(excerpted from The Pipeline: A Picture of Homebuilding Production, originally posted on Escape from Averageness in June 2010, updated and reposted here)
One of the sales representatives looked at the superintendent, and laughed. “Which one of the Productionally-Transmitted Diseases would you like to have. Good one.”
The intrepid, results-based consultant smiled and continued.
“In a previous session, someone said RB Builders closed 200 homes in 2007, on an average work-in-process of 100 houses, which is also the baseline for 2008. But, everyone also agreed that your production system should be capable of producing 240 closings on those 100 units of work-in-process. Later, someone else mentioned that the building schedules [stipulate an average cycle time] of 120 days.”
Moving to the erasable board, she wrote the following data in a table:
2005:
- WIP = 100
- CLOSINGS = 225
- CYCLE TIME = ?
2007:
- WIP = 100
- CLOSINGS = 200
- CYCLE TIME = ?
2008:
- WIP = 100
- CLOSINGS = 240
- CYCLE TIME = ?
“Someone calculate RB Builders’ cycle time”, she said. “How many days?”
After a minute, the sales representatives looked up from her calculator, and said, “If I am doing this right, I calculate that, in 2005, our cycle time was 160 days. In 2007, it was 180 days. And, for 2008, we are targeting 150 days.”
The intrepid, results-based consultant completed the cycle time column with the calculated cycle times, but added two more rows with identical values.
2005:
- WIP = 100
- CLOSINGS = 225
- CYCLE TIME = 160 days
2007:
- WIP = 100
- CLOSINGS = 200
- CYCLE TIME = 180 days
2008:
- WIP = 100
- CLOSINGS = 240
- CYCLE TIME = 150 days
WIP = ?
- CLOSINGS = ?
- CYCLE TIME = 120 days
WIP = ?
- CLOSINGS = ?
- CYCLE TIME = 120 days
‘Okay”, she said. “Tell me what your production system looks like with a cycle time of 120 days.”
“There are two ways to look at it”, said the superintendent. “We could be closing 240 houses with 80 units of work-in-process. Or – we could be closing 300 houses with 100 units of work-in-process.”
The intrepid, results-based consultant added the new calculations.
2005:
- WIP = 100
- CLOSINGS = 225
- CYCLE TIME = 160 days
2007:
- WIP = 100
- CLOSINGS = 200
- CYCLE TIME = 180 days
2008:
- WIP = 100
- CLOSINGS = 240
- CYCLE TIME = 150 days
- WIP = 80
- CLOSINGS = 240
- CYCLE TIME = 120 days
- WIP = 100
- CLOSINGS = 300
- CYCLE TIME = 120 days
“Remember our discussions on margin and velocity?”, she asked. “This is where that comes into play. There are always two ways RB Builders can increase the amount of Throughput – the amount of Gross Income – it generates. Margin is how much money we make on every house we close, and velocity is about how many houses we can build and close in a period.”
(The Pipeline: A Picture of Homebuilding Production is available on the publisher website (virtualbookworm.com), and the author website (thepipelinebook.com), as well as amazon.com, barnesandnoble.com, and booksamillion.com)