Archive for August, 2021

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

Posted August 28, 2021 By Fletcher Groves

It is the first quarter of 2021.  RB Builders is again aiming to extend its reputation as one of the few builders that has attained sustainable competitive separation, by learning to thrive, operationally, on both the margin and velocity sides of Return on Assets.  RB Builders plans to do so by expanding into another new geographical market, via the late-2020 acquisition of its eighth existing homebuilding operation.

Despite being the largest acquisition RB Builders has made to-date, this newly-acquired division is in-line with all but one of the previously acquired operations in terms of its target market segment.  Like its predecessors, it has historically generated operating results and business outcomes that are lower than what RB Builders considers acceptable.  As was the case with its predecessors, this new building operation has acceptable current land/lot positions.

To date, RB Builders has completed the newly-acquired division’s management technology conversion, and has started the conversion of its business and operating processes.  Despite the challenges, RB Builders’ management team is confident they can continue their remarkable track record of unifying, developing, and improving the capabilities of existing teams at the builders it has acquired, and, in the process, 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:  Thirteen years earlier, at the beginning of 2008, shortly after the halcyon period known as the Age of Homebuilder Entitlement® came to an end, 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”.

It was a transformation process that had four key components:

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

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

(3) an accounting/costing approach that connected 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 important initiatives, some dealing with workflow, others dealing with scheduling, some dealing with the value stream and trade partnering, others dealing with product buildability and value, some dealing internal learning.

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 pressure on margins, overall Gross Income Margin had increased slightly, from 22% to 24%;  as a result, RB Builders’ Gross Income had out-paced its 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), far less than the same-period increase in Revenue, and as a result, RB Builder’s Net Income had risen from $2.5 million to $16.5 million, six-times what it had been before the company began its transformation;  Net Income Margin had almost tripled, from 5% to 14%.

In 2008, RB Builder’s cycle time had been 180 days;  four years later, 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 homes under construction;  by the end of 2012, the company been able to reduce its average work-in-process to 80 homes under construction, despite doubling the number of homes 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 homes and closing 453 homes, RB Builders had been able to more than double its 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.

By 2013, RB Builders had 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 only the remaining operating assets.

By any measure, it had been a remarkable transformation.

The seven 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, doing so without incurring any increases in Operating Expense, all the while maintaining lower levels of work-in-process and operating under reduced construction lines of credit.

As RB Builders’ management team described it, it was a case of relentlessly finding ways to “do more without more”.

 

NEWLY-ACQUIRED DIVISION:  Near the end of 2020, RB Builders acquired this, its eighth homebuilding operation, what it refers to as RBB-8.  Unlike the outlier, never-to-be-repeated 2017 acquisition, RBB-8, despite its considerably larger size, was thought to continue the return to acquisitions 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-8 to a Contribution Income Statement format based on a variable costing approach to cost allocation, the same action it takes with all of its acquisitions.

In its last year of independent operation, RBB-8 had closed 80 homes, on which it generated $20.0 million in Revenue;  with its $16.8 million in restated Cost of Sales now reflecting only its direct, variable costs, the division had generated $3.2 million in Gross Income, producing a 16% Gross Income Margin.

With its $2.4 million in restated Operating Expense now reflecting only its indirect, non-variable costs, the operation had generated $800,000 in Net Income, producing a 4% Net Income Margin.

Since it carried an average work-in-process of 40 homes under construction for the year in 2020, RBB-8 had a calculated cycle time of 180 days (despite job schedules calling for 120 days);  and, because cycle time and inventory turn are reciprocal measures, the 80 closings achieved with an average work-in-process of 40 homes under construction meant that the division had turned its physical inventory twice (2.0x) during 2020.

Adopting another one of RB Builders’ mandates, and moving all of its vacant land holdings and developed lot inventory off its balance sheet and into subsidiaries, RBB-8 now showed a restated average work-in-process of $5.7 million, based on an average per-unit LIP balance of $142,500, which consisted of a $75,000 average lot takedown draw and a $210,000 fully-funded LIP balance (100% of cost, including land;  84% of the $250,000 average sales price).

In 2020, an average work-in-process of $5.7 million and Revenue of $20.0 million gave RBB-8 an asset turnover ratio of 3.5x;  with a Net Income Margin of 4% and a restated asset turnover ratio of 3.9x, RBB-8 had generated a Return on Invested Assets of 15.6%.

 

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, with significantly reduced work-in-process, a likewise significantly 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 unwelcome variation – evidenced solely by your 2020 calculated cycle time – is costing your division $1.6 million 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 2020, your division had Net Income of only $800,000.  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:  How does using a different scheduling algorithm 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 14-15, 2021, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  Attendance is limited to 30 attendees.  The cost is $895.00 per person.  For team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting.  Sponsored by Simpson Strong-Tie.

For more details:  www.buildervelocity.com

 

Pipeline Workshops™: What’s your Production IQ®?

Posted August 20, 2021 By Fletcher Groves

Remove any consideration of financial leverage (the equity multiplier) from the calculation of Return on Assets, and economic return becomes a function of profitability (Return on Sales) and operating efficiency (Asset Turnover).

