Archive for September, 2016

Pipeline Workshops™: RB Builders: Lessons from the Pipeline©

Posted September 25, 2016 By Fletcher Groves

(excerpted and adapted from RB Builders: Lessons from the Pipeline©, the business case study used at Pipeline workshops™)

Three Pipelines to the Horizon

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.

Details:  www.buildervelocity.com

 

Pipeline Workshops™: What’s your Production IQ®?

Posted September 18, 2016 By Fletcher Groves

EFA - Production IQ

The fundamental understanding that emerges from the DuPont identity for Return on Assets:  remove the financial leverage (equity multiplier) from the formula, and economic return becomes a function of profitability (Return on Sales) and operating efficiency (Asset Turnover).

Economic return is margin x velocity;  it is a co-equal dependency.

Is margin proficiency necessary?  Yes.  Is it sufficient?  No.  To a homebuilding company, does superior margin hold-forth the possibility of achieving sustainable competitive separation?  Never.

We’re not alone in this assessment:

“ . . . [asset] turnover is just as important as profit margin.”  Barron’s Accounting Handbook (Siegel, Shim), 1990, 1997, p. 150.

“ . . . [improving] inventory turnover . . . increases asset velocity, one of the most under-appreciated components of making money . . . higher velocity improves productivity and reduces working capital.  It also improves cash flow, the life-blood of any business.”  Execution: The Discipline of Getting Things Done (Bossidy, Charan, 2002, p. 17)

Nevertheless, in the homebuilding industry, action on the velocity side of Return on Assets inexplicably takes a backseat to action on the margin side.  Pipeline workshops™ are aimed at changing that paradigm, but the motivation to attend a workshop starts with a willingness to acknowledge and remedy what is a profound lack of knowledge regarding production principles and disciplines.

Think you already know this stuff?  There’s one way to find out.  Take the test.

  1. If a homebuilding production system is a pipeline, what determines the size, capacity, length, and cost of the pipe?
  2. True or False: Even-flow production is an outcome, not a mechanism.
  3. What is the proper determination of size for a homebuilding company? revenue   b. number of full-time employees  c. houses under construction  d. annual closings
  4. From an operational perspective, there are three activities that describe “what happens to money?” The terms for those activities can be used to express – and, therefore, link – the formulas for productivity, cycle time, and inventory turn, to the equations for Net Income, and Return on Assets.  What are the terms?  What do they mean?
  5. True or False: A production system with balanced capacity across all resources will not do as good a job of optimizing the utilization of capacity as a production system where capacity is not balanced across all resources.
  6. In what three ways will a production system protect itself from variation?
  7. Which method of scheduling jobs considers both task dependency and resource contention, Critical Path or Critical Chain?
  8. Calculating the cycle time of a production process requires the knowledge of two operational measures. What are they?
  9. True or False: The phases in a job schedule should not have safety built into their durations to insure a “high certainty” of on-time completion.
  10. Which measure of operating performance is the reciprocal of inventory turn?
  11. Lean Production views homebuilding as a build-to-order process. Which resource does Lean recommend using to set the pace of production?
  12. True or False: CCPM (Critical Chain Project Management) adjusts the job schedule according to when phases finish, whether early, on-time, or late.
  13. What three human behavioral tendencies consume the time safety built into a schedule?
  14. As a matter of standard deviation, increasing the probability that a task will finish on-time, from 50% to 95% will cause the anticipated duration of the task to increase by a factor of how much? How many standard deviations does this represent?
  15. What is the difference between speed and velocity?

(the answers are at the bottom of the post)

It’s just a quiz.  Like any quiz, the questions represent a very small portion of the production and business knowledge required to effectively manage homebuilding production, increase operating performance, generate higher Net Income, and improve Return on Assets.

Every homebuilding company has to determine how it will manage production within a specific context, within the parameters that comprise its market, its product mix, its choice of an information/management technology system, its financial situation.

But, the ability to manage production starts with an understanding of the underlying principles and disciplines.

It starts with what you learn in a Pipeline workshop™.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on October 26-27, 2016.  Cost is $850.00.

Sponsored by BUILDER and Constellation HomeBuilder Systems.

Details:  www.buildervelocity.com

 

Answers:  (1) size is the amount of work-in-process, capacity is the rate of output produced with a planned, finite, and controlled amount of work-in-process, length is cycle time, cost is all of the indirect, non-variable expenses associated with overhead;  (2) True;  (3) c: houses under construction;  (4) money generated through sales is called Throughput, money invested in whatever will be turned into Throughput is known as Inventory or Investment, and money spent turning Inventory into Throughput is called Operating Expense;  (5) True;  (6) higher work-in-process, longer duration, or more capacity;  (7) Critical Chain;  (8) work-in-process and throughput, expressed in units;  (9) True;  (10) cycle time;  (11) the most capacity-constrained resource;  (12) False;  (13) Student Syndrome (wait until it is too late), Parkinson Law (expand to the time allowed), and multi-tasking (divide work between multiple jobs);  (14) factor of 1.64, reciprocal of .61; four out of every 10 days in the schedule are safety to assure on-time completion;  two standard deviations  (15) velocity is a vector measure, velocity is speed in a specific direction, speed with purpose.

