Archive for November, 2016

Apocalypse Now: Is a Shattered Industry What It Takes?

Posted November 29, 2016 By Fletcher Groves

(first published on Escape from Averageness® in June 2009;  re-posted in connection with George Casey’s “Elephant in the Room” article in Big Builder, October 28, 2016)

Everyone likes to talk about the “green shoots” that appear and disappear in the housing market and homebuilding industry, as the hopeful evidence for a return to business-as-usual. I think the worst Residential Fixed Investment disaster in three generations should count for more than a return to business-as-usual.

efa-apocalypse-now

If we are going to pay this steep a price, why not just blow up the dysfunctional business model of production homebuilding?

It is a solution that has undoubtedly crossed the minds of every one of us who understand Lean Production and the Toyota Production System; those of us who understand constraint management and Critical Chain Project Management; those of us who understand Six Sigma and the effect of variation; those of us who understand production physics; those of us who stare across the chasm, and roll our eyes at everything we see.

Custom homebuilding is excluded. The building of one-off or highly-individualized homes could benefit from the selective use of the tools in the toolbox, but custom homebuilding is a separate, specialized value stream. It is a separate culture.

So, what is the vision of a post-apocalyptic home building industry?

To cite a few, one in which:

  • the deal-driven mentality that pervades the industry is at least relegated to the land side of the business, and is replaced with a much more disciplined, process-centric approach to production home building.
  • the constant question is: “Does this create value?” And, the decisions are based on the outcome.
  • builders achieve 6:1 Inventory Turns, and the debate about build-to-order (presale) versus build-to-forecast (inventory or spec) becomes a moot point (Note: Toyota has not solved this one, either; they still build-to-forecast and swamp dealer lots with inventory).
  • building companies need negligible working capital for production operations, and one in which cash on the Balance Sheet is not the defining competitive advantage of large, public homebuilding companies.
  • homebuilding companies do not strip-mine the value stream by outsourcing 90% of the work, with all of the attendant duplication in overhead and difficulty in coordinating schedules and resources, and, instead, actually build the houses.
  • a homebuilding company understands that it is first and foremost a project portfolio organization.
  • geographic expansion and increased market share are not the only models for growth.
  • the absurd cost approach used in the NAHB Chart of Accounts Income Statement is changed, so that builders can actually use the information that it provides to make decisions. You know, small decisions, like determining breakeven and the cost of production capacity.
  • a preoccupation with “Industry Best Practices” is recognized as the self-limitation that it is.
  • agility and speed counts for more than size. One in which a savvy, accountable, and motivated homebuilding team trumps an executive committee.
  • the mental model is “More-for-Less”, not “More-for-More” or “Less-for-Less”.

The season is upon us.  Looking for a gift guaranteed to consume every waking moment of anyone charged with the responsibility and opportunity of managing homebuilding production?  Would you actually enjoy your own life more if they were so consumed (and therefore, out of yours)?

Look no further.  The Pipeline: A Picture of Homebuilding Production, Second Edition© makes the perfect gift for Christmas.

The Pipeline 2nd Edition Book Cover (VBW)

Highly-regarded, strongly reviewed, handsome, hard-covered, an essential working textbook that can double as the perfect addition to your office lobby or business library, The Pipeline: A Picture of Homebuilding Production, Second Edition© has been known to cause grown men and women to seclude and immerse themselves in the production principles and disciplines that govern homebuilding production, playing multiple iterations of the renowned production and business simulation known in the book as the Pipeline game™ until the break of dawn.

Your colleagues and loved ones will emerge as genuine experts in the production physics that shape homebuilding production.  They will long to meet the hero of this pulsating story:  the intrepid, results-based consultant who enabled her client, RB Builders, to achieve legendary status by thriving on both the margin and velocity sides of Return on Assets, by thriving on both the margin and velocity sides of economic return.

And – they will personally identify with the characters of RB Builders teammates.

As a result of reading this book, they would want to connect with the intrepid, results-based consultant and follow her on LinkedIn;  they would want to attend a Housing Leadership Summit in the hope of meeting her.

