Archive for February, 2021

Pipeline Workshops™: Disruptive Learning

Posted February 15, 2021 By Fletcher Groves

“The concept of production building being a ‘pipeline’, along with the simple and straight-forward concepts discussed in this seminar, made this one of the most eye-opening experiences I have ever had when it comes to learning about production building.”  (Patrick Bukszar, Dir. Construction Services, Essex Homes, Lexington, SC)

“The Pipeline workshop™ was an eye-opening experience.  I took away invaluable insight on what it takes to operate a profitable homebuilding company.”   (Daniel Hopkins, Director of Purchasing/Estimating, Jeff Benton Homes, Huntsville, AL)

“I walked away with a new perspective on making returns in residential homebuilding that challenged the models and assumptions I have worked under.”  (Mark Carter, Operations Manager, Drees Homes, Jacksonville, FL)

“It was quite intense, challenging, and not for the intellectually lazy”. (Scott Sedam, President, TrueNorth Development, South Lyon, MI)

Our intent in delivering a Pipeline workshop™ – plainly and simply – is to open builders’ eyes, open them wider than they have ever been opened, and to make the learning as disruptive as possible to conventional, long-accepted ways of thinking.

We don’t want to just inform builders’ thinking;  we want to reform it – and to re-form it.  We want to change their thinking about homebuilding production, and, in so doing, rebuild it as a new understanding of homebuilding production.

To that end, Pipeline workshops™ use two unique tools:

Pipeline games™ are both a production simulator and a business game, and they are largely what make Pipeline workshops™ so intense, so interactive, so competitive, so unique, so worthwhile.  Already the best production simulator in the business (and the only one of its kind), we have made the Pipeline game™ even better over the past eight years, by getting to the results faster, by giving it an income/operating statement that looks exactly like a homebuilding company, by comparing integrated and outsourced building models, and more.

RB Builders: Lessons from the Pipeline© is an MBA-level business case developed specifically for Pipeline workshops™.  It presents a set of problems related to a very realistic homebuilding operation, problems that attendees are required to solve, as a team, in real time;  it is a test that challenges their knowledge and understanding of both production and business principles.

Pipeline games™ and the RB Builders: Lessons from the Pipeline© business case are the type of tools that make what was already known for its unique, engaging, and challenging format a much sharper learning experience.

Pipeline workshops™:  creating a visual image of homebuilding production;  making the connection between operating decisions and the business outcomes those decisions drive;  ushering in a new way of systems-oriented thinking – a paradigm shift – towards solving core problems, managing constrained capacity, dealing with variation and uncertainty, and managing homebuilding production as the specific and particular workflow that it is;  emphasizing the actions that enable builders to thrive on the velocity side of Return on Assets.

Come.  Participate.  Learn.

 

Pipeline workshop™ No. 15 will be held March 17-18, 2021, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  The stated attendance fee is still $895.00.  However, the first fifteen (15) attendees will be registered at no charge, and the next fifteen (15) attendees will be registered at a reduced $395.00 per person;  all that is required is proof of room reservations (two nights, single occupancy) at the Ponte Vedra Inn and Club).

Attendance will be capped at only 30 attendees, so everyone attends at a significantly reduced cost;  there is no early registration;  there is no team pricing.

For more details:  www.buildervelocity.com

 

(published on Escape from Averageness® every year since 2009, coinciding with the NAHB International Builders Show;  updated as necessary, incorporated, and republished, here as the first in the five-part series)

The NAHB Chart of Accounts enables builder-to-builder comparisons, complies with GAAP reporting requirements, and allows the same consultants to give the same presentation year-after-year at IBS.  But, to the extent that its Income Statement presents costs as anything other than a true delineation based on behavior in regard to Revenue, it is – from a managerial accounting standpoint, and therefore, from a larger management standpoint – utterly useless.

It is useless, because it prevents a builder from understanding how it makes money.

The ability to generate cash, make a profit, and produce an economic return depends, in large part, on an understanding of cost classification.  How costs are classified, or associated, according to structural hierarchy, cost objects, and behavior.

