Archive for January, 2018

(We welcome BuilderMT and Sales Simplicity President Tom Gebes as a guest writer on Escape from Averageness®, as BuilderMT invests in the capabilities of its clients through their sponsorship of Pipeline workshops™;  here, Tom reports on variation and errors in two front-end processes that impact both margin and velocity)

Making money in home building is easy.

Want to see how you do it?  I’ll tell you.

First, focus on the front-end of your business, and break the home-selling process into two parts:  1) Prospecting and Contact;  and 2) Options Selection and Contract.

The Prospecting and Contact includes all your website lead tracking, and it is largely driven by your CRM, or whatever software you have in place to track web visits and automate the contact with the prospect.

The Options Selection and Contract part of the process is managed by your sales automation software system, which must be linked to an options management system (more on that later).

Now, here’s the trick to profitability.  In its most essential form, the gross profit margin (GPM) you expect to make as you convert your prospect to a contract should match the gross profit margin you actually experience at closing, with no slippage.

Sounds simple, right?  The core message here is that margin protection is what drives profitability.

 

Predicting Profit

Let’s take a deeper dive.  In your financial planning, it’s relatively easy to dictate what margins you expect to make.  Your workflow software should allow you to set margins as a percentage across multiple categories of products, e.g. 15% for commodities, 25% for appliances, 17% for flooring, etc.

You should be able to automatically apply those margins to the price you pay vendors for those products.  When you are applying those percentages, you take into account the labor, storage, loss, carrying costs, and waste of installing that particular option.

Simple enough, right?

The bugaboo comes when you take those ideal GPMs, developed in a planning environment, and protect them during two of the most-volatile stages of home building: the options selection process, and the construction process.

Let’s break those down.

Your gross profit margins are most at risk in the options selection process.  The main risk you have is when intersecting options are poorly managed, and options that should not be selected by your customer are nevertheless ordered.

 

Field Volatility. The Profit Killer

What kind of errors can you expect?  Let me count the ways.  For instance, a third garage bay is ordered by your buyer, and your new sales person is more than happy to sell the upgrade… except that on this lot, with this plan, the third garage bay violates the setback.  It’s not so bad if that error is caught in time, but if you don’t have the systems in place to detect the “option clash,” you will design and build the wrong home, and have to tear out the error.

Guess who eats the cost?  You do, the builder.  And guess what gets dinged?  The GPM on that house.

 

Eager Sales People

Here’s another more-subtle example.  You just finish a pep talk with your sale people, urging them to sell an additional $300 per house in upgrades.  Eager to please, your top rep pushes bay windows.  It’s a big hit.  She sells three of them on the first day.  Your estimator is pleased with himself because he catches the selection, and orders the extra windows and lumber… but he forgets to order the shingles for the roof kick-out.  The missing shingles means the roofer can’t finish, and he bills you for another half-day, just to come back to do that job.  Ouch.

And while you’re waiting for him, it rains, and the drywall in that corner of the house is ruined.  Double ouch.

You can already guess who’s paying for that one.  You, the builder.

In three decades of home building, I can easily cite a hundred examples like this.  And each one subtracts dollars from the idealized GPM you set forth in the planning stage – margins you do future corporate profitability forecasting with – only to see the volatility in the field lay waste to your plans.

At the end of the quarter, when your CFO presents his numbers to the CEO, the CEO says something like this:  “What the heck happened?  We forecasted aggregated GPMs at 22% and they came in at 16%!”

And the CFO responds:  “We had an execution problem, sir.  On 15 or our 22 starts, options were spec’d that shouldn’t have been ordered, because they didn’t fit with that model, and the tear outs and corrections killed us.”

The next thing that the CEO says cannot be printed.

 

Solutions: Software

How to fix this mess?  You need software that marries the Prospecting and Contact and the Options Selection and Contract processes;  software that automates and organizes the library of options, so only the options that fit on a model/lot/community are even allowed to be selected.

That software should have cross-over capabilities, so the options that are properly selected populate your estimating and purchasing systems, which in turn communicate with your supplier and component manufacturer.

These systems exist and run smoothly.  However, in my experience, it takes lots of pain before builders wake up to the fact that $1 spent on software saves $10 or $20 on operations, year in and year out.

So, set your margins, and protect those margins with software that regulates and automates the design and construction of your homes.

