(excerpted and adapted from RB Builders: Lessons from the Pipeline©, the business case study used at Pipeline workshops™)
It is the first quarter of 2016. RB Builders wants to extend its reputation as a builder thriving on both the margin and velocity sides of Return on Assets, by expanding into another new geographical market, via the late-2015 acquisition of its third pre-existing homebuilding operation.
Like previous years’ acquisitions, the newly-acquired division serves segments of the new home market compatible with RB Builders’. Like its predecessors, the newly-acquired building division generates historical operating results and business outcomes that are unacceptable to RB Builders. Nevertheless, RB Builders is confident it can continue its track record for unifying, developing, and improving the capabilities of existing teams at acquired divisions, to ones reflecting the own savvy, motivated, and mutually-accountable homebuilding team that defines the parent operation.
This road has become a familiar path for RB Builders.
HISTORY OF RB BUILDERS: Eight years earlier, at the beginning of 2008, shortly after the end of the halcyon period known as the Age of Homebuilder Entitlement®, RB Builders had begun its own transformation process, with the objective of extracting itself from what it self-described as “the tar pits of averageness”.
RB Builders benefited from the use of four tools: (1) a unique team-based performance compensation plan; (2) full operational and financial transparency; (3) an accounting system that connected operating performance to business outcomes; and (4) a focused, urgent process of continuous improvement – consecutively-ordered initiatives, short durations, targeted and measurable results.
RB Builders had made massive strides.
During the ensuing five-year period (2008-2012), annual Revenue grew from $50 million to more than $121 million. The number of closings increased from 200 houses per year to 453 houses per year. Despite the margin pressure from higher market share, overall Gross Margin increased from 22% to 24%; Gross Income grew from $11 million to $29.5 million.
During this period, Operating Expense increased from $8.5 million to $11 million, less than the same-period increase in Revenue. As a result, RB Builder’s Net Income rose from $2.5 million to $16.5 million, more than six times what it had been before the company began its transformation; Net Margin almost tripled, from 5% to 14%.
In 2008, RB Builder’s cycle time was 180 days; by the end of 2012, cycle time had been reduced to 65 days. In 2008, the average amount of work-in-process had been 100 houses under construction; by the end of 2012, the company had been able to reduce its average work-in-process to 80 houses under construction. The reductions in cycle time and work-in-process occurred despite more than doubling the annual number of closings.
In 2008, RB Builders had targeted an inventory turn of 2.5x; in 2012, by keeping its work-in-process at 80 houses and closing 453 houses, RB Builders had been able to more than double its physical inventory turn, to 5.7x.
In 2008, RB Builders turned the value of its assets two times; in 2012, it turned the value of its assets almost five times. Because it had been able to maintain margins while significantly improving velocity, RB Builders saw its main barometer of economic return – Return on Invested Assets – increase almost six-fold during the five-year period, from 11% in 2008 to 64% in 2012.
In 2013, RB Builders had moved all of its raw land holdings and developed lot inventory off of its balance sheet, and into subsidiaries, which would have served to further increase Asset Turn – and ROIA – had those measures been restated to reflect the remaining assets.
It had been a remarkable transformation.
NEWLY-ACQUIRED DIVISION: RB Builders acquired its third homebuilding operation near the end of 2015. In its last year of independent operation, it had closed 64 houses, and generated $16 million in Revenue; with $12.16 million in Cost of Sales now reflecting only its direct, variable costs, the operation had generated $3.84 million in Gross Income, producing a 24% Gross Margin.
With its $2.56 million in Operating Expense now reflecting only its indirect, non-variable costs, the newly-acquired operation had produced $1.28 million in Net Income, resulting in an 8% Net Margin.
Because it had average work-in-process of 32 houses under construction during 2015, the division had a calculated cycle time of 180 days (its job schedules were typically 120 days)and a physical inventory turn of 2.0x.
Adopting the policy of RB Builders, and moving all of its raw land holdings and developed lot inventory off its balance sheet and into subsidiaries, the newly-acquired building operation showed a restated average work-in-process of $4.24 million; with Revenue of $16 million, it had an asset turnover ratio of 3.8x.
With a Net Margin of 8% and a restated asset turn of 3.8x, the new operation had an ROIA of 30.4%.
Here is the nature of the exercises attendees will have to consider at the upcoming Pipeline workshop™:
♦ How to address a mandate that the new division double its annual closings over a two-year period, with less work-in-process, a smaller line of credit, and the same amount of overhead.
♦ How to calculate breakeven points and rates, in financial terms and unit (closings) terms.
♦ How to deal with a contention that variation – evidenced by 2015 cycle time, supported by other operating performance measures – is costing the new division between $1.5 and $1.9 million in Net Income every year; the division only had Net Income in 2015 of $1.3 million.
♦ How the new division will adapt Epic Partnering™, RB Builders’ proven program/process for creating cooperative relationships and beneficial arrangements with its suppliers and subcontractors.
♦ How to map workflow as part of an overall Business Process Improvement initiative intended to remove non-value-adding work and make the remaining value-adding work flow faster, more evenly, more smoothly, with fewer mistakes and rework.
♦ How to modify the work breakdown structure of its job schedules to reduce cycle time to 96 days (from 120 days), while assuring reliable job completion dates.
Come. Participate. Learn.
RB Builders: Lessons from the Pipeline© is the underlying business case study used at every Pipeline workshop™. The next workshop is being held October 26-27, 2016, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida. Cost is $850.00.
Sponsored by BUILDER and Constellation HomeBuilder Systems.