Does it matter how costs are classified?  Does it matter where they are incurred, what caused them to be incurred, or whether they vary in relationship to anything?

Yes, it absolutely matters.

Costs are the most operative part of a home builder’s Income Statement, and an understanding of how costs are allocated and classified provides a basis of operational insight that is otherwise completely missing.  Understanding where costs are incurred and whether they are incurred directly or indirectly is important, but the distinguishing characteristic of costs is how they behave.

Here is the operative question:  Does the cost vary with the volume of Revenue, or does it not?

Cost behavior presents a builder with the truest picture of what its production capacity costs, where its breakeven points are, and how it analyzes changes in costs, production levels, and margins.

Not only the truest picture, but the only picture.

At the core of variable costing is the understanding that costs have attributes, and those costs cannot be managed as if their attributes don’t exist.

Builders need to control their direct, variable costs – the costs that should be “above the line” on their Income Statement, what is known as Cost of Sales;  they need to either reduce the cost, or extract maximum value (benefit in excess of cost) from having incurred it;  they need to exploit it, optimize its potential, find productive ways to get more value out of it, and understand, if they didn’t generate the Revenue, they didn’t incur the cost.

At the same time, they need to leverage their indirect, non-variable costs – the costs that should be “below the line”, costs expected to be incurred regardless of the Revenue generated, what is known as Operating Expense;  the objective should be to produce as many closings as possible, from having incurred the cost in the first place.

Controlling and extracting value from direct, variable costs is how a builder improves margin;  leveraging indirect, non-variable costs is how it increases velocity.  Economic return is Return on Assets;  ROA is margin x velocity;  it is velocity acting upon margin.

Builders must distinguish between variable and non-variable costs, to have any picture whatsoever of breakeven, i.e., the rate at which it absorbs overhead.  If Cost of Sales contains non-variable costs, and Operating Expense contains variable costs, that understanding of breakeven is destroyed.

These three examples of the problem with the NAHB COA Income Statement make our point:

  1. Indirect Construction Cost is treated as a cost that is deducted from Revenue to determine Gross Profit; the only difference between Gross Margin and Gross Profit is the inclusion of Indirect Construction Cost.  Do Indirect Construction Costs generally vary according to Revenue?    For the most part, they are non-variable costs that will be incurred regardless of the Revenue produced.
  2. Selling Expenses (including Real Estate Commissions) are treated as an Operating Expense, part of overhead. Anything allocated to Selling Expense should, therefore, be a non-variable cost.  Is that the case?    The bulk of Selling Expense is a variable cost.
  3. Financing Costs are treated as an Operating Expense, but it would only be a non-variable cost if a builder had its construction lines of credit fully-drawn every day of the accounting period, or if the LIP balance on the construction line of credit never varied. Is this typically the case?    Are loan fees non-variable costs that do not fluctuate with volume?  Typically, no.

Bottom-line:  Report your financial condition and meet your tax reporting obligations, as required.  Mindlessly compare your company with other builders, if you choose.  But – give yourself cost information that guides your operating decisions.

Next:  Part II:  The Problem with the NAHB Chart of Accounts Income Statement

 

(variable costing and the Contribution Income Statement format are considered as a part of every Pipeline workshop™.  Learn more here:  buildervelocity.com or saiconsulting.com/buildervelocity-pipeline-workshops)

 

Pipeline Workshops™: Right for You?

Posted February 6, 2021 By Fletcher Groves

Homebuilding production is a system.  It has to be managed as a system.  In order to be managed as a system, it must first be understood as a system.

That type of ordered, process-centric, capacity-focused thinking is not the homebuilding industry’s natural inclination;  it clashes with the deal-driven, product-centric, margin-focused mentality that typifies the industry.

Yet, that thinking is crucial, and will remain so, because in an industry continuing to face challenges, both old and new, both long and short-term, almost a decade after the end of the worst economic and housing recession in three-quarters of a century, the way forward cannot continue to be a reliance on only one component of economic return, a reliance solely on achieving higher margins.