Tom Gebes is the co-founder of BuilderMT, and the president of BuilderMT and Sales Simplicity. BuilderMT and Sales Simplicity are both MiTek® companies. MiTek is a Berkshire Hathaway company.

 

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.

For more details:  www.buildervelocity.com

 

(We welcome Specitup’s Founder and CTO Rick Cosgrove as a guest writer on Escape from Averageness®, as Specitup invests in the capabilities of its clients through their sponsorship of Pipeline workshops™;  here, Rick reports on how one of those clients, Logan Homes, achieves remarkably high profitability by offering a highly customizable home for home buyers)

Over the past 10 years, production home builders have offered more and more plans, options and complex spec levels to create a more customized home buying experience.  A world of more and more choices is the new reality, but that new reality clashes with what we also know to be essential, finding a way to get to the right results – the right answers – faster, more effectively.

For production home builders, whether options is a profit center or a dreaded necessity, the need – or the opportunity – to offer more choices is here to stay.  The problem is maintaining control over the web of options and plans without getting bogged down, without slowing down.  Taking months to get new communities to the market and new plans into the hands of sales associates represents a significant deterrent to achieving higher velocity.

The answer is to do “more-and-better-with-less”:  Deliver more and better choices, more complete, more accurate, more useful pricing data;  deliver it more clearly, with less confusion, in less time;  deliver it faster with fewer errors, omissions, and inconsistencies;  deliver it with more clarity.

Builders are increasingly turning to Specitup to discover how to get homes and communities to market faster, in spite of more and more choices demanded by home buyers.  Better information at the builder’s fingertips is the key to balancing home building efficiency with home buyer demands.

 

In their work with home builders, SAI Consulting has brought a highly refined analytical approach to understanding how the velocity side of economic return can dramatically improve the margins and profitability of a home building company.  We agree with that thinking, which is one of the reasons we signed on as a sponsor of SAI’s Pipeline workshops™.

Pipeline workshops™ also give Specitup a unique opportunity to invest in the capabilities of our client builders, an opportunity to invest in their futures as profitable home building businesses.  And, it is an actual investment, because, in addition to sponsoring this workshop, we provide scholarships to all Specitup licensees that cover a portion of their cost to attend it.

 

In order to demonstrate Specitup’s capabilities, we recently profiled Logan Homes, an elite home builder that has invested the time it takes to master the art of maximizing profits.

Here’s their story:

Logan Homes, based in North Carolina, is among the most successful home building companies, large or small, in the U.S. today.  Remarkably, the company consistently achieves 8-10% net margins on its sale price, making it one of the most profitable builders in the U.S. on a per-start basis.

How does Logan Homes achieve such high profitability, when industry averages are around one quarter of what Logan achieves?

Simply put, it is how Logan Homes’ manages options.  D Logan, the marketing and operational mastermind behind Logan Homes, has taken a remarkably innovative approach to organizing options.  The company uses Specitup, and with Specitup, D Logan has so much flexibility in his option configuration that he can wake up with a new home design in his mind, and be able to offer that new model – fully priced out as a base model with community and series options, by the end of the day, without relying – or even involving – his CAD or Estimating departments.

Logan Homes implemented Specitup to do what every other production builder wants to do:  get control of its options, while offering a highly customizable home.  D Logan has also found that changing market dynamics is forcing him to compete at a very intense and detailed level for new buyers.

D Logan wanted to be able to fine-tune his sale price, and have so much control that he can offer as many standard options into a model as possible, while still preserving an optimum and competitive square foot cost.  That’s why he brought in Specitup.

Specitup is an ideal tool for just this type of competitive market options management.  And, here’s why:  because Specitup can be used to manage option tiers and configurations to an extremely granular level, adjusting and optimizing the home to the lot-specific level, to make sure the house is extremely competitive in pricing, and in the options it offers as standard and as upgrades.

D Logan says, “With Specitup, I can very quickly option-out that house with the standard options that my competitor is offering for his $300,000.  If I find I can add more standard options, and still make a profit – Specitup will tell me – then I’ve got a real advantage, because the customers notice that stuff.”

D Logan can configure Specitup so quickly that he regularly creates a “spec’d up” house on the fly when he is deciding what he should pay for lots.  And he doesn’t have to pick up the phone to call in his estimators or his CAD team to create BIM models.

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

Learn more about Logan Homes and Specitup at www.specitup.net.

 

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.

For more details:  www.buildervelocity.com

 

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.

 

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

 

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