Archive for May, 2021

The Cost of Process Variation and Waste

Posted May 29, 2021 By Fletcher Groves

(originally published on EFA® in August 2012 as “The Cost of Tolerating the AS-IS State of Business Processes”, reduced to its essence, updated, and republished as part of two retrospectives, “Above Average: The Best of Escape from Averageness®, 2009-2012” in 2013 and “Still Above Average: The Best of Escape from Averageness®, 2009-2021” in 2021)

SAI has been mapping business processes – documenting, analyzing, improving workflow – in the residential construction industry for more than two decades.  During that period, we have managed dozens of engagements, across a broad spectrum of geographical markets and builder types, multiples of processes, involving tens of thousands of discrete steps.

Most of our clients are well-managed homebuilding companies, some of them exceptionally well-managed by the standards with which this industry is judged.  The list includes past National Housing Quality (NHQ) Award winners and past winners of Professional Builder’s Builder of the Year award.  All of them, at the very least, were forward-thinking enough to be concerned with improving their business processes in the first place.

Nevertheless, the data from these process mapping engagements, anecdotal or otherwise, in its totality, suggests that fully 25% of the work these otherwise very competent builders were performing added no value whatsoever;  it is almost certain that the actual percentage of non-value-added work was considerably higher.  No two process steps have equal weight, but acknowledging the percentage of non-value-added work has merit;  it has validity in assessing whether a process is badly-designed, is being poorly managed, or both.

If you are a homebuilder, the point is this:  What are such badly-designed and/or poorly-managed processes costing you?

What are they really costing you?

The most basic – the most universal – proposition of business – applicable to any industry, but applied here to homebuilding – is this:  the goal of a homebuilding enterprise is to make money;  the way it makes money is through the value that it delivers to its homebuyers;  that value is delivered by the work the enterprise performs, and that work has to be performed in some method of workflow.

The effort to deliver homebuyer value costs the homebuilding enterprise something.

Set aside, for now, the substantial costs a homebuilding company incurs in the business sub-process known as Start-to-Completion (STC).  For a number of reasons, we exclude STC as a process from the scope of a process mapping engagement (see the original post).  The cost of that part of the effort to deliver value – including all of the very real cost of wasted effort associated with scrap, jobsite conditions, jobsite mistakes, scheduling conflicts, design issues, etc. – is not reflected in the data we just referenced.

That is because, on an Income Statement, that cost should be classified as Cost of Sales.

Cost of Sales is considered to be a converted or transformed cost, and the cost of the non-value-adding effort is passed on, largely hidden, in the form of higher pricing from the sub-contractors and suppliers that perform all of the work.  The cost of non-value-adding effort contained in Cost of Sales diminishes Gross Income;  it depletes the value delivered to the homebuyer, who paid more than he should to receive the benefit for which he contracted.  It can be affected by non-value-adding effort in areas outside of Cost of Sales, as well.  It is significant.  It is expensive.

But, it is not the issue being discussed.

This discussion is about the consumed cost of non-value-adding effort, reflected in a homebuilding company’s Operating Expense.  Whether you choose to view Operating Expense as a productivity issue or as an excess capacity issue – as a consumed cost that should be leveraged (our preference), versus a consumed cost that should be reduced – there is clearly a pointlessly-incurred cost associated with wasted effort, associated with effort that produces no value.

That cost diminishes Net Income.

How much?

A number of years ago, John Caulfield highlighted data from one of the Shinn Group’s annual Financial and Operations Studies, based on information provided by 450 builders that were participants in the Shinn Builder Partnership programs.  More than two-fifths of the builders surveyed reported Operating Expenses above 25% of Revenue (at the time, Shinn’s recommended target was to keep Operating Expense at less than 25% of Revenue, but, in so many words, urged builders to keep Operating Expenses significantly lower, at under 20% of Revenue).

Out of the Shinn data and the SAI data, let’s consider a favorable scenario:  a hypothetical homebuilder with favorable overhead (20% of Revenue) and a low level of wasted effort (25%) within that overhead.  That makes this hypothetical builder’s cost of wasted effort five-percent (5%) of its Revenue;  for every million dollars of Revenue, the cost is $50,000, a cost that comes right off the builder’s bottom-line.

That cost is one thing, if you are a homebuilding company the then-size of Pulte (an annual cost that then represented a mere $197.5 million in lost-but-potentially-recoverable Net Income).  It’s another matter, one that likely strikes closer to home, if you are a homebuilder with Revenue in the $40 to $45 million range – a range bracketed, at the time, by two of the consistently successful builders that SAI had taken through the effort to map their business processes, and who’s data was included in our calculations:  Jagoe Homes (Owensboro, KY) and Charter Homes & Neighborhoods (Lancaster, PA).