That is the fundamental understanding that emerges from applying the DuPont identity, regarding Return on Assets.  This means that economic return is margin x velocity, which then raises two questions:  (1) How much can I make on each house I build?  (2) How many houses can I build with the finite capacity that I have?

It is a mutual, co-equal, dependent relationship.

Is margin proficiency necessary?  Yes.  Is it sufficient?  No.  Does superior margin hold-forth the possibility of achieving any degree of sustainable competitive separation?  That is highly unlikely.

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)

Those facts and admonishments notwithstanding, in the homebuilding industry, action on the margin side of Return on Assets seems to always overshadow action on the velocity side of ROA.

Pipeline workshops™ are aimed at changing that paradigm.

The real motivation to attend a Pipeline workshop™ starts with the willingness to acknowledge – and a desire to remedy – what amounts to a profound lack of knowledge regarding production principles and disciplines, and the impact they have on economic return.

Let the meaning of the last part of that statement linger for a moment:

In the homebuilding industry, there is a profound lack of knowledge regarding the operation and management of production systems, and the effect those systems have on profitability and economic return.

Disagree?  Think you know your stuff?  Really?  Then, prove it.  Take the test.

  1. If a homebuilding production system is a pipeline, what determines the size, capacity, length, and cost of the pipe? What controls the flow?
  2. Is even-flow production a mechanism or an outcome?
  3. What is the true measure of size for a homebuilding company? revenue  b. number of employees  c. houses under construction  d. annual closings
  4. What are the terms for the three activities that describe “what happens to money” in a homebuilding business, terms which can be used to express and link all the formulae for operating performance (productivity, cycle time, and inventory turn) to both measures of financial performance (Net Income and Return on Assets)? What do those activities represent?
  5. What type of workflow best describes homebuilding? Is it process management?  Is it project management?  Is it a combination of both?  If it is a combination, which element does it favor?
  6. True or False: A production system that balances capacity across the resources that perform the work does a poorer job of optimizing capacity utilization than a production system that unbalances capacity across those resources.
  7. In what three ways will a production system protect itself from variation and uncertainty?
  8. In scheduling a portfolio of jobs, which algorithm considers both task dependency and resource contention? Is it Critical Path or Critical Chain?
  9. Calculating the cycle time of a production system requires knowledge of two operational measures. What are they?  Determining the level of necessary work-in-process requires knowledge of what operational measures?  Projecting the rate of periodic closings requires knowledge of what two operational measures?
  10. True or False: Building reasonable safety into task durations does not ensure a high percentage of on-time completions.
  11. What measure of operating performance is the reciprocal of cycle time?
  12. Lean Production views homebuilding as a build-to-order process. How does Lean recommend selecting a resource to serve as the process’ pacemaker?
  13. What is the difference between measured cycle time and calculated cycle time? What is the best use for each?
  14. What is the true cost of variation in a production system? What is typically mistaken as the cost of variation?
  15. What three human behaviors consume the time safety intentionally built into a job schedule?
  16. How does the matrix for managing starts in a “push” release system differ from the same matrix in a “pull” release system?
  17. Increasing the likelihood – the assurance – that a task will finish on-time, from a 50% probability to a 95% probability will cause the duration of the task to increase by a factor of how much? What is the multiplier?  In statistical terms, how many standard deviations does this factor represent?
  18. Is trade partnering a program or a process?
  19. True or False: The NAHB Chart of Accounts Income Statement enables a builder to calculate a breakeven point and a breakeven rate.
  20. What is the difference between velocity and speed?

(answers are at the bottom of the post)

We know, just a quiz.  Like any quiz, the questions represent a very small portion of the operating 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 parameters that include its market, its product mix, its choice of an information/management technology system, its financial resources.

But, the ability to manage production starts with an understanding of its underlying principles and disciplines.

It starts with what you learn in a Pipeline workshop™.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held October 14-15, 2021, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  Attendance is limited to 30 attendees.  The cost is $895.00 per person.  For team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting.  Sponsored by Simpson Strong-Tie.

For more details:  www.buildervelocity.com

 

Answers: 

(1) size is the amount of work-in-process, capacity is the rate of throughput (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 to occur at the rate of closings;  (2) even-flow 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 measures are known, the third measure can be calculated;  (10) True;  (11) inventory turn;  (12) Lean recommends using the most capacity-constrained resource as the pacemaker, one of the areas in which Lean Thinking agrees with the Theory of Constraints;  (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) the true cost of variation in a production system is not wasted or excessive cost, it is the Contribution (Gross Income) from every house that was not built and closed because of variation in the system, Gross Income that would have dropped straight to the bottom-line as Net Income;  (15) procrastination (student syndrome), expand to whatever time is allowed (Parkinson’s Law), multi-tasking;  (16) the start matrix in a push system determines 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 (reciprocal .61), meaning that four out of every 10 days in the job schedule is padding (safety) intended to assure on-time completion of every task, and, therefore, the on-time completion of the job;  it amounts to two standard deviations;  (18) establishing epic relationships with trade partners is both a program and a process;  (19) False;  (20) velocity is a vector measure;  it is speed in a specific direction;  velocity is targeted, purposeful speed.

