Archive for September, 2020

Velocity Accelerators®: Critical Chain Project Management

Posted September 27, 2020 By Fletcher Groves

One of the areas we always single-out for deeper discussion in a Pipeline workshop™ – areas we call Velocity Accelerators® – deals with the unrealized, under-appreciated benefit that would come from replacing the current method of scheduling houses under construction.

The nature of the workflow in homebuilding production is project portfolio management;  it is about managing what can be large amounts of work-in-process, about managing what can be a large number of houses under construction.  Yes, there is workflow performed in processes, but those processes are a different type of workflow, and they are generally embedded in, or enabling and supporting of, the larger, more primary function of managing a project portfolio.

The process of building a home – what we call the Start-to-Completion process – is actually the management of multiple projects that share resources.  It is the structuring and the management of a portfolio of job schedules, with interdependencies and interactions of tasks and resources.

At its core, homebuilding is multi-project management.

The current method of project scheduling is a reference to its algorithm, known as the Critical Path Method (CPM), which evolved from the Program Evaluation and Review Technique (PERT) in the 1950s;  Critical Path has been in existence for almost 70 years;  nevertheless, it is the algorithm, thus, the method, used in every homebuilding ERP.

PERT and CPM were designed for one-off programs with large, complex structures (think, Polaris weapons system, the Manhattan Project), but the Critical Path Method has become the de facto standard for scheduling all types of projects:  aerospace/defense, software development, product development, research, and – yes – construction.

The problem with CPM is that it was not designed for managing a portfolio of projects, and it was not designed to function in environments where velocity is important, where faster cycle time and higher inventory turns are critical drivers of business outcomes.

Where it must contend with variation and uncertainty, Critical Path offers only a buffer of additional time – individual task durations lengthened to protect the completion date of each task, but not necessarily insuring the completion date of the project.

And – what is the cost of that added safety?  What is the cost of specifying (supposedly) highly-reliable (95%) probabilities of completion over average (50%) probabilities of completion?

Statistically, this supposed solution lengthens the job schedule by a factor of 1.64.  Which is how 90-day job schedules become 150-day job schedules.  Built-in safety that three well-known, yet typically un-checked, types of behavior then conspire to waste.

For the most part, builders are oblivious to the effects of variation on their production system.  Yet, the cost of that variation is apparent and simple to calculate;  it is the Gross Income lost from all of the closings that never occurred, from houses that were never built with the capacity that was purposely available.

For an already profitable builder, it is Gross Income that would have clearly become Net Income, and ultimately, Net Profit.

And, it’s a lot of money.

Moreover, while CPM considers task dependency (the predecessor-successor relationships of tasks) in its work breakdown structure, it does nothing to resolve resource contention;  it does not consider situations in which tasks of different projects/jobs depend on the availability of resources that do not have sufficient capacity to meet the demand being placed upon them.

These two factors – dealing with variation and resolving resource conflict – should be anathema to homebuilders.

Critical Path was never designed to contend with the production environment homebuilding presents.  It is not the problem (the problem is variation and resource conflict), but CPM is benign to the solution.  ProChain Solutions’ Rob Newbold (Project Management in the Fast Lane) told me that he would go further, saying:  “CPM supports values that perpetuate the problems of homebuilders.”

Which brings us to Critical Chain Project Management.

Developed in 1997, Critical Chain addresses both task dependency and resource contention, and it replaces the padded durations intended to protect the completion date of every task with a smaller project buffer that is fully-capable of protecting the completion date of the overall project/job;  in the process, CCPM becomes much more aware of system capacity and constraints.

Understand what this different, changed approach means:  it means that Critical Chain substantially reduces the duration of projects – the cycle time of houses under construction – without impacting the reliability of their completion dates.

Consider this excerpt from one of the exercises in the RB Builders: Lessons from the Pipeline© business case being used in the upcoming Pipeline Workshop™:

“RB Builders’ newly-acquired division has a construction schedule of 120 calendar days, but its calculated cycle time is actually 180 calendar days.  It is widely agreed that the division should be able to build its homes in far-less than the 120 days called for by the schedule, because that duration reflects ‘highly certain’ task durations.

“Switching from CPM to CCPM would immediately reduce the schedule from 120 days to 97 days, cutting the schedule by almost 20% with no diminution of confidence;  it would reduce the actual 180 day cycle time by almost half (46%).”

