of Accounts is designed for historical financial reporting.  It is not a managerial accounting tool.  NAHB would do its members a great service by developing guidance on cost and managerial accounting.

“In my roles as both a CFO and a President of a homebuilding company, I am intimately familiar with both the strengths and weaknesses of the NAHB Chart of Accounts.  It was a great tool for benchmarking our performance with other builders and to industry standards.  It was interesting to benchmark our company, but the statements produced utilizing the NAHB Chart of Accounts were of no use when it came to making pricing decisions.”

So said, in part, one of the CFOs participating in SAI’s survey regarding the format and the utilization of their company’s particular Income Statement in relation to the NAHB Chart of Accounts Income Statement.

The thoughtful examination of any managerial accounting or cost accounting textbook validates this CFO’s statements.

To cite one:

“Financial accounting is mainly concerned with the historical aspects of external reporting . . . governed by generally-accepted accounting principles (GAAP).  Management accounting, on the other hand, is concerned primarily with providing information to internal managers . . . charged with planning and controlling the operations of the firm . . . not subject to GAAP . . . one thing is clear from the NAA definition of management accounting:  The major function of cost accounting is cost accumulation for inventory valuation and income determination.  Management accounting, however, emphasizes the use of the cost data for planning, control, and decision-making purposes.”

Accounting Handbook, Barron’s, J. Siegel and J. Shim, 1990.

To cite another:

“Although an Income Statement prepared in the functional format may be useful for external reporting purposes, it has serious limitations when used for internal purposes . . . the Contribution Income Statement emphasizes the behavior of costs, and therefore, is extremely helpful to a manager in judging the impact on profits, of changes in price, cost, or volume.”

Managerial Accounting, 10th Ed., McGraw-Hill Irwin, R. Garrison and E. Noreen, 2003.

To cite yet another, directed towards resolving the need for a company to prepare multiple sets of financial information:

“For companies committed to maintaining variable contribution information, there are two choices available . . . 1. maintain their accounting system on a full-absorption GAAP basis, with separate calculations and analysis of variable contribution information [or] 2. maintain their accounting systems on a variable contribution basis with a monthly reconciliation to GAAP . . . if the only real reason for maintaining full-absorption accounting is to satisfy external requirements, doesn’t it make more sense to use option 2 and perform simple month-end reconciliation to GAAP?”

The Measurement Nightmare: How the Theory of Constraints Can Resolve Conflicting Strategies, Policies, and Measures, APICS series, The St. Lucie Press, D. Smith, 2000.

The last of the preceding excerpts is consistent with the others;  in fairness, it comes from Throughput Accounting (the emergent cost accounting methodology supporting Theory of Constraints), which places it outside the mainstream.  Throughput Accounting uses a profit and loss statement that is an outlier to even a Contribution Margin P&L, by refusing to assign costs to inventory, and expensing product costs immediately;  literally, it has no internal use for GAAP compliance.

In the similarly nascent and outlying world of cost accounting methods that aim to support Lean Production, in its broadest sense, as a management system – as a business strategy, as an operating philosophy – the advice is more obtuse;  Lean Accounting sees no conflict with GAAP, uses an operating statement that clearly mixes variable and non-variable costs, but nevertheless states these among its Lean Accounting Concepts and Principles:  “2. Do not confuse a fixed cost for a variable cost” and “3. Eliminate absorption accounting for manufacturing transactions.”

The Real Numbers: Management Accounting in a Lean Organization, Managing Times Press, J. E. Cunningham, O. J. Fiume, E. Adams, 2003.

At best, comparison with “industry best practices” promotes a satisfaction with some sort of competitive equality, a settling for the expediency of the ideas of someone else.  The real problem with best practices is that it stifles creativity and innovation, works against creating competitive advantage, and creates the illusion of continuous improvement.

GAAP-for-the-sake-of-GAAP?  Compliance-for-the-sake-of-compliance?  You manage every day;  you only report periodically.  You are not in the business of complying with generally-accepted accounting principles;  you are in the business of making money.  Emphasizing compliance is a case of the tail wagging the dog.

Bottom-line:  the two arguable attributes of the NAHB Chart of Accounts Income Statement – comparativeness-driven conformity and reporting-driven compliance – might be desirable, and to a degree necessary, but they are not a justification to sacrifice sound managerial accounting.  You cannot properly and effectively manage a homebuilding operation using the cost allocations recommended in the NAHB Chart of Accounts Income Statement.

Next:  Part V:  Groves and Shinn:  The Debate Over Costing

 

(this issue is addressed in every Pipeline workshop™;  after all, builders are in business to make money.  Learn more here:  http://buildervelocity.com or http://saiconsulting.com/buildervelocity-pipeline-workshops/)