Let’s be clear:  If you are the then-size of a Jagoe or a Charter, and – unlike Jagoe or Charter – you do nothing to improve the AS-IS, do nothing to remove the waste and variation associated with the current state of the processes you depend upon to deliver value to your homebuyers, that bogie is a cool $2.1 million, incurred every year.

Not exactly chump change.

 

(introduced on builderonline.com in November 2014;  published on Escape from Averageness® in June 2016, as the second in a two-part series about a new consulting deliverable we were launching;  updated and republished here as part of our latest retrospective, “Still Above Average: The Best of Escape from Averageness®, 2009-2021”)

From time to time on Escape from Averageness®, we share high-level outcomes from selected consulting engagements, in order to provide different insights.  In this case, the insight is into how a focused, prioritized process of continuous improvement should work, a process that starts with a complete understanding of current reality.

Building Urgency Towards Results® is a two-part series summarizing the analysis and initiatives from one of the first Current Reality Assessments® we ever conducted [in the years since, we have conducted almost a dozen CRA®s].  Part I is about assessing and understanding current reality;  Part II, what follows, is about determining the best way forward from that reality.

Continuing from Part I:

From the UDEs and the IO Map, the team developed a Plan Forward, a roadmap to get them from where they were, to where they wanted to be.  As such, the plan represented a planned, purposeful commitment to achieving that goal.  It was a series of initiatives with short durations, conducted in consecutive order, aimed at producing rapid, targeted, measurable improvements in areas of operational performance that drive improvements to a specific business outcome.

Fully-defined in terms of order, relationship, responsibility, completion dates, requirements, and outcomes, the Plan Forward was a focused course of action that addressed the cause-and-effect relationship between the root causes of problems and their visible symptoms;  the Plan Forward was also tailor-made for use with an open-book, team-based approach to performance compensation.

All of the so-called P-initiatives in the Plan Forward flowed from the assessment of current reality, the UDEs, the IO Map.

The team decided to focus on eight initiatives:

 

P-1:  Strategic Direction:  Confirm the specific direction the company is committed to take, in terms of its value proposition, value discipline, target market, product type, architectural style and design, revenue and closings, and production size and capacity.

Purpose:  Provide strategic clarity.

Prerequisites:  None

Duration:  15 business days

 

P-2:  Team-Based Performance Compensation Plan:  Design and implement a Gross Income Milestone Plan, one based on the confirmed strategic direction, and providing for the payout of a GI Reserve reflecting the difference between a GI Baseline and a GI Target.

Purpose:  Become a company of business-people;  provide teammates a stake in the outcome.

Prerequisites:  P-1 complete

Duration:  5 business days

 

P-3:  Business Process Improvement:  Part I:  Completely analyze the current state of every critical business process, documented as cross-functional flowcharts.  Part II:  Redesign all of those critical business processes to provide significantly improved workflow, and then document them as IDEF0 process models (a hierarchical series of graphic and supporting text diagrams).

Purpose:  Implement elegant workflow solutions:  get horizontal;  clear the fog;  simplify the workflow;  attack variation, waste, and non-value-adding work;  take the freed-up internal resource capacity and deliver higher value work.

Prerequisites:  P-1 complete

Duration:  35 business days

 

P-4:  “Pull” Release Mechanism for Starts:  Implement a Start Release process designed to sequence the rate of job starts to (1) the completion of jobs already in the production system, and (2) the number of previously-released jobs in front of the most constrained resource.

Purpose:  Increase velocity:  reduce cycle time, manage capacity, reduce/control work-in-process;  synchronize starts and closings.

Prerequisites:  P-1 complete, P-3 complete

Duration:  9 business days

 

P-5:  Identify-Exploit-Elevate the constraint:  Identify the external resource that has a combination of the least capacity and/or the highest demand on that capacity;  partner with that resource to optimize its capacity, insure that it is never idle, and then – as a final resort – arrange for more capacity.

Purpose:  Increase velocity:  manage capacity, control work-in-process.

Prerequisites:  P-1, P-3, P-4 all complete

Duration:  5 business days

 

P-6:  Job Schedules:  Reduce current calculated cycle time (see Little’s Law) from 206 days to under 150 days, by removing all of the task duration safety and adding a project buffer to protect the job completion date (see Critical Chain).

Purpose:  Increase velocity:  reduce cycle time, by shortening the job schedule.

Prerequisites:  P-5 complete

Duration:  10 business days

 

P-7:  Plan Portfolio:  Expand and enhance the existing/current portfolio of floorplans and elevations, using the new Plan Review process.