Critical Chain Project Management does more than just reduce the length of construction schedules.  It also specifies a set of rules preventing behaviors that consume (and waste) the safety Critical Path builds into task durations.  It installs a release mechanism that “pulls” starts into the system and keeps work-in-process at the levels required to produce faster cycle times.

It implements simple, visual tools to manage production.

Builders can put a number of these practices into place without changing the scheduling algorithms from Critical Path to Critical Chain.  They can use add-on applications that convert existing CPM scheduling applications to CCPM.  They can implement standalone CCPM software applications.  However – Critical Chain will not be a complete, integrated solution for the homebuilding industry until its management technology providers wake up and address it.

It all starts with obtaining the knowledge necessary to insist on that change.

Come.  Participate.  Learn.

 

Critical Chain Project Management is one of three Velocity Accelerators® (along with Business Process Improvement, and Open-Book Management and Team-Based Performance Compensation) that will be explored in depth at the next Pipeline workshop™, October 21-22, 2020, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

Delivered by SAI Consulting.

Sponsored by Specitup and Simpson Strong-Tie (Specitup is currently in the process of developing its own CCPM application;  come hear what they have to say about it).

Cost is $895.00 per person;  for team pricing, inquire here (flgroves@saiconsulting.com).

Details:  www.buildervelocity.com

 

Velocity Accelerators®: Business Process Improvement

Posted September 19, 2020 By Fletcher Groves

The majority of SAI Consulting’s work, both in and out of homebuilding, has been about enabling clients to organize and structure themselves around their core-critical business processes;  Business Process Improvement is the area of our practice for which we are most recognized.

There is a good and simple reason why SAI focuses so much effort on documenting, redesigning, reengineering, improving, and managing business processes:

The most basic, most fundamental premise in business is this:  the existence of a business enterprise depends on its ability to make money;  the way enterprises make money is by delivering extraordinary levels of distinctive value to their customers and other stakeholders;  that value is delivered through the work that enterprises perform;  that work has to be performed in some manner of workflow;  the most common form of that workflow is work performed in processes.

Make money . . . by delivering value . . . through the work you perform . . . in processes.

From a business standpoint, processes are critically, centrally important;  processes exist – processes matter – whether homebuilders are intentional about them or not.

We constantly make the point that Pipeline workshops™ are about thriving on the velocity side of Return on Assets®, but better process workflow pays off on both sides of economic return;  it drives both higher margins and higher velocity, drives higher Return on Sales and higher Asset Turns.

Consider:

Start-to-Completion (the sub-process within the Prospect-to-Closing process that is the aorta of workflow in a homebuilding enterprise) is not, at its core, process management;  the workflow in Start-to-Completion is multi-project management;  it is project portfolio management, with embedded, supporting, and surrounding processes;  it is also workflow in which all of the non-supervisory work is performed by external resources (trades and suppliers).

Start-to-Completion is not managed like a process, so we don’t treat it as a process;  we don’t map it like a process;  we don’t document it as a process;  except for its embedded processes, we exclude Start-to-Completion from process management.

All of which should make this next point particularly startling:  even with Start-to-Completion workflow excluded, the results from dozens of process mapping engagements SAI has performed, over decades, suggest that 25% of all the process work a homebuilding company does perform – the work that consumes a building company’s overhead – is completely non-value-adding.

Ponder that revelation for a moment.

Here is the bottom-line:

If your Operating Expense represents – consumes is more to the point – eight percent (8%) of Revenue, it means you are throwing away $20,000 of every $1,000,000 in Revenue you generate.  And, if your true Gross Margin is 18%, it also means you are throwing away $20,000 of every $180,000 in Revenue you would actually get to keep.

The most visible element of BPI (and BPM) is the mapping of process workflows, but process mapping involves far more than documenting – and confirming, accepting as-is – the current state of that workflow;  it includes redesigning those workflows in ways that improve them, an effort which invariably reveals other issues – the core, root causes of problems – that affect profitability and economic return.

Which makes understanding and improving workflow the means to a much more important end.

