Archive for May, 2017

(initially published on EFA® in March 2011, republished in March 2013 as the second of a four-part series in the retrospective Above Average: The Best of Escape from Averageness®, 2009-2012, updated and republished here)

Our proposition regarding processes is very simple:  The goal of an enterprise is to make money;  the way an enterprise makes money is by creating value for its stakeholders, most importantly, its customers;  the way an enterprise creates value is through the work that it does;  that work is performed in some manner of workflow, which involves processes.

For us, understanding workflow is a means to an end.

It is the front-end of a problem-solving methodology, in which we first eliminate the activities, reports, inspections, and other work that is waste (muda), and, therefore, adds no value, and then make the remaining value-adding activities flow more smoothly, more directly.

In our way of explaining production principles, using the analogy of a pipeline, we want a process that is a shorter, straighter pipe.  It is a way of simplifying and streamlining processes, so that our clients can deliver more value from what remains, with the same amount of capacity.

Understanding workflow also tends to clarify the underlying problems and issues, for example, the variation and uncertainty that haunts any production system.  When process workflows are connected to performance measures – to existing performance and targeted performance – clients can start to understand the requirements and necessary conditions that have to exist for the process to be improved.

For the most part, we like to look at the current (AS-IS) state of a process through the lens of cross-functional flowcharting teams, comprised of the people who actually perform the work in the process;  management, we like to remind our clients, at best, only knows how a process is supposed to work.

Before 2000 – before the turn of the century – we would also use cross-functional flowcharting teams to redesign the same process to reflect its desired future (SHOULD-BE) state, because it made comparisons between previous and redesigned states of a process more insightful.

It makes the difference between AS-IS and SHOULD-BE more stark.

We like the starkness.  Now, however, we tend to get to the point more quickly.  We use IDEF0 process modeling in the design/redesign phase, and we document processes in IDEF0 notation.  For continuity, and to take advantage of the insight gained mapping the current state, we use the same cross-functional teams for the SHOULD-BE that we used in the AS-IS;  we just use a different methodology.

The advantage of IDEF0 lies in the ability of its hierarchical structure of graphic diagrams and supporting text diagrams to gradually and infinitely reveal increasing levels of process detail.  Unlike cross-functional flowcharting, SIPOC charts, or value stream mapping, IDEF0 process modeling does not impose a single level of process detail;  the level of detail is whatever is necessary to create the understanding.

As a result, IDEF0 presents a far better learning/training outcome than flowcharting, SIPOC, or value stream mapping.

There are additional advantages to using IDEF0 for designing and documenting the desired future state of a process. Unlike other methods, IDEF0 establishes parameters and outcomes as part of the process design. More importantly from a process design/redesign standpoint, IDEF0 does not carry the legacy – the burden – of the current state, as other methods tend to do.

I would be glad to send, any reader who requests it, the client tutorial we wrote explaining IDEF0 process modeling.

Process design, improvement, and documentation is only half the battle.  There still has to be a way to manage process workflow.  The inability to provide clients with a practical means of automating and managing processes has tended to be a shortcoming of Business Process Improvement (BPI) and Business Process Management (BPM).

There is an emerging standard known as BPMN, (Business Process Modeling and Notation), the promising aspect of which is the ability to automate and manage process steps through execution language.  Some require code to be written, others claim not to require additional code-writing.  The current version (2.0) is more open source and supported by OMG.  The common execution languages that BPMN uses are BPEL, XPDL, and XML.

The significance is that these applications extend process design, improvement, and documentation into process management and automation.  BPMN offers the prospect of process management and automation for the everyday business world.

Like IDEF process notation, BPMN uses a hierarchical, parent-child structure of processes and embedded sub-processes.

Since most of our clients are homebuilding companies, the benefit of automating processes is of less importance than industry verticals that have high-transaction volumes and high-IT components.  For our clients, we would prefer to have whatever automation is needed built into the operating system that supports the process workflow, not the other way around.

Moreover, homebuilding companies, as I said earlier, have to be concerned with project management, not just process management.

