Archive for January, 2018

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

Posted January 14, 2018 By Fletcher Groves

The fundamental understanding that emerges from the DuPont identity regarding Return on Assets is this:  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.  Does superior margin hold-forth the possibility of achieving sustainable competitive separation?  Absolutely not.

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 of ROA.

Pipeline workshops™ are aimed at changing that paradigm.

The motivation to attend a Pipeline workshop™ starts with the willingness to acknowledge and remedy what amounts to a profound lack of knowledge regarding production principles and disciplines.

You heard me right.

In the homebuilding industry, there is a profound absence of knowledge regarding production systems.

Disagree?  Think you already know this stuff?  Really?  I flat-out challenge you.  You – and your team – take the test.

  1. If a homebuilding production system is a pipeline, what determines the capacity, length, and cost of the pipe?
  2. Is even-flow production a mechanism or an outcome?
  3. What is the most operative, useful 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” in a homebuilding business. The terms for those three activities can be used to express and 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. What type of workflow is homebuilding? Is it process management, project management, or a combination of both?
  6. True or False: A production system that does not balance capacity across the resources that perform the work does a better job of optimizing the utilization of capacity than a production system that does balance capacity across those resources.
  7. How does a production system protect itself from variation and uncertainty? It wants more of three things.  What are they?
  8. Which algorithm for scheduling jobs considers both task dependency and resource contention in the Work Breakdown Structure? Is it Critical Path or Critical Chain?
  9. Calculating the cycle time of a production system requires knowledge of what operational measures? Determining the level of necessary work-in-process requires knowledge of which operational measures?  Estimating the rate of closings requires knowledge of what operational measures?  How are they all connected?
  10. True or False: Building reasonable safety into task durations is the best way to insure a high percentage of on-time completions.
  11. Which measure of operating performance is the reciprocal of inventory turn?
  12. Lean Production views homebuilding as a build-to-order process. Which resource does Lean recommend using to set the pace of production?
  13. What is the difference between measured cycle time and calculated cycle time? For what do you use them?
  14. True or False: CCPM (Critical Chain Project Management) adjusts the job schedule to reflect delays.
  15. What three human behavioral tendencies consume the time safety built into a every job schedule?
  16. How does the start matrix in a push release system differ from the start matrix in a pull release system?
  17. 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?
  18. Is trade partnering a program or a process?
  19. True or False: The NAHB Chart of Accounts Income Statement does not enable a builder to calculate both a breakeven point and a breakeven rate.
  20. 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 held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on February 28 – March 1, 2018.  The cost is $895.00 per person;  for team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting and Continuum Advisory Group.

Sponsored by BUILDER, BuilderMT, and Specitup.

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, flow is controlled by the valve that allows starts;  (2) even-low production is an outcome, not a mechanism;  (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) homebuilding is multi-project (project portfolio) management with embedded and supporting processes;  (6) True;  (7) higher work-in-process, longer duration, or more capacity;  (8) Critical Chain;  (9) work-in-process and closings, expressed in units, cycle time expressed in days;  if two are known, the third can be calculated;  (10) False;  (11) cycle time;  (12) the most capacity-constrained resource;  (13) measured cycle time is the average (mean) duration of a series of jobs;  calculated cycle time reflects the relationship between the inventory (work-in-process) a production system carries and the closings (throughput) it produces;  measured cycle time is about forensics, calculated cycle time is about the system;  (14) False;  (15) procrastinate, expand to whatever time is allowed, multi-task;  (16) the start matrix in a push system both the order and rate of starts, whereas in a pull system, the start matrix only determines the order of starts (the rate of starts is governed by the rate of closings;  (17) a factor of 1.64, a reciprocal of .61; four out of every 10 days in the schedule are safety to assure on-time completion;  two standard deviations;  (18) establishing epic relationships with trade partners is both a program and a process;  (19) True;  (20) velocity is a vector measure, i.e., speed in a specific direction, speed with purpose.

 

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Pipeline workshops™ are a size-limited, intense, interactive, comprehensive immersion into the principles and disciplines that drive homebuilding production.

Now in their fifth year, we have added a lot of material these events.  We have added the RB Builders: Lessons from the Pipeline© business case with its robust set of problem-solving exercises, most of which deal with another segment we have added, what we call Velocity Accelerators®.

Nevertheless, most attendees and observers would tell you that the most compelling part of a Pipeline workshop™ is the Pipeline game™, in which teams of geographically-diverse builders go through a progression of production scenarios, scenarios that are both a simulation of home building production and a business game.

It is the same Pipeline game™ we have used at Housing Leadership Summits. at CertainTeed Builder Advisory Groups, at Builder 20 Groups, at Pipeline workshops™ held privately for large builders, and at Builder Technology Summits.

The objective of the Pipeline game™ is to reinforce the production principles taught in the Pipeline workshop™, including:  (1) the effect of variation on a production system, (2) pull scheduling according to the capacity of a constrained resource, and (3) the importance of connecting decisions made on operating matters (like flow, capacity, duration, and work-in-process) to the critical business outcomes of profitability and return on assets.