Purpose:  Increase margins:  increase value delivered, by increasing the benefit and/or reducing the cost;  insure that the plan portfolio is a compelling differentiator in the company’s housing market;  strive for floorplans/elevations that are desirable-yet-buildable, buildable-yet-desirable.

Prerequisites:  P-1, P-3, P-6 all complete

Duration:  90 business days

 

P-8:  Job Budgets and Job Costs:  Apply the new Job Budgeting/Costing process to every floorplan and elevation in the expanded/enhanced plan portfolio to produce accurate and complete job budgets.

Purpose:  Increase margins:  produce accurate and complete job budgets;  use better specifications;  obtain better pricing.

Prerequisites:  P-3 complete, P-7 complete

Duration:  41 business days

 

Eight initiatives, to be completed in nine months.  Focused.  Prioritized.  Manageable.  Measurable.  Results-Driven.

Expected Results:  strategic clarity;  better processes;  everyone with a stake in the outcome;  cycle time reduced from 209 days to 150 days;  Inventory Turns increased from 1.7x to 2.4x;  Gross Margin increased from 17% to 22% (albeit on a useless absorption costing, NAHB-comparative basis).

Not too shabby.

I told our client it was a good start, but it is too modest;  I told them not to stop there.

Based on the UDEs and the IO Map (and we suspect the CRT had it been developed), and in the midst of developing the Plan Forward, I warned them that there remained a lack of clarity, boldness, and urgency, and advised them to address the deficiencies.

I told them that they understood the current situation, and they had a plan, but that is all they had.  It was up to them.  I told them that the hard work lay ahead, and it had to start right then.

If it was a different client, in a different situation, under different economic circumstances, it would have no doubt have resulted in a different plan.  But – whatever the situation – this is the type of urgency that continuous improvement needs to foster.

 

(introduced on builderonline.com in November 2014;  published on Escape from Averageness® in June 2016, as the first in a two-part series about a new consulting deliverable we were launching;  updated and republished here as part of our latest retrospective, “Still Above Average: The Best of Escape from Averageness®, 2009-2021”)

From time to time on Escape from Averageness®, we share high-level outcomes from selected consulting engagements, in order to provide different insights.  In this case, the insight is into how a focused, prioritized process of continuous improvement should work, a process that starts with a complete understanding of current reality.

Building Urgency Towards Results® is a two-part series summarizing the analysis and initiatives from one of the first Current Reality Assessments® we ever conducted [in the years since, we have conducted almost a dozen CRA®s].  Part I, what follows, is about assessing and understanding current reality;  Part II is about determining the best way forward from that reality.

Together, these two parts present a summary of the process.  It is also a picture of the candor and directness that must exist to make the process work.

The purpose of a Current Reality Assessment® is to:  (1) set forth a focused, prioritized, and measurable process of continuous improvement, with targeted economic outcomes;  (2) create a forward-looking plan, consisting of consecutive initiatives with short durations aimed at achieving the targeted outcomes;  and (3) build a sense of urgency towards the achievement of those outcomes.  That sense of urgency is held by everyone on the team, fueled, in part, by everyone having an economic stake in the outcome (stakeholders are not stakeholders if they don’t have a stake).

It is also a picture of the type of urgent, focused, rapid-results process of continuous improvement that is one of our requirements for working with clients – and being compensated – on the basis of the progress achieved toward a specific financial outcome;  in a Results-Based Consulting® arrangement, we have exactly the same stake in the economic outcome that our clients have.

The proceedings of any Current Reality Assessment® are determined by the particular situation and the period, and reflective of the specific business model.  However, those particulars and specifics notwithstanding, the principles of continuous improvement never change.  This client happened to be a $25 million, semi-production builder that strives for a 50/50 mix of inventory and presale homes, all in communities that it develops, communities in which it is the exclusive builder, and its CRA® reflected those circumstances.

Current Reality Assessments® require advance planning, preparation, data gathering, and analysis, but the onsite portion of the assessment can be completed in a matter of days.  This client took an aggressive stance, by agreeing to our recommendation that all three elements of their CRA® be completed in the course of a single day.

Those three elements were:  (1) the assessment of the current situation, the current reality;  (2) the plan forward from that current reality (the series of initiatives based on an Intermediate Objectives (IO) Map and Current Reality Tree (CRT), two of the logical thinking processes in Theory of Constraints practiced by Goldratt, Newbold, Kendall, and others);  and (3) the development of a team-based performance compensation plan (a progressive series of payouts of a reserve created from the milestone achievements related to a single business outcome targeted above an agreed baseline).

