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Part I: Lean Homebuilding

Posted October 16, 2018 By Fletcher Groves

(excerpted from The Pipeline: A Picture of Homebuilding Production, Second Edition©.  Initially published on Escape from Averageness® in March 2009, as the intrepid, results-based consultant helps RB Builders understand the benefits and the limitations of Lean Production)

©Mark Eaton, Dreamtime.com

“This part is going to be production physics. It is going to seem very theoretical, and I am not even giving all of it to you. You are going to have to trust me and accept it as laws of physics. Not blindly. With an open mind. I need you to grasp the basic concepts, and just stick with me. I promise I will give you something concrete.

“But – you simply cannot understand what we are doing in reality, unless you understand the concept.

“I apologize. That is just the way it is.”

“You don’t need to apologize”, said the CEO.  “Just do it.  We have trusted you in a lot of ways, and, so far, you have never let us down.  We will do our best to keep up with you.”

The intrepid, results-based consultant smiled, nodded appreciatively, and then continued.

“From an overall enterprise standpoint, RB Builders has decided that it wants to embrace – as strongly as possible – the tenets of Lean Homebuilding, particularly when it comes to standardization of work, elimination of waste, visual management, kaizen, PDCA problem-solving, A-3 planning and policy deployment, and other areas.

“Culturally-speaking, RB Builders has decided that it wants to become a Lean Homebuilding enterprise, embodying the most useful and transferable elements of Lean Thinking.  In the case of RB Builders, Lean Homebuilding’s most beneficial contribution, to this point, is having embedded a process of continuous improvement.

“However – Lean Production, even crafted as Lean Homebuilding, is not the total answer.  By itself, Lean Production – or Lean Homebuilding – cannot get RB Builders to where it needs to go.

“As useful, beneficial, and vital as Lean Homebuilding has been in the area of continuous improvement, it has not been as effective in the area of production management, in the areas of what is generally known as ‘flow’, at least, not straight out-of-the-box.

“Like every other worthwhile production method, Lean Production does not come from a homebuilding environment.  That is a problem, because – as a homebuilding company – RB’s production system has different parameters, faces different conditions, and imposes different requirements.

“We could discuss this for hours, but we do not have the time”, she said.  “Let me give you several quick examples to highlight the type of “Lean issue” we see in various areas of production.

“First of all, Lean Production places a heavy emphasis on what it terms ‘Just-in-Time’ replenishment, or JIT – the principle of producing only what is needed or ordered, leveling demand, leveling production, pull, continuous flow, etc.

“But – how does that work in homebuilding?

“As the second example, consider production leveling, or heijunka.  A typical Lean manufacturer levels production based on forecast orders, not actual customer orders.  Some companies are better at making and adjusting forecasts than others, but, at best, it is a mix of “change-to-order” and “build-to-order”.  It is really “build-to-forecast”.  To the extent there is variation in the forecasts, they either have to carry a large inventory of finished goods, have to promise very long delivery dates, or have to live with a lot of excess, and unused, capacity.

“That would be the equivalent of RB Builders having to very accurately forecast the demand for every plan it offered in every community – or – live with some combination of an enormous inventory of completed homes, in addition to its required work-in-process), live with long delivery date promises, or live with a ton of unused production capacity.

“How in the world does something like that ever work in homebuilding?

“Finally”, she said, “consider the challenge of achieving continuous flow with a totally outsourced labor force, in a fragmented value stream, with as many manufacturing facilities or production plants as we have communities.  How would we make that work?

“Think about that.”

“So – are you saying that we should abandon our commitment to Lean Homebuilding?”, asked the VP of Construction.

“No.  That is not what she is saying”, answered the CEO.  “She is saying find a way to use the tools that work best for us, without regard to the religion or the denomination from which they came.

“She is saying, understand the playing field.  She is saying, understand the parameters.  She is saying, understand the world we live in.

“She is saying, do what works.  She is saying, above everything else, get results.”