Business Process Improvement is the tip of the spear, the front-end of a continuous improvement methodology in which the activities and elements of workflow that add value are preserved, the activities and elements that add no value are eliminated, and the remaining activities and elements that enable value are refined to make the workflow more clear, more consistent, more streamlined, more connected, more succinct, more fit for its intended, defined purpose.

In the language of a Pipeline workshop™, we want a shorter, straighter pipe.

Because it is so foundational, it is impossible to overstate the importance of understanding and improving the way work is performed, before starting down the long road on other improvement initiatives, before the process of continuous improvement moves anywhere else.

In addition to being the means to a more important end – and the front-end of a process of continuous improvement – BPI ushers in a new perspective.

It shifts the organizational view away from the internal structure of work performed in functions, and towards the flow of work performed in value-adding processes;  BPI shifts the perspective from vertical to horizontal;  it turns a homebuilding enterprise 90 degrees from vertical, lays the enterprise on its side, and aligns its workflow with the value it seeks to create.

Business Process Improvement is about getting horizontal.

The relevance goes beyond the processes themselves.  Processes are the centric element of the business operating model that forms any strategic value discipline that serves to deliver exceptional levels of the specific, distinctive value demanded by a narrowly-defined segment of homebuyers.

Come.  Participate.  Learn.

 

Business Process Improvement is one of three Velocity Accelerators® (along with Critical Chain Project Management, and Open-Book Management and Team-Based Performance Compensation) that will be explored in depth at the next Pipeline workshop™, October 21-22, 2020, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

The cost is $895.00 per person;  for team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting.

Sponsored by Specitup and Simpson Strong-Tie.

Details:  www.buildervelocity.com

 

Pipeline Workshops™: Velocity Accelerators®

Posted September 13, 2020 By Fletcher Groves

If you had to choose one word to associate with a Pipeline Workshop™, it would be velocity – a vector measure defined as speed made good in a purposeful direction.

As a measure of business outcomes, we want to elevate velocity to an equal standing with margin, because those two measures – margin and velocity – are the co-equal components of economic return, and the two conditions necessary for achieving sustainable competitive separation.

Which is why, at every Pipeline workshop™, we highlight specific areas of production management for a deeper dive – more discussion, challenging, pointed exercises from the RB Builders: Lessons for the Pipeline© business case, etc.

These areas are known as the Velocity Accelerators®.

Velocity Accelerators® tend to be important areas that never receive sufficient attention;  in fact, beyond a passing understanding, Velocity Accelerator® sessions are often the first meaningful exposure builders attending a Pipeline workshop™ have had to these areas.

For the upcoming workshop (Pipeline Workshop™ No. 14, October 21-22, 2020, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida), we are highlighting three areas:

Business Process Improvement (BPI):  The most basic, most fundamental proposition in the business of building homes is this:  the reason a builder exists is to make money;  the way a builder makes money is by delivering value – benefit in excess of cost – to its homebuyers and other stakeholders;  that value is mostly delivered through the work that the building enterprise performs;  value-delivering work has to be performed in some manner of workflow, which includes work performed in processes.

Make money . . . by delivering extraordinary value . . . through the work a builder performs . . . in processes.

BPI is the front-end of a process of continuous improvement, one that fundamentally changes the perspective of workflow, and becomes the driving component of the operating model that forms a builder’s strategic value discipline.

BPI improves both the margin and velocity sides of economic return.

Critical Chain Project Management (CCPM):  Developed more than sixty years ago, the project scheduling algorithm known as the Critical Path Method (CPM) was never intended to function in the environment of homebuilding production, which is essentially project portfolio management with surrounding, supporting, and embedded processes.

CPM was never designed to function in environments in which velocity is important, where faster cycle time and higher inventory turns are critical drivers of business outcomes.  Moreover, CPM is oblivious to the effect variation has on the scheduling of a production system.

Yet, Critical Path is the scheduling algorithm used in every ERP system designed for homebuilders.

CCPM is the leading edge – the future – of project scheduling for homebuilding;  it promises significant improvements in the management of homebuilding production – faster cycle times, faster inventory turns;  managing variation;  enabling homebuilders to generate more Revenue, more Gross Income, with a planned, finite, and controlled amount of work-in-process and production capacity.

Critical Chain is about improvement on the velocity side of Return on Assets.

One of our sponsors, Specitup, is coming out with their own CCPM app, and they will be available to share that information.