With multiple teams playing every game with exactly the same rules and understanding, the results never lie.

Look at the results from a previous workshop.  In every category – from Revenue, to Work-in-Process levels, to Inventory Turns, to Cycle Time, to Net Income, to Return on Assets – the teams made remarkable progress towards targeted performance, often exceeding expectations.  Look at the results, and you will see something else:  they rarely started out that way.

You have to play the Pipeline game™, see the measures, and calculate the results for yourself, in order to fully understand what the axis values mean;  instead, focus on the performance trends (y-axis), as the games in this workshop progressed (x-axis).

This was Revenue . . .

This was inventory turn . . .

This was cycle time, expressed in days . . .

This was Net Income Margin . . .

This was Return on Assets, a reflection of its co-equal components:  Net Income Margin (margin) and inventory turn (velocity) . . .

After the initial shock of shattered instincts, every metric was in precisely the direction you would want, the direction you would expect, if the underlying production principles are true, and if real progress is being made.

Clearly, the builders attending this Pipeline workshop™ learned from their participation.  They learned the principles and disciplines of homebuilding production.

Pipeline games™ teach builders to “see” production;  they simulate the environment – fast-paced, rapidly-changing, filled with uncertainty, risk, and variation – in which homebuilding production decisions must be made.  It is learning based on experience and action, not words.

Pipeline games™ compress the learning curve.

In a Pipeline workshop™, the progression of the games mirrors the progression of the learning.  In the book that gave rise to the workshops (The Pipeline: A Picture of Homebuilding Production, Second Edition©), this is how they were described:

“Change is a necessary condition to any improvement effort, but change is difficult, disruptive, time-consuming, and costly;  the effort can fail to produce the desired – the intended – result.  Learning needs to occur without so much cost, disruption, and risk.  Managing production and improving operating and financial performance becomes intuitive and simple, but there is much to understand.  It is counter to what is taught, therefore, difficult to grasp;  it must be learned, and that is harsh when it occurs at the cost of real operating performance and actual business outcomes.”

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on February 28 – March 1, 2018.  The cost is $895.00 per person;  for team pricing, inquire here (flgroves@saiconsulting.com)

Delivered by SAI Consulting and Continuum Advisory Group.

Sponsored by BUILDER, BuilderMT, and Specitup.

Details:  www.buildervelocity.com

 

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Pipeline Workshops™: Improvements to the Game™

Posted January 2, 2018 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)

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 arrangement better reflects a manufacturing operation or project management organization;  a realistic depiction of a homebuilding production system is one that separates capacity from cost.

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 restored 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 cost, 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 used at three of the last four Housing Leadership Summits (2014-16);  it has been used in Builder 20 Club meetings;  it has been used at CertainTeed Gypsum Pipeline Seminars™ (part of CertainTeed’s Builder Advisory Councils);  it was played at the 2016 Builder Technology Summit;  it has been used in every private client Pipeline workshop™ and at every open sponsored Pipeline workshop™ after the first one.

 

Come.  Participate.  Learn.

The next Pipeline workshop™ will be held February 28 – March 1, 2018, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  Cost is $895.00;  for team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting and Continuum Advisory Group.

Sponsored by BUILDER, BuilderMT, and Specitup.

Details:  www.buildervelocity.com

 

Specitup Becomes a Pipeline Workshop™ Sponsor

Posted January 1, 2018 By Fletcher Groves

We would like to welcome Specitup as a Pipeline Workshop™ sponsor, joining our long-term sponsors BUILDER and BuilderMT, in investing in the ability of home builders to thrive on the velocity side of ROA, investing in their ability to thrive on the velocity side of economic return.

An award-winning software solution for home builders designed to get homes to market faster with accurate and profitable selling prices, Specitup is not an estimating or production program;  Specitup is a new breed of software that includes plan/options/specification management combined with comprehensive financial analysis.

Specitup is designed for any builder that wants to shorten time to market, get deeper insight into generating profits, and growing their business. 

Specitup’s capabilities are impressive:

  • Create 7,000 options in seconds
  • Spec the same plan differently by community
  • Option up plans in hours
  • Analyze competitor offerings

Here is insight from two builders using Specitup:

“If I can’t compete, Specitup has told me that ahead of time, and I wouldn’t have even bought the lot.”  (D. Logan, Owner, Logan Homes)

“With Specitup, I can add a new plan in a matter of hours.  And now, we don’t have to engage estimating until the house is actually sold.”  (Dan Kent, Owner Kent Homes)

BuilderMT and Specitup view their sponsorship of Pipeline workshops™, not as chances to hawk their software, but as opportunities to invest in the operating and business capabilities of their licensees and users.  If you are a builder licensed to use either BuilderMT or Specitup, anyone from your company attending the upcoming Pipeline Workshop™ No. 9 (February 28 – March 1, 2018, at the Ponte Vedra Inn and Club in Ponte Vedra Beach, Florida) is entitled to a scholarship covering a portion of the attendance fee.

Contact your BuilderMT or Specitup rep, and ask them about it.

To learn more about Specitup, visit specitup.net.

Details:  www.buildervelocity.com