Archive for July, 2017

Homebuilding is an industry that leverages equity with debt, therefore, some version of Return on Assets is the best measure of a homebuilding enterprise’s economic return.  The most useful version of ROA is the DuPont identity, which expands economic return into two components:

Margin (Return on Sales) and Velocity (Asset Turn).

 

 

From an operational perspective, the vast majority of assets on a builder’s balance sheet ought to be houses in some stage of construction, particularly when raw land and developed lot inventory is held off-balance sheet;  which means, when we calculate Return on Invested  Assets, we can reasonably associate Asset Turnover (financial term) with Inventory Turn (operating term).

The point is to thrive in this business, not just survive in it.  To do that, a builder has to do well on both the margin side and the velocity side of ROA.  That understanding fundamentally proposes two questions:  (1) How much can I make on every house?  (2) How many houses can I build with a planned, finite, and controlled amount of inventory and production capacity?

As a builder, consider this scenario:  You have a competitor that has exactly the same work-in-process, resource overhead, working capital requirements, borrowing capacity, and risk profile.

If you generate a Gross Margin of 24% and turn your inventory twice a year, you will be outperformed by this competitor that generates a Gross Margin of only 18%, but turns its inventory four times a year;  you will be outperformed in terms of Revenue, outperformed in terms of closings;  you will be out-performed – by better than two-to-one – in terms of Net Income and Return on Assets.

You will struggle to compete;  in fact, you will struggle to survive.

It is the picture of a slow, marginally-productive homebuilding company versus a fast, highly-productive homebuilding company;  your competitor generates 85% higher Revenue and 40% more Gross Income than you do, and does it with the same amount of assets.

It is also a picture of the difference between a 180 day cycle time and a 90 day cycle time, and if that contrast is too stark, consider this:  your competitor – the one with the 18% Gross Margin and a 4x turn – produces almost the same ROA as you do with a 24% Gross Margin and a 3x turn;  that’s the picture of your competitor’s 90 day cycle time versus your 120 day cycle time.

In the face of clear differences in economic outcomes, remember this:  in this scenario, your competitor is exactly the same size as you, when the real measure of size is the amount of work-in-process you each have to carry.

What creates competitive separation – the distance between competitive position?  It lies in doing the important-yet-difficult things.  The demands of higher productivity are so tough, require so much rigor, so much discipline, so much resolve, that most builders won’t even go there.

It’s not a choice between higher margin or higher velocity;  it’s the challenge – and the opportunity – of producing higher margin and higher velocity.

Pipeline workshops™ are a two-day immersion into the production physics – into the principles and disciplines – that enable homebuilders to thrive on the velocity side of economic return, to thrive on the velocity side of Return on Assets.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on October 18-19, 2017.  The cost is $875.00 per person;  the cost during early registration, open through July 17, 2017, is $745.00;  for team pricing, inquire here (flgroves@saiconsulting.com).

Sponsored by BUILDER and BuilderMT.

For more details:  www.buildervelocity.com

 

Pipeline Workshops™: Finding TrueNorth

Posted July 1, 2017 By Fletcher Groves

Scott Sedam is President of TrueNorth Development, Inc., and is the industry’s foremost Lean Production practitioner.  A well-known, well-respected Lean Building purist, Scott has roots that go back to Edwards Deming and Total Quality Management.  He is a friend, and longtime fellow consultant.

In 2013, after the first edition of The Pipeline: A Picture of Homebuilding Production© was published, and as I was planning the first Pipeline workshop™, I offered for Scott to attend as SAI’s guest.  I wanted him to see the workshop for himself.

I wanted his opinion of the workshop, but also wanted him to share his thoughts with those first-time-ever 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 graciously 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 solution that works best for homebuilding.

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 this 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.

 

The next Pipeline workshop™ is October 18-19, 2017, at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida.  The cost is $875.00 per person;  the cost during early registration (through July 17, 2017) is $745.00;  for team pricing, inquire here (flgroves@saiconsulting.com).

Sponsored by BUILDER and BuilderMT.

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).