Archive for October, 2021

Pipeline Workshops™: Improvements to the Game

Posted October 10, 2021 By Fletcher Groves

“Pipeline games™ 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, Gallatin, TN)

“The Pipeline games™ were not only fun, 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.  This workshop was really eye opening!”  (Charles Roberts, Providence Homes)

“Pipeline games™ are a very innovative way to demonstrate the critical nature and relationship between cycle time, inventory turn, margin, and return on assets.”  (Vishaal Gupta, President, Park Square Homes, Orlando, FL)

“[the] Pipeline Game™ truly connected the dots.  A remarkably creative tool.”  (David Nielsen, Cole West Homes)

Simulating production principles is a big part of every Pipeline workshop™.  We hear, repeatedly, that the opportunity to simulate production in a progressive series of scenarios is what enables builders to actually “see” production, to see production principles in action.  Because it is both a production simulator and a business game, Pipeline games™ are what make Pipeline workshops™ so intense, so interactive, and so competitive.

Pipeline games™ have always been a tremendous tool for teaching both production and business principles, but we are never content.  We constantly improve them, introducing significant changes over the past five years that make them even more effective.

One of the earlier changes was to shorten the game, so that we could run more production scenarios in the same amount of time, and so that each operating decision became more consequential.  Another change, designed to make the game more realistic, was to have it depict the completely outsourced nature of homebuilding production, just as it currently exists.

That later change begs a deeper dive.

In the earliest version of the game, the resources that did the work reflected both capacity and the cost of that capacity;  the problem was, that arrangement more reflected a manufacturing operation than a homebuilding operation.  In order to realistically depict the current, outsourced nature of homebuilding production, capacity has to be separated from cost.

Why?  Because, the external resources that determine production capacity are a part of Cost of Sales (making them a direct, variable cost);  Cost of Sales is a measure of product cost, not capacity cost;  Operating Expense (the indirect, non-variable cost of internal resources) is what determines capacity cost.

Using the resources to reflect both capacity and cost required us to essentially disregard Revenue and Cost of Sales, and treat Throughput  (i.e., Gross Income, normally a residual) as Revenue;  again, that’s fine for depicting a manufacturing operation, but it is not a good depiction of a homebuilding operation.  In the improved version of the Pipeline game™, we restored Revenue and Cost of Sales to the equation, making Throughput (i.e., Gross Income) a residual.  In effect, we now account for the margin side of Return on Assets, not just the velocity side.

Because they do the work (not simply manage it), the external resources in a Pipeline game™ now define the production system’s capacity, and the cost of those resources is reflected in Cost of Sales, stipulated as a percentage of Revenue;  as it relates to Revenue, they are a direct, variable cost associated with the construction of a home.  Operating Expense is now an imposed cost, reflecting the budgeted cost of the internal capacity required to manage work-in-process;  that makes Operating Expense an indirect, non-variable cost, as it relates to Revenue (and the completions and closings that produce it).

This represents a significant stride in reconciling Revenue, Cost of Sales, Throughput, and Gross Income, making operating decisions easier to connect to financial outcomes.  The result is a production simulator and business game that is truly reflective of a homebuilding operation, with lessons that are now much easier for builders to understand.

This change continues to pay-off.  But – we don’t ever stop;  the Pipeline game™ keeps getting better and better.

Example?  At a recent Pipeline workshop™, we introduced a scenario that contrasts the current industry- accepted growth and operations strategy (a completely outsourced building model) with a radically different growth and operations strategy (a completely integrated building model), in order to explore the difference between a strategy based on a broader, shallower footprint and one based on a narrower, deeper footprint.

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.  The cost is $895.00 per person.  Attendance is limited to 30 attendees.  For team pricing, inquire here (flgroves@saiconsulting.com).

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

For more details:  www.buildervelocity.com

 

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“The absence of business logic is simply astounding.”

Posted October 2, 2021 By Fletcher Groves

(originally published on EFA® in February 2010 under the same title;  republished in April 2013, as part of our retrospective Above Average: The Best of Escape from Averageness®, 2009-2012;  updated and republished in advance of each Pipeline workshop™)

McKinsey and Company

It is mid-2012.  The intrepid, results-based consultant smiled and shook her head, with equal measures of amusement, incongruence, and disbelief.  It was yet another sobering reminder that RB Builders, early in this process, was capable of coming to bewildering conclusions, the latest of which centered around the company’s intentions for its team-based performance compensation plan.