 

Pipeline Workshops™: Finding TrueNorth

Posted September 12, 2016 By Fletcher Groves

As almost everyone in this industry knows, Scott Sedam is the President of TrueNorth Development, Inc., and is the foremost Lean Production practitioner in the homebuilding industry.  He is a Lean Building purist, with roots that go back to Total Quality Management.  He is a friend, and longtime fellow consultant.

EFA - TrueNorth logo (capture)

In 2013, after The Pipeline: A Picture of Homebuilding Production© was published, and as I was planning the first Pipeline workshop™, I suggested to Scott that he attend as SAI’s guest.  I wanted him to see the workshop for himself;  I wanted his opinion, but I also wanted him to share his own beliefs with those first-time attendees on applying Lean principles beyond the margin side of economic return, towards what we were now terming the velocity side of Return on Assets.

Scott came to the first workshop in March 2014, functioned like any attending builder in the discussions and in the Pipeline games™, and was a panelist (with me) on blending improvement methodologies towards a homebuilding solution.

Afterwards, in September 2014, this is what Scott wrote in a discussion on the Builder group on LinkedIn:

“If you are ready to challenge your brain, get out of your well-sealed ‘Builder Box’ and make a huge leap forward in understanding schedule and its impact, come to [a Pipeline workshop] and bring a few of your better thinkers.

“The roots of [this] workshop are in Goldratt’s Theory of Constraints, which is at first-blush exceedingly simple, but you can spend years studying the intricacies.  Fletcher puts it all in builder language and forces you to go deep into the impact of our most common builder practices.

“If all builders learned and followed the principles in [a Pipeline workshop™], our industry would take a huge leap forward.  The winners would not be the builders alone, but also homeowners and especially our suppliers and trade contractors.  Fletcher does not know I am writing this, but I strongly recommend his Pipeline Workshop™ to everyone who has the will to change for the better.”

Come. Participate.  Learn.

 

Join us – Brandon Hart, Clark Ellis, and Fletcher Groves III – at the next Pipeline workshop™, October 26-27, 2016, at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida.

Cost is $850.00.

Sponsored by BUILDER and Constellation HomeBuilder Systems.

For more details:  www.buildervelocity.com

 

The Pipeline: A Picture of Homebuilding Production, Second Edition© is available on the publisher website (virtualbookworm.com), as well as through the major book sellers (amazon.com, barnesandnoble.com, and booksamillion.com).

 

I remember where I was . . . I remember who I was with . . .

Posted September 11, 2016 By Fletcher Groves

(this entry has been shared, or posted on Escape from Averageness®, every year on the anniversary of the 9/11 attacks)

EFA - 9-11

On Tuesday morning, September 11, 2001, fifteen years ago to the minute, I was in the offices of Fidelity Homes, in Venice, Florida, commencing a process mapping engagement to give this start-up homebuilding company a state-of-the-art set of business processes.  SAI Consulting’s involvement was part of a large pro bono effort, sponsored by Professional Builder, that included a number of top consultants then serving the homebuilding industry.

I was the Process Architect for Fidelity Homes.

Sitting across the table were David Hunihan and Todd Menke, two young builders, eager to take their experience in homebuilding and pursue a National Housing Quality award.  We had barely started, when David was pulled away by a telephone call.  It was his wife, Lauren, asking if he was aware of what was going on in New York City.

As the events continued to unfold, in New York City, in Washington DC, in western Pennsylvania, we finally decided that it was impossible to focus on mapping workflow, and whatever we were doing did not seem all that important, anyway.  We cancelled everything for the rest of the day, and, in our own ways, watched and tried to process what was happening.

Bill Lurz, then a senior editor at Professional Builder, joined us the following day.  We finished the project two days later, and I drove back to my family in Ponte Vedra Beach through a tropical storm.  On that day, the embraces had particular conviction.

The article was written and published in Professional Builder.  The full story of Fidelity Homes was told in a six-part series on Escape from Averageness® in 2011, coinciding with the tenth anniversary of the 9/11 attack.

I still consider the events of 9/11 to be a matter of unfinished business for this country.  Time has only increased my feelings about it.  We were attacked, fifteen years ago, because of who we were, because of who we unapologetically remain.  Our enemy sees it as unfinished business, as well.

Evil remains the enemy of good, and that evil has an ever-more-radical face.  In the presence of that evil, we have failed to clearly state what war is;  we have dismissed the understanding of war as the utter and complete destruction of an enemy.

It doesn’t matter what we think of issues like American Exceptionalism, our place in the world, the tradeoff between national security and the constitutional rights to privacy of US citizens, the threat of terrorist attacks on our own soil, the still-unaddressed murder of US diplomats and security personnel in Benghazi, the ramifications of decisions not to intervene in Iran and Syria, the emergence of ISIS, or the question of what happens when Iran becomes a terrorist regime with nuclear weapons.

The discussions on all of those matters miss the point.

