Archive for December, 2019

Homebuilding is an industry that leverages equity with debt, therefore, some version of Return on Equity is the final measure of a homebuilding enterprise’s economic return.  However, from an operational perspective, leverage doesn’t have to be considered, which makes Return on Assets the most useful measure of economic return.

One look at the DuPont identity tells you that non-leveraged economic return has two components:

Margin (Return on Sales) and Velocity (Asset Turn).

From an operational perspective, the vast majority of assets on a builder’s balance sheet ought to be houses in some stage of construction, particularly when raw land and developed lot inventory is held off-balance sheet, as it should be.  This means, when we calculate Return on Invested Assets, we can reasonably associate Asset Turnover (financial) with Inventory Turn (operating).

Here is the point.  You want to thrive in this business, not just survive in it.  In order to do that, a builder has to excel on both the margin side and the velocity side of ROA.  That understanding fundamentally proposes two questions:  (1) How much can my company make on every house it builds?  (2) How many houses can my company build with a planned, finite, and controlled amount of inventory and production capacity?

As a builder, consider this scenario:  You have a competitor that has exactly the same work-in-process, overhead, working capital requirements, borrowing capacity, and risk profile.

If you generate a Gross Margin of 24% and turn your inventory twice a year, you will be outperformed by your competitor that generates a Gross Margin of only 18%, but turns its inventory four times a year;  you will be outperformed in terms of Revenue, outperformed in terms of closings, out-performed – by a better than two-to-one margin – in terms of the Net Income you earn and the Return on Assets you generate.

You will struggle to compete;  you will struggle to survive.

It is the picture of a slow, marginally-productive homebuilding company versus a fast, highly-productive homebuilding company;  your competitor generates 85% higher Revenue and 40% more Gross Income than you do, and does it with the same resources.

It is also the picture of your 180 day cycle time versus your competitor’s 90 day cycle time.  If that contrast is too stark, then consider this:  your competitor – the one with the 18% Gross Margin and a 4x turn – produces almost the same Return on Assets as you would with a 24% Gross Margin and a 3x turn.  That is the picture of your now 120 day cycle time versus your competitor’s 90 day cycle time.

In the face of clear differences in economic outcomes, remember this:  In this scenario, your competitor is exactly the same size as you, when the real measure of size is the amount – the burden – of work-in-process you each have to carry.

It’s not a choice forced between either higher margin or higher velocity;  it’s the challenge – and the opportunity – of doing both, of maintaining higher margins at higher velocities.

Very few builders will meet that challenge or avail that opportunity.

Despite the obvious advantages, the demands of achieving higher velocity – the demands of generating higher productivity – are so daunting, require so much rigor, so much discipline, so much resolve, that most builders won’t attempt it.

And, therein lies competitive separation.

Pipeline workshops™ are a two-day immersion into the production physics – into the principles and disciplines – that enable homebuilders to thrive on the velocity side of economic return, to thrive on the velocity side of Return on Assets.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on March 25-26, 2020.  The cost is $895.00 per person;  the cost during early registration, open through January 8, 2020, is $750.00;  for team pricing, ask: (flgroves@saiconsulting.com).

Sponsored by Specitup.

For more details:  www.buildervelocity.com

 

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Pipeline Workshops™: Finding TrueNorth

Posted December 1, 2019 By Fletcher Groves

Scott Sedam is President of TrueNorth Development, Inc., and is the industry’s foremost Lean Production practitioner.  A well-known, well-respected Lean Building purist, Scott is a Bill Pulte protégé, with roots that go back to Edwards Deming and TQM.

He is a friend, and longtime fellow consultant.

In 2013, after the first edition of The Pipeline: A Picture of Homebuilding Production© was published, as I was planning the first-ever Pipeline workshop™, I suggested that Scott attend as SAI’s guest, so that he could judge the merits of pipeline-thinking for himself.

I wanted his opinion of the workshop, but I also wanted him to share with those first-time-ever attendees his thoughts on applying Lean Thinking beyond the margin side of economic return, towards what we were now terming the velocity side of Return on Assets.

Scott graciously came to that first workshop in March 2014, functioned just like any attending builder in the discussions and in the Pipeline games™, and was a panelist with me on blending improvement methodologies towards a solution that works best for homebuilding.

Afterwards, this is what Scott wrote in a discussion on the BUILDER group on LinkedIn:

“If you are ready to challenge your brain, get out of your well-sealed ‘Builder Box’ and make a huge leap forward in understanding schedule and its impact, come to this workshop and bring a few of your better thinkers.

“The roots of [this] workshop are in Goldratt’s Theory of Constraints, which is at first-blush exceedingly simple, but you can spend years studying the intricacies.  Fletcher puts it all in builder language and forces you to go deep into the impact of our most common builder practices.

“If all builders learned and followed the principles in [a Pipeline workshop™], our industry would take a huge leap forward.  The winners would not be the builders alone, but also homeowners and especially our suppliers and trade contractors.  Fletcher does not know I am writing this, but I strongly recommend his Pipeline Workshop™ to everyone who has the will to change for the better.”

Come. Participate.  Learn.

 

The next Pipeline workshop™ will be held March 25-26, 2020, at the Ponte Vedra Inn and Club in Ponte Vedra Beach, Florida.  The cost is $895.00;  the cost during early registration, open through Jauary 8, 2020, is $750.00;  for team pricing, inquire here:  (flgroves@saiconsulting.com).

Sponsored by Specitup.

For more details:  www.buildervelocity.com

 

The Pipeline: A Picture of Homebuilding Production, Second Edition© is available print-on-demand from the publisher website (virtualbookworm.com), as well as through the major book sellers (amazon.com, barnesandnoble.com, and booksamillion.com).  It is almost always carried in-stock on amazon.com.

 

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