 

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

Posted September 16, 2018 By Fletcher Groves

Builders should be able to determine, for themselves, how attuned they are to the critical tasks that enable them to thrive on the velocity side of economic return.  In furtherance of that end, we will make the RB Builders: Lessons from the Pipeline© business case (the current version of the same business case used at every Pipeline workshop™) available to any builder that asks for it.

There are only two conditions:  (1) you have to state the intent of actually completing all the exercises;  (2) if you want our methods and solutions, you have to share your results with us.

For the business case, contact:  flgroves@saiconsulting.com

The offer comes with this warning:  like everything else about a Pipeline workshop™, this business case is challenging;  if you are up to that challenge, the following excerpt is taken from how the business case opens, followed by the nature of the questions its exercises require you to consider:

“It is the first quarter of 2018.  RB Builders is aiming to extend its reputation as a builder that thrives on both the margin and velocity sides of Return on Assets, by expanding into another geographical market, via the late-2017 acquisition of a fifth existing homebuilding operation.

“Like its predecessors, the newly-acquired building division has historically generated lower operating results and business outcomes than what RB Builders considers acceptable;  in fact, this is the worst-performing of all the acquisitions, from the standpoint of both margin and velocity.

“RB Builders is confident that it can continue its record for unifying, developing, and improving the capabilities of existing teams at acquired divisions, transforming them to ones that reflect the savvy, motivated, and mutually-accountable homebuilding team of the parent operation.

“This road has become a familiar path for RB Builders.

“HISTORY OF RB BUILDERS:  A decade earlier, at the beginning of 2008, and 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 had employed a program that used four initiatives (team-based performance compensation, operational and financial transparency, accounting procedures that connected operating performance to business outcomes, and a focused process of continuous improvement) to make massive strides.

“During the ensuing five-year period (2008-2012), annual Revenue had grown from $50 million to more $121 million;  the number of closings had increased, from 200 houses per year to 453 houses per year.  Despite the pressure on margins from increasing market share, overall Gross Margin had increased from 22% to 24%;  Gross Income had grown from $11 million to almost $30 million.

“Operating Expense had increased, from $8.5 million to $11 million, far less than the same-period percentage increase in Revenue.  As a result, RB Builder’s Net Income had risen six-fold, from $2.5 million to $16.5 million;  its Net Margin had almost tripled, from 5% to 14%.

“In 2008, RB Builder’s cycle time had been 180 days;  by the end of 2012, cycle time had been reduced to 65 days.  The average amount of work-in-process had been 100 houses under construction;  the company had reduced its average work-in-process to 80 houses under construction.  The reductions in cycle time and work-in-process occurred, despite a more than doubling of the annual number of closings.

“In 2008, RB Builders had targeted an inventory turn of 2.5x;  in 2012, RB Builders had been able to more than double its physical inventory turn, to 5.7x.  In 2008, it had turned the value of its assets two times;  in 2012, it turned the value of its assets almost five times.

“Because it had maintained margins while 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 further increased Asset Turn – and ROIA – had those measures been restated.

“It had been a remarkable transformation.

“The four building operations that RB Builders had previously acquired had now met – or were on-track towards meeting – their own two-year plans for increasing closings and Revenue without any increase in Operating Expense, while maintaining lower levels of work-in-process and operating under reduced construction lines of credit.

 

“NEWLY-ACQUIRED DIVISION:  Near the end of 2017, RB Builders acquired this, its fifth homebuilding operation.  This acquisition was considered a departure from RB Builders’ M&A pattern;  this new division has a different product offering, in a different price range.

In its final year of independent operation, the division had closed 32 houses, and generated $12.8 million in Revenue;  with almost $10.8 million in Cost of Sales now reflecting only its direct, variable costs, it had generated just over $2.0 million in Gross Income, producing a 16% Gross Margin.

With its $1.5 million in Operating Expense now reflecting only its indirect, non-variable costs, the division had produced $550,000 in Net Income, resulting in a 4.3% Net Income Margin.

Since it carried an average work-in-process of 20 houses under construction throughout 2017, it had a calculated cycle time of 225 days (despite job schedules that were typically 150 days) and an inventory turn of 1.6x.

