SAI Consulting Escape from Averageness

(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)

(excerpted from The Pipeline: A Picture of Homebuilding Production, originally posted on Escape from Averageness in May 2010, updated and reposted here)

“I want to talk about variation and uncertainty”, said the intrepid, results-based consultant.  “It was mentioned earlier that variation is a form of waste, because, to the extent that it does not add value, variation is wasteful.  That thinking largely comes from the Toyota Production System and the Lean Production methodology that TPS later spawned.  But – Taiichi Ohno did not include variation as a form of waste (muda) in the TPS, opting instead to use the term for unevenness (mura), and associate it with the separate principle of stability;  production processes need stability, and variation causes instability.

“In both Lean Production and the TPS, the principle of stability sits between the principle of waste and the principle of standardization, which includes the concept of standards, visual management, and problem-consciousness, which are linked to PDCA problem-solving.  I think there is a reason Mr. Ohno chose to not place waste and variation in the same category.  Given their inherent characteristics, a desire to remove waste in all of its forms is more reasonable than a desire to eliminate variation.”

Turning to the board, the intrepid, results-based consultant wrote:

DISTINCTIONS: WASTE V. VARIATION

PRODUCTION PHYSICS: LAW OF VARIABILITY BUFFERING

“Beyond that distinction, there is the series of basic laws of production physics that directly or indirectly form our understanding of variation;  two laws in particular”, she said.  “The first law, called the Law of Variability, states that higher levels of variation degrade the performance of the production system.

“The second law, the Law of Variability Buffering, says that variation will always be buffered by some combination of inventory, capacity utilization, or time.”

BUFFERS: 

• HIGHER WIP
• EXCESS/UNUSED CAPACITY
• LONGER DURATION

“If all RB Builders does is attack variation by attacking waste (in the form of errors, rework, etc.), and it fails to directly attack the variation that causes instability, then it will have to live with a production system that protects itself with some combination – buffers itself with some level – of additional work-in-process, longer-than-necessary cycle times, or wasted capacity.

“Our production system will default to longer durations.  Time is the self-determining buffer, the ‘buffer of last resort’, so to speak.  If we do nothing about variation, yet limit work-in-process and capacity, the result will be long cycle times.

“Guaranteed.

“Buffers – high levels of work-in-process, long cycle times, and unused capacity – allow the system to compensate for variation, but, they result in lost Throughput.  The true cost of variation is the financial throughput – the Gross Income – that RB Builders surrenders to that variation.

“You begin to get a sense that variability is a very big deal”, said the intrepid, results-based consultant.  “Jack Welch used to say, ‘Variation is evil’.  Some variation and uncertainty is natural, and some of it is necessary and planned.  But, the instability that variation and uncertainty cause is a decidedly evil form of waste.

“In process religion, the gods of production will not be mocked”, she said.  “If we fail to directly attack the variation that causes instability, we will have to accept a production system that protects itself with some combination of too much work-in-process, long cycle times, or reduced throughput.”

“But – isn’t protection a good thing?”, deadpanned a superintendent.  “Shouldn’t we be practicing safe production?”

“Yes, protection would be a good idea”, responded the intrepid, results-based consultant, equally deadpan.  “Especially for boys like you, who should be worried about contracting a PTD.

“Put it this way”, she said.  “Which one of the Productionally-Transmitted Diseases would you like to have?  Which combination of longer-than-necessary cycle times, higher-than-necessary levels of work-in-process, and lower-than-possible rates of throughput (because of excess and unused capacity) do you really want?

“Some level of variation and uncertainty is natural, inevitable, and unavoidable”, she said.  “Some variation is necessary, just to protect ourselves in the marketplace;  we don’t offer only one floorplan and elevation.  Whenever we are protecting the output of the system from variation and uncertainty, some level of protective capacity or buffering is needed.

“But – protecting a system from variation comes at a cost, and to the extent that the variation that necessitates the buffering is unnecessary, avoidable, excessive, or uncontrollable, it is a very bad thing.”

(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)

The Pipeline: A Picture of Homebuilding Production was published in 2013, but it was written in mid-2007;  that this book has managed to survive the past seven years of turbulence and difficulty with its relevance intact is a testament to the immutability of the production principles that it illuminates.

None more than the principles that measure how a system is affected by variation and uncertainty.

Originally published on Escape from Averageness as a five-part series of Pipeline excerpts in mid-2010, the connected concepts regarding cycle time, the variation that lengthens it, the cost of that variation, and the cost-volume-profit thinking that it requires builders to consider have become the whiteboard exercises that resonate the most with builders during the Pipeline workshops.

Republished on EFA as an eight-part series, starting this week with Part I:  Waste, Variation, and Other Productionally-Transmitted Diseases.

(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)

Enabling builders to test the principles and lessons learned is a significant part of the takeaway we offer in a Pipeline workshop.  We repeatedly receive feedback from attendees saying that the opportunity to simulate production in a progressive series of scenarios enables them to “see” production in a way that they have not previously experienced.

There is nothing comparable to a Pipeline game, anywhere.  Although the game is already a tremendous tool for teaching production principles, we, nevertheless, take seriously the opportunity to make it better.

And, we do listen.  Partly as a result of feedback, we are making two significant changes to the game.

The first change is to shorten the duration of the game, without diminishing its effectiveness, so that we can run more scenarios in the same amount of time;  basically, we halved the number of rounds.  The unexpected benefits of shortening the game:  (1) it makes every operating decision more consequential;  (2) it makes the results more realistic, easier to comprehend, therefore, more intuitive.

The second change is to more realistically reflect the outsourced nature of homebuilding production.  Previous versions of the game used the resources to reflect both the capacity of the system, and the cost of that capacity.  That arrangement is appropriate for a manufacturing operation or even a project management organization, but a more accurate reflection of homebuilding production is to separate capacity and cost.

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;  rather, it is the indirect, non-variable cost associated with internal resources – part of Operating Expense (overhead) – that determines the cost of capacity.

In previous versions of the Pipeline game, using the resources to reflect capacity and cost allowed us to disregard Cost of Sales, and focus on Throughput, which is more closely related to residual Gross Margin.  In the new version of the game, we bring Revenue and Cost of Sales back into the picture.  The external resources in a game now only define the production system’s capacity, and their cost is reflected in Cost of Sales, as a percentage of Revenue;  they are now the true, variable costs associated with production.

Throughput is now Revenue, less Cost of Sales, which is still Gross Margin.  This represents a huge stride in reconciling these terms, and making operating decisions easier to connect to financial outcomes.  Operating Expense is now an imposed (budgeted) value, reflecting the cost of the internal capacity required to manage work-in-process;  it is a non-variable cost, and it is now only indirectly related to expected project completions.

The overall effect is now a board game much more reflective of a homebuilding operation;  the lessons are now much easier for builders to understand, with a production simulator that exponentially increases learning over that which occurred before.

The new version of the game gets rolled out next week at the Housing Leadership Summit, and it will then become part of every subsequent Pipeline workshop.

We are looking forward to it.