The one-day onsite schedule was intended to break complacency and force a sense of urgency.  We also knew that it might prove to be an impossible achievement – which it did.  So, we had to help the team complete the unfinished elements of the CRA® remotely over the course of a week.

The assessment looked at 12 operational areas, with the functional team from each area establishing their performance and current situation, and identifying what they felt were the symptoms of root-based, core problems (Theory of Constraints refers to these symptoms as the visible, undesirable effects – the UDEs – of problems that, while not-yet identified, will nevertheless have to be addressed and solved, because treating the symptoms of the problem will not work).

UDEs emerged from every operational area, on a range of issues, including:  the rate and consistency of sales;  the lack of clarity concerning strategic direction and purpose;  the mechanism and resulting pattern of starts;  the lack of synchronization between sales, starts, and closings;  the excessive level of work-in-process;  the excessive length of cycle time;  lower-than-desired Gross Margins;  vague branding;  and the lack of documented workflow (prior to the CRA®, we had done a private channel Pipeline workshop™ for this client, so they were well-aware of the production issues).

Mindful that UDEs only reflect the symptoms of the real problems, the team required a couple of iterations of the IO Map to define the system and its goal, establish the Critical Success Factors (CSFs) for achieving that goal, and establish the Necessary Conditions (NCs) for achieving those CSFs.

From the UDEs and the IO Map, the team developed the Plan Forward, the roadmap that would get them from where they were then, to where they wanted to be.  As such, it represented a planned, purposeful commitment to a measurable outcome.  As required, it was a series of initiatives with short durations, conducted in consecutive order, aimed at producing rapid, targeted, measurable improvements in areas of operational performance that drive improvements to a specific business outcome.

Fully-defined in terms of order, relationship, responsibility, completion dates, requirements, and outcomes, their Plan Forward met the necessary conditions of being a focused course of action that addressed the cause-and-effect relationships between problems and symptoms of problems, and being tailor-made for use with an open-book, team-based approach to performance compensation.

All of the so-called P-initiatives in the Plan Forward flowed from the assessment of current reality, the UDEs, the IO Map.

Next:  Part II:  Developing the Plan Forward

 

“You have to own it.”

Posted May 8, 2021 By Fletcher Groves

I have now been a consultant with SAI Consulting for going on 27 years.  Before that, I was a commercial bank officer and lender.  Between my banking career and my consulting career, I was a licensed homebuilder and real estate broker.  There was a highly-valued (and much-appreciated) stint with Arthur Rutenberg Homes, but the majority of my time as a homebuilder coincided with my role as an in-fill residential developer.

As a developer and builder, the driving force – the focus of my energy and interest – was residential architecture;  residential architecture, broadly and generally, but, particularly and specifically, the residential architecture of my native state of Florida and of the South.

I came to realize that an energy and interest in architecture is not enough to be a full-time, long-term homebuilder or run a homebuilding business, and I am fine with it;  my avocation does not need to be my vocation (I continue to build my own houses anytime I like).

The move to SAI was the right move made at the right time;  I wanted to use my business background to make a meaningful difference in the homebuilding industry, on the velocity side of Return on Assets, on behalf of the homebuilding enterprises engaged in it.  And, after all of these years, I continue to enjoy the consulting work that I do, and I especially appreciate the fact that the vast majority of my client portfolio still consists of homebuilding companies.  I doubt that I would have enjoyed consulting in any other vertical space.

When I joined what was then known as the Service and Administrative Institute, it was very much a decision to work where I lived, not live where I work.  Cort Dondero, the then-owner and CEO of the Ponte Vedra Beach, Florida-based firm, listened to what I wanted to do.  The industry vertical in which I wanted to consult bore no resemblance to the bulk transportation and logistics, TQM-based consulting firm he owned and managed.

Cort nevertheless allowed me the freedom to choose the path I wanted, and he put me into engagements in which I could learn the tools, notably how to map and improve business processes.  I think Cort based his decision on the ides that I was willing to completely own my consulting practice – to come up with the consulting model, blend the improvement methodologies and tools, develop the deliverables, sell the client engagements, manage my clients and the work product, publish my work, achieve solvency, manage the cash flow, and forgo any draw or salary.

For my part, I was looking to start a consulting practice, not find a consulting job.

Some of the other consultants then with Service and Administrative Institute helped immensely – friends like Kent Steen, Joe Kinsey, the late Steve Hollwarth, and Bob Pues.  Hoyt Lowder, retired now from the Fails Management Institute (FMI), was a valued resource.  All of the writers and thinkers that I attributed in The Pipeline: A Picture of Homebuilding Production© played a significant role in my development as a management consultant.  Clients contributed to my development, in ways they will never know.