Survival in the homebuilding business now imposes – now mandates, now requires – attention to both components of Return on Assets, to the achievement of both higher margins and higher velocities, and – if you want to put the game out-of-reach – to the achievement of much higher margins at much higher velocities.

It cannot be one-or-the-other, one at the expense of the other.  It cannot be a tradeoff between superior performance achieved in one component and inferior performance accepted in the other.

Meeting that dual mandate, achieving those outcomes, is the only path to creating sustainable competitive separation;  and – make no mistake – the ability to achieve sustainable competitive separation is what will determine survival.

Pipeline workshops™ are a two-day immersion into production physics – into the principles and disciplines that enable homebuilders to thrive on the velocity side of Return on Assets, to thrive on the velocity side of economic return®.  They transfer in-depth knowledge and create an intuitive, instinctive, and perceptive understanding of production principles and disciplines, focused solely on homebuilding operations.

It is an understanding of homebuilding production that becomes acquired behavior, that becomes innate, ingrained, second nature, visceral.

Pipeline workshops™ are size-limited events.  The material is comprehensive; the learning is intense;  the format is interactive and competitive.  The comprehensiveness, intensity, interaction, and competitiveness flows from two unique elements:

(1) RB Builders: Lessons from the Pipeline© is an MBA-level business case pertaining exclusively to homebuilding production and business management;

(2) the Pipeline game™ is both a business game and a production simulator, a progressive series of production scenarios that reflect homebuilding production in the real business world, in an environment of variation and uncertainty, where operating decisions result in economic outcomes, with the results of each game diagnosed immediately afterward, so that the connection between operating decisions and business results is embedded, so that the principles and the disciplines are ingrained.

What do you take away from a Pipeline workshop™?  

  • A visual image of a homebuilding production system – its purpose, its size, its cost, its length, its capacity, its limiting controls;
  • An understanding of how operating decisions drive business outcomes, and how the measures of operating performance connect to the measures of business performance; 
  • A set of mental models – a way of thinking about size, growth, capacity, even-flow, cost of variation, and other critical areas that define a homebuilding production system, that provides a systemic approach to solving production problems and managing finite production capacity, that delivers a blended approach to managing the unique attributes and parameters of homebuilding production; 
  • A set of velocity accelerators – deeper dives into Pipeline™ methods and practices that shorten schedules, reduce cycle times, produce higher quality with less waste, and achieve higher throughput with a planned, finite, and controlled amount of capacity and work-in-process.

Is a Pipeline workshop™ right for you? 

Pipeline workshops™ are not about job titles, operational scope, or company size.  They are intended for those charged with the critical responsibility of managing – or managing interactions with – a production system at some level of a homebuilding enterprise.

Pipeline workshops™ are for anyone who must understand/manage homebuilding production and drive results, including:

  • C-Level Executives – Presidents, CEOs, CFOs
  • Division and Regional Managers
  • Vice Presidents of Operations and Construction
  • Vice Presidents of Sales and Marketing
  • Design, Estimating, and Purchasing Managers
  • Production Managers
  • Construction Managers

Pipeline workshops™ are also an excellent experience for the equivalent positions with both building trade partners – manufacturers, distributors, suppliers, and subcontractors who must interact with builders in the value stream – and with the technology partners that must provide the systems.

Come.  Participate.  Learn.

 

Pipeline workshop™ No. 15 will be held March 17-18, 2021, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  The stated attendance fee is still $895.00.  However, the first fifteen (15) attendees will be registered at no charge, and the next fifteen (15) attendees will be registered at a reduced $395.00 per person;  all that is required is proof of room reservations (two nights, single occupancy) at the Ponte Vedra Inn and Club).

Attendance will be capped at only 30 attendees, so everyone attends at a significantly reduced cost;  there is no early registration;  there is no team pricing.

For more details:  www.buildervelocity.com