Open-Book Management and Team-Based Performance Compensation:  The efforts of a homebuilding company to improve operating performance and business outcomes will become far more difficult – it will likely fail – if it does not succeed first in creating a homebuilding team that works toward commonly-held and commonly understood business goals, as opposed to being a collective of so-called teammates working toward individual goals.

What would be missing, is an underlying business logic that forms the necessary context for understanding everything else.

To become the kind of savvy, motivated, mutually-accountable homebuilding team required to compete effectively today in the business world, everyone on the team has to learn the “business” of homebuilding, they have to understand their individual responsibilities as part of the overall team, and they have to understand what is at stake, individually and collectively.

That is the role of Open-Book Management.

But, it is not enough that teammates understand the business outcome that is at stake;  they must each have a personal stake in that business outcome.

That is the role of Team-Based Performance Compensation.

Open-Book Management and Team-Based Performance Compensation affect both the margin and velocity sides of economic return.

 

The reason we are only highlighting these three Velocity Accelerators® at this workshop, instead of the five or so we have highlighted in previous workshops, is to give these three areas sufficient emphasis.  We still intend to touch on two other Velocity Accelerators®:

Epic Partnering™:  Builders attending Pipeline workshops™ consistently emphasize the need for stronger trade-partnering, better coordination, more cohesiveness, a more unified approach to managing the trade side of production.

They acknowledge the obvious:  they do not have the internal resources necessary to perform “the set of all specific actions” required to bring houses through the start-to-completion process, and – as a completely outsourced supply chain – they are completely dependent and reliant on skilled construction resources that are in short supply;  they understand that they can no longer dictate the terms of engagement.

Developing the business relationships that unify a builder’s value stream is both a program and a process, consisting of milestones, education, features, and rewards.

Epic Partnering™ is transformative, and it has implications on both the margin and velocity sides of economic return.

Building Information Modeling (BIM):  Building Information Modeling (BIM) explores building design in a 3D model of the three spatial dimensions of width, height, and depth (some would also say time and cost), and links to multiple databases with information on costs, schedules, specifications, engineering data, and more.

BIM integrates, consolidates, and links information;  it makes data more accurate, useful, and manageable.

As with Epic Partnering™, Open-Book Management, and Business Process Improvement, BIM has implications for both sides of economic return, for both the margin side and the velocity side of Return on Assets:  better, more collaborative designs with fewer design errors, more accurate job cost books, job budgets, and purchase orders (margin);  plans that are easier to build, with more dependable job schedules, shorter cycle times, faster inventory turns (velocity).

By some estimates, BIM can make product 35% faster and 25% less costly to build, with a more satisfying homebuying experience and a higher quality product.

Yet, for all its promise to transform the homebuilding industry, BIM has historically had a shallow adoption curve, largely because implementing BIM requires a lot of money, huge amounts of determination and resolve, a different mental model, and a willingness to abandon past practices.

Which is where opportunity often lives.

One of our sponsors, Simpson Strong-Tie, will be available to share information on their BIM Pipeline and Quickstart Toolkit apps.

 

We like the balance between the these Velocity Accelerators®:  a blend of immediate and long-range initiatives that accelerate velocity, but also improve margins.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held October 21-22, 2020 at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  The cost is $895.00 per person;  for team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting.

Sponsored by Specitup and Simpson Strong-Tie.

Details:  www.buildervelocity.com

 

“I remember where I was . . . I remember who I was with.“

Posted September 10, 2020 By Fletcher Groves

(posted on Escape from Averageness®, every year, on the anniversary of 9/11)

September 11, 2001.  8:46 AM.  Nineteen years ago today, I was in the offices of Fidelity Homes, in Venice, Florida, commencing a process mapping engagement to give this start-up homebuilding company a state-of-the-art set of business processes.  SAI Consulting’s involvement was part of a large, pro bono effort, called “From the Ground Up”, arranged by Professional Builder, that included a number of top consultants serving the homebuilding industry.

My role was to be the Process Architect for Fidelity Homes.

Sitting across the table were David Hunihan and Todd Menke, two then-young builders, eager to take their experience in homebuilding and pursue a National Housing Quality award.  We were well underway, when David was pulled away by a telephone call.  It was his wife, Lauren, asking if he was aware of what was going on in New York City.