By moving all of its raw land holdings and developed lot inventory from its balance sheet into subsidiaries, the division showed a restated average work-in-process of $4.56 million  (the average per-unit LIP balance of $228,000 represented an average lot takedown of $120,000 and a fully-funded LIP balance of $336,000, or 84% of the $400,000 average sales price).

Revenue of $12.8 million gave it an asset turnover ratio of 2.8x.  For 2017, with its Net Margin of 4.3% and its restated asset turn of 2.8x, the new operation had achieved an ROIA of just over 12%.

 

As the management team, here are the questions the business case exercises raise for you:

Q;  How will you address a mandate that your newly-acquired division increase its annual closings by more than 50% over a two-year period, with less work-in-process, a smaller line of credit, and the same amount of overhead?

Q:  How will you use Building Information Modeling (BIM) to improve both the margin and velocity sides of economic return?  What will your ROBIMI (Return on Building Information Modeling Investment) be?

Q:  What cost accounting practices will breakeven analysis require?

Q:  How will you create a savvy, motivated, mutually-accountable homebuilding team?  One that understands the business of homebuilding as much as it understands the homebuilding business?  How will you give every teammate a significant financial stake in the outcome?  What outcome?

Q:  How will you answer RB Builders’ contention that variation – evidenced solely by your 2017 calculated cycle time – is costing your division between $700,000 and $1.1 million in lost Net Income every year?  Is what they are asserting even possible?  After all, in 2017, your division only produced Net Income of $550,000.

Q:  How will you implement Epic Partnering™ (RB Builders’ program/process for creating relationships-arrangements of compelling mutually-shared interests) with your suppliers and subcontractors?  What are the attributes of the partnering relationship?  What are the components of the partnering program?  What does a transformational partnering process look like?  Is vertical integration an option to consider?

Q:  How will you use Business Process Improvement (BPI) 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 will you build a shorter, straighter pipe?

Q:  How will you use Critical Chain Project Management to reduce your job schedules from 150 days to 121 days, while also assuring more reliable job completion dates?

Take us up on our offer.  Request the business case.  When you have completed it, grade yourself.  How did you do?  Able to answer the questions?  Able to solve the problems?  If you find as unacceptable – we’ll call it your “degree of attunement” – you should come to the next Pipeline workshop™.

 

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 September 26-27, 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

 

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

Posted September 11, 2018 By Fletcher Groves

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

On Tuesday morning, September 11, 2001, seventeen years ago, at 8:46 AM, 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, called “From the Ground Up”, that was arranged by Professional Builder, that included a number of top consultants then – and still – serving the homebuilding industry.

I was the Process Architect for Fidelity Homes.

Sitting across the table were David Hunihan and Todd Menke, two young (at the time) builders, eager to take their experience in homebuilding and pursue a National Housing Quality award.  We were well underway, 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 welcoming embraces had particular conviction.

The article for “From the Ground Up’ 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, because we still haven’t accomplished what we set out to do.  Time has only increased my feelings about it.  We were attacked, seventeen years ago, because of who we were, because of who we unapologetically remain.  Our now-enemies see it as unfinished business, as well.

Evil is the enemy of good;  that evil has an ever-more-radical, and now secular, 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 complete and utter 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 ebb and flow of ISIS, Al-Qaeda, and other bad actors, the question of what happens if 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 or rogue regime nuclear attacks.  The problem is the terrorists and their sponsors;   the problem is rogue nuclear regimes and their enablers.

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.

It is true that, as Christians, we are told to love our 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)

 

There has always been an underlying context – an underlying business logic – to everything we teach in a Pipeline workshop™.  Understandably, the focus is on the principles and disciplines of homebuilding production, but we also give that context – that business logic – the attention it deserves.

Pipeline workshops™ are not just about the “what” and the ‘how-to”;  it is also about the “why” and the “want-to”.

So – one of the Velocity Accelerators® is a deeper-dive into that context and business logic, into two crucial disciplines that work together, that are inseparable:  Open-Book Management and Team-Based Performance Compensation.