 

Next:  Part III:  Recommendations

 

(initially published on EFA® in March 2011, republished in February 2013 as the first of a four-part series in the retrospective Above Average: The Best of Escape from Averageness®, 2009-2012, updated and republished here)

Those of you who know me, know that I do not make a practice of promoting the capability or expertise of SAI Consulting on the pages of this weblog.  However, when it is advice that is being offered, it is different than offering an opinion or viewpoint, and it carries a requirement that whoever is offering the advice actually knows what he is talking about.

In that regard, when it comes to the documentation, analysis, measurement, design and redesign, improvement, and management of operating and business processes, SAI Consulting is the homebuilding industry’s leading expert.  We have done it longer, and we have done more of it, than any other consulting firm.

It is our tour de force.

It is the area for which we are most recognized.  Virtually every consulting engagement we have ever accepted, in-or-out of homebuilding, has dealt – in some way – with how a client should structure itself around its core-critical business processes.  And – we have provided this same insight and advice to others on hundreds of occasions.

There is a reason for the centrality of business processes.  When you talk about an enterprise, whether it is a homebuilding company or a company in some other industry vertical, the most basic proposition of that enterprise – the reason for its existence, the way it makes money – is through the value that it delivers to customers and other stakeholders.  That value is only delivered by the work that the enterprise performs, that work has to be performed in some manner of workflow, and the most common form of that workflow is the work performed in processes.

Processes exist, whether enterprises are intentional about them or not.  Processes are important.  They are critical.

Start with some distinctions and some clarifications.

First, there is the difference between the methods of workflow – there is a difference between process management, project management, and case management.

In addition to their business processes, many business enterprises today involve the scheduling and management of projects, to the point that many companies are now becoming project management organizations (PMOs).  PMO is a term that is particularly relevant in homebuilding, because jobs are essentially projects.  Homebuilding is essentially multi-project management;  it is project portfolio management with embedded, supporting, and surrounding processes.

In companies that have workflow that is less pre-defined (more ad-hoc), case management is becoming an alternative to a pure process approach.  Case management also applies to workflow situations that are more document-intense (as opposed to data-intense), that share documents in the same folder, that require real-time collaboration (as opposed to a more defined sequence), and that involve physically separated, remote, and independent resources.

Second, there is a distinction between procedures, processes, and value streams.

They serve different, but related, purposes, and, although there is an ascending order to the relationship between them, they are not interchangeable expressions of workflow.

Third, there is a distinction between processes and areas/functions/departments.

The functional perspective is vertical, a picture of departmental silos, in which everything about a department is contained in its own defined space.  Processes present a horizontal perspective of work flowing through an enterprise, across areas, departments, and positions.  You do not “map” the accounting function, you “map” the accounting processes.

Finally, processes must fit within a context at the business enterprise level, as part of a business operating model dealing with products, organizational structure, systems, and cultures.  That context must be clear, it must be understood, it must be unified.

With that being said, the term “process mapping” encompasses a lot.  Invariably, process mapping includes the flowcharting of business process workflows, but it typically goes well-beyond process flowcharting.

Business Process Improvement (BPI) projects typically focus on a specific process approach or method for documenting processes that is aligned with a particular improvement methodology.  Six-Sigma prefers to document processes in SIPOC charts;  Lean likes to use value stream maps, etc.;  IT has its own preferences.

Consultants often determine the methodology, and the methodology often determines the definition.

At SAI, when we use the term “process mapping”, it includes more than documenting the current workflow of a process.  Most of the time, it also includes redesigning workflows, which invariably leads to other issues.  Because it is so foundational, it is difficult to get around the need to understand and improve – and change – the way work is performed, before starting down the road on other change or improvement initiatives.

Next:  Part II:  Process States and Methods

 

The global headquarters of SAI Consulting is located in Ponte Vedra Beach, Florida (“work where you live, don’t live where you work”), so the week following TPC week is designated Pipeline Week (at least, unless and until the PGA Tour moves The Players Championship back to March).

 

Now in its second edition, 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.

Like its 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.

 

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

 

Part V: Groves and Shinn: The Debate Over Costing

Posted May 6, 2017 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) 

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 of Accounts] 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 of Accounts] 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 their 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.”

 

(variable costing and the Contribution Income Statement format are addressed at every Pipeline workshop™;  learn more here:  http://buildervelocity.com or http://saiconsulting.com/buildervelocity-pipeline-workshops/)