As the events continued to unfold, in New York City, in Washington DC, in western Pennsylvania, we finally decided that it was impossible to focus on mapping workflow, and, anyway, under the circumstances, whatever we were doing did not seem all that important.  We cancelled everything for the rest of the day, and, in our own ways, watched and tried to process what was happening.

The late Bill Lurz, then a senior editor at Professional Builder, joined us the following day.  We finished the project two days later, and I drove back to my family in Ponte Vedra Beach, Florida through a tropical storm.  On that day, the welcome home had extra meaning.

The article for “From the Ground Up’ was written and published in Professional Builder.  I told the full story of Fidelity Homes in a six-part series on Escape from Averageness® in 2011, coinciding with the tenth anniversary of the 9/11 attack.

I still consider the events of 9/11 to be a matter of unfinished business for this country.  Yes, it is difficult to resolve unfinished business when the risk associated with that business is ever changing.  Osama bin Laden is dead, Al-Qaeda is a remnant, ISIS has been destroyed, but the intentions they fomented remain.  The threat of terrorism has not ended;  it is alive on four or more continents.

Domestically, is Antifa, at its heart, really any different?

Time has only increased my feelings about it.  We were attacked, almost twenty years ago, because of who we were, because of who we unapologetically remain.  Our enemies see it as unfinished business, as well.

Evil is the enemy of good;  that evil has an ever-more-radical face, both secular and non-secular.  In the presence of that evil, we have failed to clearly state what war is.  We have dismissed the understanding of war as the complete and utter destruction of an enemy.  Whether the outcome of complete and utter destruction of an enemy can be accomplished by cutting off its head, or has to be achieved through the complete annihilation of its being, doesn’t matter.

It doesn’t matter what we think of issues like American Exceptionalism, our place in the world, the tradeoff between national security and the constitutional rights to privacy of US citizens, the threat of terrorist attacks on our own soil, the still unaddressed murder of US diplomats and security personnel in Benghazi, the ramifications of decisions not to intervene in Iran and Syria, the continuing involvement in Afghanistan and Iraq, the ebb and flow of ISIS, Al-Qaeda, the Taliban, and all of the other bad actors, the question of what happens if Iran or North Korea become terrorist regimes with nuclear weapons, cyber warfare, the more likely employment of infectious diseases as a weapon.

The discussions on all of those matters miss the point.

The discussions miss the point, because they don’t address the root cause of the problem.  The core problem is not the threat of future terrorist attacks or rogue regime nuclear attacks, or any of the rest.  The problem is the terrorists and their sponsors;   the problem is rogue nuclear regimes and their enablers;  the problem is countries that have always been our enemies and will never be our friends.

And, the solution is not attrition, or containment, or control, or minimization, or dismantlement of the threat, or mounting an international coalition against terror, or imposing sanctions, or providing more humanitarian aid, or granting political asylum, or creating deeper understanding, becoming woke, or negotiating peace, or peace, itself.

It is true that, as Christians, we are told to love our enemies.  It is also true that love and forgiveness do not remove consequences, and that scripture is filled with instances when the children of God were instructed to destroy their enemies.  And – yes – at some point, the One, True God, in His righteousness and omnipotence, may decide to impart His own justice to this situation.

However – absent divine intervention – we cannot afford the “problem of conjecture”, as Henry Kissinger described it.  We have now assured ourselves that there will be a war;  if not a nuclear war, then certainly a war over who will have nuclear weapons.  Competitors that already have nuclear weapons no longer fear us;  the ones that hope to obtain them will not fear us, either.  We are now in a far more dangerous, more deadly, more vulnerable situation than we were in the aftermath of 9/11.

“Fleury.  Tell me what you whispered to Janet, in the briefing, to get her to stop crying about Fran, you know, before all this, before we even got airborne.  What’d you say to her?  You remember?”

“I told her we were gonna kill ’em all.”

(The Kingdom, Universal Pictures, 2007)

 

Pipeline Workshops™: RB Builders: Lessons from the Pipeline©

Posted September 7, 2020 By Fletcher Groves

It is the first quarter of 2020.  RB Builders is aiming – once again – to extend its reputation as a builder that thrives on both the margin and velocity sides of Return on Assets, by expanding into a new geographical market, via the late-2019 acquisition of its seventh existing homebuilding operation.