They would attend a Pipeline workshop™, wanting to better understand the visual image of homebuilding production, the connection between operating drivers and business outcomes, the paradigm shifts reflected in the mental models;  they would hope to discuss the velocity accelerators and the rigorous exercises in the RB Builders: Lessons from the Pipeline© business case, possibly in the relaxed environment of the after-hours reception on the putting green of the historic inn and conference center at the famous Ocean Course at the Ponte Vedra Inn and Club.

The recipient of the gift of this book will be eternally grateful for your influence – your investment – in their professional lives, with benefits that inure directly to you.

 

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 in-stock on amazon.com:  http://amzn.com/1621378047

 

Part III: “Get Busy Living Or Get Busy Dying.”

Posted November 13, 2016 By Fletcher Groves

(this post appeared on EFA® in April 2010;  reposted here, with the same title, as the third of a three-part series.  It is about creating competitive separation;  written well-before the book was published or the workshop was created, this is what The Pipeline: A Picture of Homebuilding Production© Second Edition is all about, what Pipeline workshops™ are all about)

“I guess it comes down to a simple choice.  Get busy living.  Or, get busy dying.”  (The Shawshank Redemption, Castle Rock Entertainment, 1994)

efa-shawshank-8

If his only object was to exist or survive, I suppose that Andy Dufresne would have become like everyone else in Shawshank, and settled for whatever business-as-usual constitutes in that setting.  It took him twenty years to dig out of prison for a crime he did not commit, but Andy Dufresne did not choose to merely exist.

Get busy living, or get busy dying.

If a homebuilding enterprise will not go after higher productivity – if it will not tackle the velocity side of Return on Assets – it is left with only the margin side of ROA, left only with higher margins as a way to carve out sustainable competitive advantage.  Left with the same approach as virtually every other homebuilder.

Yes.  Margins are important.  Yes, value needs to be extracted from direct, variable costs wherever possible, with better houses (better designs, better quality, lower costs, fewer defects), more desirable and affordable communities, and – somewhere along the way – a better homebuyer experience.

But, margin is table stakes.  It is the easiest of the conditions that are necessary to generate the type of economic return that creates sustainable competitive separation.

Margins are necessary, but they are not sufficient. There is more to the equation for measuring economic return than simply maximizing how much money a building company can make on each house it builds;  Return on Assets is also a function of how many homes can be built for the investment a builder makes in its production capacity, every operating period, in order to build homes.

Return on Sales x Asset Turn.

Margin x Velocity.

Call it what you want, but the cost of production capacity is all the money a builder spends each and every year in indirect, non-variable cost.  Money that will be spent, regardless of the throughput that it generates.

Much of which will be wasted.

Wasted as a result of unstable schedules with hidden safety in every task, wasted as a result of too much inventory, wasted as a result of uneven sales, starts, and closings, and wasted as a result of the failure to manage a homebuilding company for what it truly is – the management of a portfolio of projects with dependent and shared, limited outside resources.

Not convinced?  Try to calculate a breakeven point from margin alone.

The mandate is higher productivity.

The mandate is to find ways to do more for less, and with less.  The mandate is to exploit the velocity side of ROA.  The mandate is to eliminate the need for working capital to support building operations.

Particularly true if you are not a big public builder, for whom better access to cash and financing is supposedly such an overwhelming competitive advantage.  Like any homebuilder, the publics will readily go after the margin side of ROA.

However, with margin as table stakes, velocity becomes the antidote, what you do if you are a privately-held builder, what you do if you are not positioned for cash and financing like a publicly-held builder.

As I have said on earlier occasions, elsewhere in this column, access to cash and financing only creates financial capacity, it does not create production capacity that gets utilized or make the publicly-capitalized builders that have better access to it more productive.  Unable, or unwilling, to compete on the velocity side of ROA, creating competitive separation for a public builder is reduced to geographic expansion, a quest for market share, and competing on margin.

Because that is all they have.

And, unfortunately, that will be enough, if smaller, privately-held builders choose to compete head-to-head with larger, publicly-held builders on those terms.

“I guess it comes down to a simple choice.  Get busy living, or get busy dying.”

Part II: “Get Busy Living Or Get Busy Dying.”