The discussions miss the point, because they don’t address the root cause of the problem.  The core problem is not the threat of future terrorist attacks.

The problem is the terrorists, and their sponsors.

And, the solution is not attrition, or containment, or control, or minimization, or dismantlement of the threat, or mounting an international coalition against terror, or imposing sanctions, or providing more humanitarian aid, or granting political asylum, or creating deeper understanding, or negotiating peace, or peace, itself.

Yes – it is true that Christians are told to love their enemies.  It is also true that love and forgiveness do not remove consequences, and that scripture is filled with instances when the children of God were instructed to destroy their enemies.  And – yes – the One, True God, in His righteousness and omnipotence, may decide to impart His own justice to this situation.

However – absent divine intervention – we cannot afford the “problem of conjecture”, as Henry Kissinger described it.  We have now assured ourselves that there will be a war;  if not a nuclear war, then certainly a war over who will have nuclear weapons.  Competitors that already have nuclear weapons no longer fear us;  the ones that will obtain them will not fear us, either.  We are now in a far more dangerous, more deadly situation than we were in the aftermath of 9/11.

“Fleury.  Tell me what you whispered to Janet, in the briefing, to get her to stop crying about Fran, you know, before all this, before we even got airborne.  What’d you say to her?  You remember?”

“I told her we were gonna kill ’em all.”

(The Kingdom, Universal Pictures, 2007)

 

Pipeline Workshops™: Improvements to the Game

Posted September 7, 2016 By Fletcher Groves

“Pipeline games™ were a brilliant way to demonstrate and drive home the significance of cycle time improvements and improving trade partner efficiencies on ROA and Net Income.”  (Keith Porterfield, COO, Goodall Homes, Gallatin, TN)

“Pipeline games™ are a very innovative way to demonstrate the critical nature and relationship between cycle time, inventory turn, margin, and return on assets.”  (Vishaal Gupta, President, Park Square Homes, Orlando, FL)

“The Pipeline Game™ was a great visual tool that emphasized the importance that velocity plays in home building.  It has allowed me to begin thinking creatively about the ways I can improve my department to ultimately improve our companies velocity overall.”  (Alexa Drees, Design Consultant, Drees Homes)

Pipeline Game (staged)

Simulating production principles is a huge part of a Pipeline workshop™.  We hear repeatedly that the opportunity to simulate production in a progressive series of scenarios is what enables builders to “see” production so much more clearly.  Because it is both a production simulator and a business game, the Pipeline game™ is what makes Pipeline workshops™ so intense, so interactive, so competitive, so worthwhile.

The Pipeline game™ has always been a tremendous tool for teaching both production and business principles, but we constantly improve it, introducing changes that make it even better.

For example, some time ago, we shortened the game, so that we could run more production scenarios in the same amount of time.  Shortening the duration of the game made each operating decision more consequential, and also made the results more realistic, more intuitive, easier to comprehend.

We also made the game more realistic, by making it depict the outsourced nature of homebuilding production.  In previous versions of the game, the resources that did the work reflected both capacity and the cost of that capacity.  That is an arrangement that reflects a manufacturing operation or project management organization;  a more realistic depiction of a homebuilding production system is to separate capacity from cost.

And, that’s because, in homebuilding, the external resources that determine production capacity are a part of Cost of Sales (which makes them a direct, variable cost);  Cost of Sales is a measure of product cost, not capacity cost;  Operating Expense – the indirect, non-variable cost of internal resources associated with overhead – is what determines capacity cost.

In the original version of the Pipeline game™, using the resources to reflect capacity and cost required us to essentially disregard Revenue and Cost of Sales, and focus on Throughput, which is more closely related to Gross Margin.

In the improved version of the Pipeline game™, we restore Revenue and Cost of Sales to the picture;  in effect, we now account for the margin side of Return on Assets.  The external resources in a Pipeline game™ now define the production system’s capacity, and the cost of those resources is reflected in Cost of Sales, stipulated as a percentage of Revenue;  they are a direct, variable cost associated with the product.  This represents a significant stride in reconciling Revenue, Cost of Sales, Throughput, and Gross Income, making operating decisions easier to connect to financial outcomes.

Operating Expense is now an imposed value, reflecting the budgeted cost of the internal capacity required to manage work-in-process;  that makes Operating Expense an indirect, non-variable cost, as it relates to Revenue – and the completions and closings that produce it.

The outcome is a production simulator and business game that is vastly more reflective of a homebuilding operation, with lessons that are now much easier for builders to understand.

The improved version of the Pipeline game™ was played at the past three Housing Leadership Summits (2014-16);  it was explained at the 2014 BuilderMT-Sales Simplicity Client Conference;  it has been used in Builder 20 Club meetings;  it has been used at the CertainTeed Gypsum Builder Advisory Council;  it will be played at the 2016 Builder Technology Summit;  and, it has been used at all but the first Pipeline workshop™.

Pipeline Game (staged logo 4)

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on October 26-27, 2016.  Cost is $850.00.

Sponsored by BUILDER and Constellation HomeBuilder Systems.

Details:  www.buildervelocity.com