Pipeline Workshops™: What’s your Production IQ®? Take the test.

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 (i.e., why you are in business) 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, but 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?  Are you certain?  Here’s one good way to find out.  You – and your team – take the test.

  1. If a homebuilding production system is a pipeline, what determines the size, capacity, length, and cost of the pipe?  What controls the flow?
  2. Is even-flow production a mechanism or an outcome?
  3. What is the most operative, useful determination of size for a homebuilding company? a. 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 case management?
  6. True or False: A production system with balanced capacity across the resources that perform the work does a better job of optimizing the utilization of capacity than a production system that does not balance capacity across those resources.
  7. What are the three ways a production system protects itself from variation and uncertainty? It wants more of certain 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 connected?
  10. True or False: The best way to insure a high percentage of on-time completions is to build reasonable safety into task durations.
  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? What are the uses of each?
  14. True or False: CCPM (Critical Chain Project Management) does not adjust the job schedule.
  15. What three human behavioral tendencies consume the time safety built into a 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 enables 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 October 18-19, 2017.  The cost is $875.00 per person;  for team pricing, inquire here (flgroves@saiconsulting.com).

Sponsored by BUILDER and BuilderMT.

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) False;  (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) True;  (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) False;  (20) velocity is a vector measure, i.e., speed in a specific direction, speed with purpose.