Although, it is the smallest of RB Builders’ acquisitions to-date, in terms of market segment, this newly-acquired division is in-line with all but one of the previously acquired operations.  Much like its predecessors, it has historically generated operating results and business outcomes that are lower – in this case, considerably lower – than what RB Builders considers acceptable.  Like its predecessors, this new building operation has acceptable current land/lot positions.

RB Builders has already completed the newly-acquired division’s management technology conversion, and has started the conversion of its business and operating processes.  Despite the size and performance-related challenges, RB Builders is confident that it can continue its exemplary track record of unifying, developing, and improving the capabilities of existing teams at the builders it has acquired, transforming them into teams that reflect RB Builders own savvy, motivated, and mutually-accountable homebuilding team.

This road has become a familiar path for RB Builders.

HISTORY OF RB BUILDERS:  Twelve years earlier, at the beginning of 2008, shortly after the end of the halcyon period known as the Age of Homebuilder Entitlement®, RB Builders had begun its own transformation process, with the objective of extracting itself from what it self-described as “the tar pits of averageness”.

This transformation process had four key components:

(1) a team-based performance compensation plan directed at achieving targeted results above a baseline related to a single business outcome, with payout based on the achievement of a series of progressively-weighted milestones;

(2) a method of sharing numbers that produces full operational and financial transparency;

(3) an accounting approach that connects operating performance to business outcomes, via actionable data;

(4) a focused process of continuous improvement, consisting of a prioritized series of consecutively-ordered initiatives, with short durations aimed at achieving defined, targeted, and measurable results.

Along the way, there had been a number of initiatives, some dealing with workflow, one dealing with scheduling, some dealing with the value stream and trade partnering, others dealing with buildability and product value.

As a result of this program, RB Builders had made massive strides.

During the initial five-year period (2008-2012), figured on a same company basis, annual Revenue had grown from $50 million to more than $121 million, an increase of almost 250%.  During the same period, the number of closings had increased more than 225%, from 200 to 453 houses per year.  Despite margin pressure, overall Gross Margin had increased slightly, from 22% to 24%;  as a result, RB Builders’ Gross Income had out-paced Revenue, growing by more than 250%, from $11 million to almost $30 million.

During this same five-year period, Operating Expense had increased 30% (from $8.5 million to $11 million), but far less than the same-period increase in Revenue.  As a result, RB Builder’s Net Income had risen from $2.5 million to $16.5 million, more than six times what it had been before the company began its transformation;  Net Margin had almost tripled, from 5% to 14%.

In 2008, RB Builder’s cycle time had been 180 days;  by the end of 2012, cycle time had been reduced to 65 days.  In 2008, the average amount of work-in-process had been 100 houses under construction;  by the end of 2012, the company been able to reduce its average work-in-process to 80 houses under construction, despite doubling the number of houses being closed.

In 2008, RB Builders had sought an inventory turn of 2.5x, which was actually an improvement from 2007;  in 2012, by keeping its work-in-process at 80 houses and closing 453 houses, RB Builders had been able to more than double its physical inventory turn, from 2.5x to 5.7x.

In 2008, RB Builders had been able to turn the value of its financial assets three times;  in 2012, it turned the value of those assets almost five times.  Because it had managed to maintain margins while improving velocity, RB Builders saw its main barometer of economic return (Return on Invested Assets) increase almost six-fold during the five-year period, from 11% in 2008 to 64% in 2012.

In 2013, RB Builders moved all of its raw land holdings and developed lot inventory off of its balance sheet and into subsidiaries, a move which would have further improved Asset Turn – and ROIA – had those two measures been restated to reflect the remaining assets.

By any measure, it had been a remarkable transformation.

The six divisions that RB Builders had previously acquired have all met – or remain solidly on-track towards meeting – their own multi-year plans for significantly increasing closings and Revenue, and doing so without incurring any increases in Operating Expense, while maintaining lower levels of work-in-process and operating under reduced construction lines of credit.

NEWLY-ACQUIRED DIVISION:  Near the end of 2019, RB Builders acquired this, its seventh homebuilding operation (RBB-7).  Unlike the outlier 2017 acquisition, RBB-7, despite its smaller size, was thought to be in-line with RB Builders’ M&A pattern, because of similar product offerings, in the same price range.