A few years after I joined the firm, Service and Administrative Institute was sold to Trimac, a Canadian bulk transport company, and cobbled together with other Trimac interests into Trimac Logistics.  A few of us took over the general management consulting work and renamed the firm SAI Consulting, Inc.

SAI is now a much smaller, but far better developed and far more focused consulting practice than when I joined the firm.  It has a lot of resources to offer – to make available to – a consultant who would consider joining us.  Understand, however:  we are not looking for staff consultants or analysts;  we are looking for professionals that are willing to fully-own their consulting practice from the start, and eventually become principals willing to fully-own a share of SAI Consulting.

Interested?

 

Deliverables: Results-Based Consulting

Posted May 1, 2021 By Fletcher Groves

(initially published on Escape from Averageness® in October 2014 as the last in a six-part series;  republished here as part of our latest retrospective, “Still Above Average: The Best of Escape from Averageness®, 2009-2021”)

SAI Consulting is afforded the opportunity to serve our clients’ needs, because of our management experience related to a specific industry, matched with our ability to focus a distinctive constraints-based problem-solving approach to their specific circumstances.  We have a firm grasp of the operational performance issues that affect our clients;  we focus their efforts on solutions that they should be able – should be able – to translate into increased profitability, improved cash flow, and higher economic return.

By necessity or resignation, we deliver most of our consulting work in engagements that operate under a conventional, fee-for-service approach;  “by necessity or resignation” expresses the reality that the value-driven, results-based consulting we favor imposes requirements that cannot be met, that simply do not fit within convention, do not fit within accepted rules.

The conventional approach defines projects in terms of work product, not business outcomes;  the client’s willingness and capability to implement the change is rarely considered;  the client’s commitment is not gauged;  there is no insistence that clients learn and become responsible for performing the work themselves;  there is no connection between what a project costs, and the results – the value, the benefit in excess of cost – that it delivers.

We would prefer to work with clients – and be compensated – purely on the basis of the value we help create – value defined by the results we help achieve, measured in terms of improvements to operating and business outcomes.  In our view, consultants should provide more than expertise;  consultants need to obtain results, they need to share accountability for those results, and – in terms of compensation – they need to share in those results.

Defining a project in terms of shared responsibility for the financial outcome is only one element of how a results-based consulting model should work.

Other elements are that it should not be a solution in search of a problem;  it should apply the best solution to a range of problems and constraints.  The scope of the project should be based on the client’s capability and willingness to change.  It should break projects into phases that deliver rapid results, without losing sight of the long-term goal.  It should require that clients and consultants work and learn together, in full partnership mode.  It should leverage the consultants’ resources and capabilities, not make the client increasingly, unendingly dependent upon them.

This type of high-yield, value-driven, results-based consulting requires more than a traditional consulting approach can provide – a host of requirements that make low-yield, fee-for-service consulting problematic for its consultants:  greater comprehension, longer project timeframes, more agility, higher working capital commitment.

So – what is required in a results-based consulting arrangement?

First, the client has to agree to a focused process of continuous improvement, defined as a prioritized series of initiatives conducted in consecutive order with short durations, aimed at achieving targeted, defined, measurable results.

Second, the client needs to accept a variable costing approach to managerial accounting;  it needs to embrace Cost-Volume-Profit (CVP) decision-making, and prepare its internal financial reports on a Contribution Income Statement format.  It needs to embrace targeted increases in Gross Income as the unifying business outcome;  Gross Income is targeted because it is a border crossing, the demarcation point at which its pricing and cost issues meet its productivity issues.

Third, the client has to end the practice of bonusing individual job performance, and adopt a team-based performance compensation plan, within the tenets of Open Book Management.  It has to agree to a plan that provides a self-funding, progressively-weighted series of milestones that will distribute the team’s portion of a Gross Income Reserve, which is the residual created from a Gross Income Target achieved in excess of a Gross Income Baseline.

Fourth, all other improvement initiatives must be subordinated to the overall improvement process described in the first requirement;  the initiatives have to be integrated – unified – into the overall plan, and they have to contribute to the targeted results.

Lastly, the consultant has to be satisfied with his share of the Gross Income Reserve as the only compensation he will receive for his participation in an extended consulting engagement, an engagement in which he cannot limit or restrict his involvement.

Results-Based Consulting is not an approach that will succeed for every company;  consequently, it will never fully replace traditional consulting.  But – this is the basis for how we would prefer to work with clients.

Want to learn more?