 

“The Pipeline game™ production simulations 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 (now part of Clayton Homes), Gallatin, TN)

“The Pipeline Game™ is a great tool requiring the players to put into practice the principles taught in the workshop.  It’s a hands-on exercise that requires you to think, consider, and review the results of Critical Path versus Critical Chain.”  (Lisa Ramsey, Independent Consultant, Mark Systems, Mt. Holly, NJ)

“The Pipeline game™ was fantastic.  A force multiplier to the seminar.”  (Todd Schunk, Construction Manager, CalAtlantic Homes, Jacksonville, FL)

“The workshop was really effective in showing how operational decisions affect business outcomes and how risky a ‘more for more’ approach to growing a home building company really is.  The Pipeline games™ were not only fun, but they were super-effective in showing how unbalancing the production system, managing the constraint resource, and managing the right amount of WIP creates predictable operational results and maximizes financial outcomes.

“At the end of the day, running a successful business is about how much money you make on the amount of money you invest.  The Pipeline workshop™ helped me understand this better than any workshop or seminar I’ve ever attended.  I highly recommend it.

“This workshop was really eye-opening!”  (Charles Roberts, Vice President – Operations, Providence Homes, Jacksonville, FL)

Pipeline workshops™ are an intense, interactive, size-limited immersion into the principles and disciplines that drive homebuilding production.

Over the eight consecutive years they have been offered, we have made a number of additions and changes that improve the learning that Pipeline workshops™ deliver, most notably, adding the RB Builders: Lessons from the Pipeline© business case, with its challenging set of problem-solving exercises, several of which are used with another added component, what we call the Velocity Accelerators®.

Despite all the improvements, most attendees and observers will tell you that the most compelling part of a Pipeline workshop™ is the team-based simulation tool the entire workshop was built around.  Pipeline Games™ are a progression of production scenarios that produce business outcomes, a production simulator that reveals both the home building business and the business of building homes.

In addition to the open, sponsored Pipeline workshops™, we have used the Pipeline game™ at Housing Leadership Summits (now the Builder 100 Summit), at CertainTeed Builder Advisory Groups, at BuilderMT-Sales Simplicity User Conferences (now MiTek), with NAHB Builder 20 Groups, at the many private Pipeline workshops™ we have held for larger builders, and at other industry gatherings.

Pipeline Games™ reinforce the production principles taught in a Pipeline workshop™, most notably, the effect of variation and uncertainty on a production system, pull scheduling according to the capacity of a constraint resource, and the importance of connecting operating decisions – made on matters like flow, cycle time, capacity utilization, and the level of workinprocess – to the critical business outcomes of profitability and Return on Assets.

Look at the results from any of the previous 16 workshops, and you will see that the results never lie.  The following set of results are typical.  In every category – from Revenue, to the levels of Work-in-Process, to Inventory Turns, to Cycle Time, to Net Income, to Return on Invested Assets – the teams attending this workshop made remarkable progress towards targeted performance, often exceeding expectations.

Look at the results, and you will see something else:  the teams rarely started out that way.

The game has changed, so the metrics have changed.  And, you clearly have to play the Pipeline game™ – see the measures and calculate the results for yourself – in order to fully comprehend 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 . . . higher . . .

This was inventory turn . . . faster . . .

This was cycle time, expressed in days . . . shorter . . .

This was Net Income Margin . . . better . . .

This was Return on Assets, a reflection of the co-equal components that comprise the measure:  Net Income Margin (margin) and Inventory Turn (velocity) . . . higher . . .

After the initial shock of shattered instincts, every metric was in precisely the direction you would want, precisely the direction you would learn to expect, if the underlying production principles are true, if those principles are being applied, and if real progress is being made.

As is always the case, the builders attending this Pipeline workshop™ clearly learned from their experience.

They learned the principles and disciplines of homebuilding production.

Pipeline games™ teach builders to “see” production;  they simulate the environment in which homebuilding production decisions must be made – fast-paced, rapidly-changing, filled with uncertainty, risk, and variation.  As in real life, it is learning based on experience and action, not on lectures.

The difference is, 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 October 14-15, 2021, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  Attendance is limited to just 30 attendees.  The cost is $895.00 per person;  the cost during early registration, open only through August 20, 2021, is $750.00.  For team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting.  Sponsored by Simpson Strong-Tie.

For more details:  www.buildervelocity.com

 

Pipeline Workshops™: Disruptive Learning

Posted August 7, 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, Division President, Essex Homes (now a part of Stanley Martin Communities), 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 make the learning as disruptive as possible to conventional, long-accepted ways of thinking.

Our aim is not simply inform builders’ thinking;  our aim is to reform it – and to re-form it.  We want to change builders’ 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, to thrive on the velocity side of economic return®.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held October 14-15, 2021, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  Attendance is limited to only 30 attendees.  The cost is $895.00 per person;  the cost during early registration, open through August 20, 2021, is $750.00.  For team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting.  Sponsored by Simpson Strong-Tie.

For more details:  www.buildervelocity.com