The efforts of a homebuilding company to improve operating performance and business outcomes will fail to achieve what is possible, if it does not succeed first in creating a homebuilding team that works toward commonly-held and commonly understood business goals, in contrast with a collection of so-called teammates working toward individual goals.

What you would likely find missing is the business logic that forms the necessary context for understanding everything else.

That is the role of Open-Book Management.

In order to become the savvy, motivated, mutually-accountable homebuilding team required to effectively compete in the business world, everyone on the team has to learn the “business” of homebuilding, they have to understand their individual responsibilities as part of the overall team, and they have to understand what is at stake, individually and collectively.

And – not just understand the business outcome that is at stake;  they also must each have a personal stake in that business outcome;  they must have a stake in what is at stake.

That is the role of Team-Based Performance Compensation.

Open Book Management flows from the work Jack Stack did in the 1980s as CEO at Springfield Remanufacturing Corporation to rescue that former International Harvester (Navistar) division from almost certain bankruptcy.  Following a 99% leveraged employee buyout, he opened the company’s books and made it everyone’s business to improve performance.

Stack recounted that effort in two books (The Great Game of Business and A Stake in the Outcome);  Inc. Magazine’s John Case reported on open-book thinking in other industries and companies, in two other books (Open Book Management and The Open Book Experience).

And, in Open Book Management, Case described how Steve Wilson developed the basics of OBM-inspired Team-Based Performance Compensation at Mid-States Technical Staffing Services (now part of Modis);  Wilson subsequently described this work in a publication, titled The Bucket Bonus Plan.

We take a very specific approach in our application of the principles of Open Book Management and Team-Based Performance Compensation.

We advise our clients to be transparent (open).  We urge them to demonstrate candor (have the courage to tell and hear the truth) in the constant internal disclosure of operating and financial data, whether in meetings, or through dashboards and heads-up displays.

We advise our clients to impart business literacy (understanding) to teammates, so that those teammates don’t just understand the homebuilding business, they also understand the business of homebuilding, through the teaching of business and production principles.

We advise our clients to adopt a team-based approach to performance compensation, by way of a progressively-weighted milestone plan centered on achieving targeted performance above a baseline in a specific business outcome impacted by the actions of every single teammate.

We urge an approach that is simple, easy to understand;  visible, transparent;  compelling;  rewards rapidly and frequently;  is self-funding, paid from income the company would never have otherwise generated.

In terms of compensation – we urge our clients to make it significant, meaningful.  In terms of participation, we urge them to make it all-inclusive.

We tell them that their Team-Based Performance Compensation Plan should provide only for winners or losers, not winners at the expense of losers.  It should give the right to lead and to demand results;  it should give the desire to be lead to deliver results.

Savvy.  Motivated.  Mutually-Accountable.  Team.

 

Come.  Participate.  Learn.

Open-Book Management and Team-Based Performance Compensation is one of the five Velocity Accelerators® highlighted (together with Critical Chain Project Management, Epic Partnering™, Building Information Modeling, and Business Process Improvement) at the next Pipeline workshop™, September 26-27, 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

 

“The absence of business logic is simply astounding.”

Posted September 8, 2018 By Fletcher Groves

(originally published on EFA® in February 2010 under the same title;  republished in April 2013, as part of our retrospective Above Average: The Best of Escape from Averageness®, 2009-2012;  republished here, to highlight one of the Velocity Accelerators® for the upcoming Pipeline Workshop™ No. 10)

McKinsey and Company

It is mid-2012.  The intrepid, results-based consultant smiled and shook her head, in a combination of amusement, incongruence, and disbelief.  It was yet another sobering reminder that RB Builders, early in this process, was capable of coming to bewildering conclusions, the latest of which centered around the company’s intentions for its team-based performance compensation plan.

The Gross Income Participation Pool – the GIPP – had been a prerequisite to her firm agreeing to become involved in a client-consultant partnering arrangement with RB Builders in the first place, one of three stipulations, along with internal financial statements that reflected a variable costing approach, and the subordination of every existing initiative to the company’s new constraint-focused, rapid-results continuous improvement process.