The Gross Income Participation Pool – the GIPP – had been a prerequisite to her consulting firm agreeing to become involved in a client-consultant partnering arrangement with RB Builders in the first place, one of three stipulations, along with internal financial statements that reflected a variable costing approach, and the subordination of every existing initiative to the company’s new constraint-focused, rapid-results continuous improvement process.

The GIPP was new.  It was purposely designed to replace RB Builders’ longstanding-but-inconsistent practice of paying individual bonuses based on multiple job-related measures.  It consisted of a team-based approach to performance compensation focused on achievement related to a single business outcome;  in RB Builders’ case, that business outcome was Gross Income achieved above a specific baseline.

Under the GIPP, the baseline performance was referred to as the Gross Income Baseline, while the stretch-budgeted performance was dubbed the Gross Income Target.  The difference between the GI Baseline and the GI Target was referred to as the Gross Income Reserve.

The GI Reserve was to be paid out progressively, based on the achievement of a predetermined number of Gross Income goals, so-called Gross Income Milestones.  The aggregate teammate share of the GI Reserve was one-third of the GI Reserve, with the remaining two-thirds allocated evenly between distributions to owners and retained earnings.

Now, however, the GIPP was getting push-back from a recently-hired Regional Vice President, who was saying the plan should be scrapped.

“We might not even achieve these goals, and if we did achieve them, there are more important uses for the funds”, he said.

The intrepid, results-based consultant’s thought to herself, “The Gross Income Participation Pool is an established prerequisite.  This guy’s assertion doesn’t have any merit, but even if it did, it is too late in the planning cycle to consider changing it, let alone canceling and replacing it.”

She was having none of it.

“Where did you get this stupid idea?”, she asked.

“People get paid salaries to do their jobs, and we bonus certain positions”, he replied.  “I need more people, not higher-paid people.”

The intrepid, results-based consultant stared at the CEO, her impassive expression nevertheless clearly communicating her unspoken thought:  “Where did you find this guy?”

She turned her attention back to the Regional VP.

“Let me get this straight.  You are concerned that your division will, what?  Be unable to meet its debt service obligations, or find land, or hire more people, if it rewards performance above its baseline?”, she asked, rhetorically.  “Really?  Where is the money supposed to come from?

“The GIPP will not have paid out anything, unless there is a reserve created by performance that exceeds the baseline.  You do realize that the GIPP is completely self-funding, that it does not cost the division or RB Builders’ owners one-red-cent?

“You do understand that, right?

“For one thing, all of the land and building lots acquired are kept off-balance sheet, so that is not a concern of yours”, she continued.  “And – given that RB Builders places strict limitations and controls on the level of work-in-process, and on any increase in non-variable expenses – is there any imaginable scenario under which additional Gross Income will result in less cash flow?

She stared down the Regional Vice President.  “I didn’t think so.”

“On baseline alone, RB Builders is profitable, operating above breakeven, correct?”, she asked, without waiting for the answer.  “So – is there any imaginable scenario under which every penny of that additional Gross Income will not drop straight to the division bottom-line?  Where it can be utilized for – oh, I don’t know, let’s say – distributed to teammates and owners before it became retained earnings?

“I can understand being prudent with important decisions;  at some point, there will be an economic downturn, and we have to be prepared for it.

“I can understand increased diligence in determining a baseline that reflects current reality.  I can understand having a more progressive structure to the payouts, so that each successive milestone is worth more.  I can understand adjusting the distribution of the reserve between teammates, owners, and retained earnings – slightly – in order to provide more money for other uses.

“I can understand – but not agree with – the choice of a supposedly-safer outcome, like Net Income.

“But, to deny yourselves – you, your teammates, your owners – the opportunity and motivation to do better?  The opportunity to preserve your shared livelihoods?  To secure your collective futures?  That, I do not understand.  That, I will not accept.

“The absence of business logic is simply astounding.”

 

Come.  Participate.  Learn.

Open-Book Management and Team-Based Performance Compensation is one of the three Velocity Accelerators® highlighted (together with Critical Chain Project Management and Business Process Improvement) at the next Pipeline workshop™, October 14-15, 2021, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

The cost is $895.00 per person.  Attendance is limited to only 30 attendees.  For team pricing, inquire here (flgroves@saiconsulting.com).

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

For more details:  www.buildervelocity.com

 

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