Posted November 6, 2016 By Fletcher Groves

(this post appeared on EFA® in April 2010;  reposted here, with the same title, as the second of a three-part series.  It is about creating competitive separation;  written well-before the book was published or the workshop was created, this is what The Pipeline: A Picture of Homebuilding Production© Second Edition is all about, what Pipeline workshops™ are all about)

“I guess it comes down to a simple choice.  Get busy living.  Or, get busy dying.”  (The Shawshank Redemption, Castle Rock Entertainment, 1994)

efa-shawshank-8

If his only object was to exist or survive, I imagine that Andy Dufresne would have become like everyone else in Shawshank, and settled for whatever business-as-usual constitutes in that setting.  It took him twenty years to dig out of prison for a crime he did not commit, but Andy Dufresne did not choose to merely exist.

Get busy living, or get busy dying.

 

Fast-forward, from 2000 to 2010.  How will you choose to make your world?  How will you create a sustainable way forward in this industry?

Builders have choices about how they move forward from this debacle, but not all of the choices available to them meet the criteria of being sustainable.  From the standpoint of what constitutes sustainable competitiveness, I do not think business-as-usual is going to cut it any longer.  I do not think settling for being different-but-no-better-no-better-but-no-worse than the competition is going to cut it any longer.  I do not think that attempting to insulate yourself and achieve a competitive advantage within a secondary market, by settling for the adoption of “industry best practices”, is going to cut it any longer, either.

I do not think there is much comfort in not being among the slowest zebras on the Serengeti.

There is such a thing as the tyranny of averageness.  At the end of the day, average is still just that.  Average.  No matter how you cut it, even if it is occurring on a higher plain.  The question is this:  Does the world really need any more average homebuilding companies?

Get busy living, or get busy dying.

In good times, the mental model that has sustained the homebuilding industry has been what you would call “More-for-More”:  More revenue, more income, along with more of everything else – more capacity, more investment (land, models, work-in-process), more cash.

In challenging times, the mental model defaults to “Less-for-Less”:  Less revenue, less income, as a result of less overhead, less capacity, a slower burn rate, and (maybe) less investment.

A more-for-more proposition is always about size and growth;  a less-for-less proposition is always about cutting costs.

Those are the mental models of business-as-usual.

Neither of these approaches are sufficient to create the type of sustainable competitive separation that will be required going forward.  That is because, neither of these approaches has anything to do with the velocity side of economic return, or has anything to do with higher productivity.

The mental models of business-as-usual have everything to do with size, cost-cutting, and competing on the margin side of economic return.

The way to create true, sustainable competitive separation is by doing the difficult work on the velocity side of ROA.  This is a different mental model.  Call it “More-for-Less”, or “More-with-Less”:  More revenue, more income, more throughput, with less inventory, less overhead, a reduced level of working capital requirement.

“More-for-Less”.  The vast majority of homebuilding enterprises will not let their shadows darken that doorway.  It is too hard, it requires too much discipline.  Most builders would prefer to compete on the margin side of ROA, partly because it is easier, and partly because it just fits the deal-driven, product-at-the-cost-of-process mentality of the industry.

Some builders are better at the margin game than others, but almost any builder finds that it is easier to compete on the margin side of ROA.

Case in point.  Lean Homebuilding.  Scattered, visionary homebuilding companies, in search of the right improvement religion, attempt to adapt the principles of TPS and Lean Thinking to the specific requirements faced by the residential construction industry.  Fine, as far as it goes;  it needed to happen.  Unfortunately, they only use Lean to solve quality problems and eliminate the waste caused by defects.  It benefits margin, but it eschews productivity.

If a homebuilding enterprise will not go after higher productivity – if it will not tackle the velocity side of Return on Assets – it is left with only the margin side of ROA, left only with higher margins as a way to carve out sustainable competitive advantage.  Left with the same approach as virtually every other homebuilder.

Yes.  Margins are important.  Yes, value needs to be extracted from direct, variable costs wherever possible, with better houses (better designs, better quality, lower costs, fewer defects), more desirable and affordable communities, and – somewhere along the way – a better homebuyer experience.

But, margin is table stakes.  It is the easiest of the conditions that are necessary to generate the type of economic return that creates sustainable competitive separation.

Margins are necessary, but they are not sufficient.