For managerial accounting purposes only, RB Builders had converted RBB-7, as it had done with all of its acquisitions, to a Contribution Income Statement format based on a variable costing approach to cost allocation.

In its final year of independent operation, RBB-7 had closed 32 houses, on which it generated $8.0 million in Revenue;  with its $6.72 million in restated Cost of Sales now reflecting only its direct, variable costs, the division had generated $1.28 million in Gross Income, resulting in a 16% Gross Margin.

With its $960,000 in restated Operating Expense now reflecting only its indirect, non-variable costs, the operation had produced $320,000 in Net Income, resulting in a 4% Net Income Margin.

Since it carried an average work-in-process of 16 houses under construction throughout 2019, RBB-7 had a calculated cycle time of 180 days (despite job schedules that called for 120 days);  since cycle time and inventory turn are reciprocal measures, the 32 closings achieved with an average work-in-process of 16 houses under construction meant that the division had also turned its physical inventory twice (2.0x) in 2019.

Adopting another RB Builders’ mandate, and moving all of its raw land holdings and developed lot inventory off its balance sheet and into subsidiaries, RBB-7 showed a restated average work-in-process of $2.28 million (the average per-unit LIP balance of $142,500 consisted of a $75,000 average lot takedown and a $210,000 fully-funded LIP balance (100% of cost, 84% of the $250,000 average sales price).

An average work-in-process of $2.28 million and Revenue of $8.0 million gave the division an asset turnover ratio of just over 3.5x.  For 2019, with its Net Margin of only 4% and its restated asset turn of 3.5x, RBB-7 had achieved a Return on Invested Assets of only 14%. 

As this newly-acquired division’s management team, here are the questions the business case exercises raise for you:

Q;  How will you address a mandate that your newly-acquired division increase its annual closings by close to 25% during its first two years, with less work-in-process, a smaller line of credit, and the same amount of overhead?

Q:  How will you use Building Information Modeling (BIM) to improve both the margin and velocity sides of economic return?  What will your ROBIMI (Return on Building Information Modeling Investment) be?

Q:  What cost accounting practices will need to change in order for you to comprehend the type of operating decisions that must drive the targeted economic outcomes?

Q:  How will you create a savvy, motivated, mutually-accountable homebuilding team?  A team that understands the business of homebuilding as much as it understands the homebuilding business?  How will you give every teammate a significant financial stake in the outcome?

Q:  How will you answer RB Builders’ contention that variation – evidenced solely by your 2019 calculated cycle time – is costing your division $640,000 per year in lost Net Income, an outcome that will persist each and every year, until it is addressed.  A fact to keep in mind:  in 2019, your division only had Net Income of $320,000.  Is what they are asserting even possible?

Q:  How will you implement Epic Partnering™ (RB Builders’ program/process for creating relationships-arrangements of compelling mutually-shared interests) with your suppliers and subcontractors?  What are the attributes of the partnering relationship?  What are the components of the partnering program?  What does a transformational partnering process look like?  Is vertical integration an option to consider?

Q:  As you analyze it, are you willing to consider replacing, over time, your fully-outsourced building model (requiring a larger, shallower geographic footprint) with a fully-integrated building model (which allows a narrower, deeper footprint)?

Q:  How will you use Business Process Improvement (BPI) to remove non-value-adding work and make the remaining value-adding work flow faster, more evenly, more smoothly, with fewer mistakes and rework?  How will you build a shorter, straighter pipe?

Q:  Can you use Critical Chain Project Management to reduce your job schedules from 150 days to 121 days, while also assuring more reliable job completion dates?

You can always ask us to send you the business case.  You can complete it, grade it, and figure out how well – or how poorly – you did.  Were you able to answer the questions?  Were you able to solve the problems?

If you find as unacceptable – what we’ll call your “degree of attunement” – you should come to the upcoming Pipeline workshop™.

 

Come.  Participate.  Learn.

RB Builders: Lessons from the Pipeline© is the underlying business case study used at every Pipeline workshop™.  The next workshop is being held October 21-22, 2020, 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.

Sponsored by Specitup and Simpson Strong-Tie.

Details:  www.buildervelocity.com