The GIPP was new.  It was purposely designed to replace RB Builders’ longstanding-but-inconsistent practice of paying individual bonuses based on multiple measures.  It consisted of a team-based approach performance compensation focused on achievement related to a single business outcome, specifically, Gross Income achieved above a specific baseline.

Under the GIPP, the baseline performance was referred to as the Gross Income Baseline, while the stretch-budgeted performance was dubbed the Gross Income Target.  The difference between the GI Baseline and the GI Target was referred to as the Gross Income Reserve.

The GI Reserve was to be paid out progressively, based on the achievement of a predetermined number of “bonus buckets”, called Gross Income Milestones.  The aggregate teammate share of the GI Reserve represented one-third of the GI Reserve, while the remaining two-thirds was allocated evenly between distributions to owners and retained earnings.

Now, however, the GIPP was getting push-back from one of RB Builders’ recently-hired Regional Vice Presidents, saying the plan should be scrapped.

“The housing market has improved, but we still have credit facilities that we have to restructure, repay, and replace, and now we need land and building lots;  the bottom-line is, we have better uses for that cash”, he tried to explain.

The intrepid, results-based consultant’s thought to herself, “The Gross Income Participation Pool is an established prerequisite.  This guy’s assertion doesn’t have any merit, but even if it did, it was too late in the planning schedule to consider changing it, let alone canceling and replacing it.”

She was having none of it.

“Where did you get this stupid idea?”, she asked.

“It is the best approach to a situation that remains very challenging and uncertain”, he replied, defensively.  “We cannot justify bonuses in this economy, in this housing market;  we are fortunate just to have our jobs.  I have nothing against bonuses in better times, just not now.”

“So, you just want to cancel the GIPP?  YOU CANNOT BE SERIOUS!!”, she screamed.

“Nice.  Channeling your inner McEnroe?”, asked the CEO.

The intrepid, results-based consultant stared at the CEO, her impassive expression clearly communicating her thought:  “Where did you find this guy?”

She turned her attention back to the Regional VP.

“Let me get this straight.  You are concerned that your division will be unable to meet its debt service obligations, or find land, if it rewards performance above its baseline?”, she asked, rhetorically.  “Really?  Where is the money supposed to come from?

“The GIPP will not have paid out anything, unless there is a reserve created by performance that exceeds the baseline.  You do realize that the GIPP is completely self-funding, that it does not cost the division or RB Builders’ owners one-red-cent?

“You do understand that, right?

“For the most part, all of the land and building lots acquired are kept off-balance sheet.  With in-place limitations on work-in-process and management controls on non-variable expenses”, she continued, “is there any likely scenario under which additional Gross Income will result in less cash flow?

She stared down the Regional Vice President.  “I didn’t think so.”

“On baseline alone, RB Builders is profitable, operating above breakeven, correct?”, she asked, without waiting for the answer.  “So – is there any likely scenario under which every cent of that additional Gross Income will not drop straight to the division bottom-line?  Where it can be utilized for – oh, I don’t know, let’s say – debt restructuring, or distributed to teammates and owners before it became retained earnings?

“I can understand being prudent with important decisions in uncertain times.  I can understand increased diligence in determining a baseline that reflects current reality.  I can understand having a more progressive structure to the payouts, so that each successive milestone is worth more.  I can understand adjusting the distribution of the reserve between teammates, owners, and retained earnings, in order to provide more money to meet extraordinary debt service requirements.

“I can understand – but not agree with – the fear that would drive your flight to a supposedly-safer outcome, like Net Income.

“But, to deny yourselves – you, your teammates, your owners – the opportunity and motivation to do better?  To preserve your shared livelihoods?  To secure your collective futures?  That, I do not understand.  That, I will not accept.

“The absence of business logic is simply astounding.”

 

Come.  Participate.  Learn.

Open-Book Management and Team-Based Performance Compensation is one of the five Velocity Accelerators® highlighted (together with Critical Chain Project Management, Epic Partnering™, Building Information Modeling, and Business Process Improvement) at the next Pipeline workshop™, September 26-27, 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