Author Archive

Apocalypse Now: Is a Shattered Industry What It Takes?

Posted May 21, 2022 By Fletcher Groves

(first published on Escape from Averageness® in June 2009, in the midst of the Great Housing Recession, what we term The End of the Age of Homebuilder Entitlement®;  updated and reposted here, at the start of what is certain to become another housing and economic recession)

Everyone likes to talk about the “green shoots” that appear and disappear in the housing market and in the homebuilding industry, as the hopeful evidence for a return to business-as-usual.  I think the worst Residential Fixed Investment disaster in three generations should count for more than a return to business-as-usual.

If we are going to pay this steep a price, why not just blow up the dysfunctional business model of production homebuilding?

It is a solution that has undoubtedly crossed the minds of every one of us who understand Lean Production and the Toyota Production System;  those of us who understand Theory of Constraints and Critical Chain Project Management;  those of us who understand Six Sigma and the effect of variation;  those of us who understand production physics;  those of us who stare across the chasm, and roll our eyes at everything we see.

Custom homebuilding is excluded.  The building of one-off or highly-individualized homes could benefit from the selective use of the tools in the toolbox, but custom homebuilding is a separate, specialized value stream.  It is a separate culture.

So, what is the vision of a post-apocalyptic homebuilding industry?  To cite a few:

— One in which the deal-driven mentality that pervades the industry is at least relegated to the land side of the business, and is replaced with a much more disciplined, process-centric approach to production homebuilding.

— One in which the constant question is:  Does this create value?  And, the decisions are based on the outcome.

— One in which builders achieve 6:1 Inventory Turns, and the debate about build-to-order (presale) versus build-to-forecast (inventory or spec) becomes a moot point (Note:  Toyota has not solved this one, either;  they still build-to-forecast and swamp dealer lots with inventory).

— One in which building companies need negligible working capital for production operations, and one in which cash on the Balance Sheet is not the defining competitive advantage of large, public homebuilding companies.

— One in which size is not defined by the number of closings, or the Revenue generated by those closings;  rather, size is defined by the amount of work-in-process and internal production capacity, where growth is not a strategy, and higher productivity is;  where strategy is not “more-for-more”, but rather “more without more”.

— One in which homebuilding companies do not strip-mine the value stream by outsourcing 90% of the work, with all of the attendant duplication in overhead and difficulty in coordinating schedules and resources, and, instead, actually built the houses.

— One which understands that a homebuilding company is first and foremost a project portfolio organization.

— One in which geographic expansion and increased market share are not the only models for growth.

— One on which the absurd cost approach used in the NAHB Chart of Accounts Income Statement is changed, so that builders could actually use the information that it provides to make decisions.  You know, small decisions, like determining breakeven and the cost of production capacity.

— One in which a preoccupation with “Industry Best Practices” is recognized as the self-limitation that it is.

 

If you want to know more, contact me:  flgroves@saiconsulting.com;  you can visit our website:  saiconsulting.com;  you can cone to a Pipeline workshop™:  buildervelocity.com

 

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The Antidote to Size

Posted May 1, 2022 By Fletcher Groves

(first published on Escape from Averageness® in July 2013, published in BUILDER (builder-on-line) in June 2014, updated and republished here, with additional insights)

In 2013, I suggested that, before we concede the inevitable assertion of overwhelming power heralding a new age in homebuilding – with an inexorable and irresistible shift in favor of a relatively few Big (for the most, part publicly-held) Builders – we might want to ask whether such an era would likely occur, without the homebuilding industry – with its notoriously fragmented supply chain – finally acquiring the consolidated share-of-market profile of almost every other industry.

A year earlier (in 2012), the three largest homebuilding enterprises at the time (DR Horton, Pulte, and Lennar), had a 13.3% market share, measured by units sold, up from 9.0% in 2003.  And, according to the resources I referenced, the builders comprising the BUILDER 100 had a 44.2% market share in 2012, again, measured by units sold, compared with a market share of 34.4% in 2003.

John McManus, former Senior Editor at BUILDER, now the CEO and Editor in Chief at The Builder’s Daily, wrote in TBD last week that, in 2020, the builders listed in the BUILDER 100 had a market share of 49.3%, up only slightly from eight years before (47.5% in 2012) and up from 36.5% in 2003.  McManus also reported that, in 2021, the index of all publicly-held builders had a total market share of 42%, up (according to the graphic chart) from 31% in 2013 and 27% in 2003;  there are a few minor discrepancies related to sources, but nothing significant.

There are more publicly-held builders now (as of 2021) than there were in 2013 and 2003, so a higher market share would be expected.  The BUILDER 100 is comprised of both publicly-held and privately-held builders;  the unifying feature is that all of the BUILDER 100 builders are large builders.

However, even with the consolidation over the past two decades, the industry still has nowhere near the market share profile of most industry verticals, where the top three companies would have over a 50% market share, likely more.

We might also want to ask what type of business operating model would be required, in order for a homebuilding enterprise to permeate every SMSA, not just the 20 largest housing markets – or five of those markets, or 10 of those markets;  otherwise, industry consolidation is just circles on a map, with vast areas excluded.  Large “national” builders, regardless of how ownership is held, are basically collections of regional building operations, even if some of the components of those building operations have been standardized (and many have not).

The main factor that plays into this situation is that homebuilding, as it currently exists, is not manufacturing, either onsite or off-site;  the value stream, from a Lean perspective, is not unified, is not integrated;  it is almost completely outsourced, thus Big Builders have to compete for the required resources with every other building operation in every market.

Component manufacturing is a consideration, but it would a consideration best made answering the overall question of the feasibility of an integrated building model;  outsourcing tends to level the playing field, without producing sufficient competitive advantage.  We now take the time, at every Pipeline workshop™, to compare the operational considerations and business outcomes of both outsourced and integrated BOMs (building operating models), using versions of the Pipeline game™.

Consolidation of the magnitude and extent described at the beginning of this post has a long way to go.  If it ever occurs, we don’t know how many Big Builders that will represent;  we don’t know how many de minimis Niche Builders will remain.  What we know is this:  Given the current parameters – the current characteristics – of the homebuilding industry, consolidation of this magnitude and extent will occur only if it is allowed to happen, only if someone capitulates to the outcome.

More to the point:  Whether consolidation of this magnitude and extent occurs or does not occur, the dynamics and imperative of dealing with the core issue doesn’t change.

From more than twenty years ago (July 2000), in a Professional Builder feature article titled “The Road That Lies Ahead”, to as recently as twelve years ago (April 2010), on Escape from Averageness® in a post titled “Get Busy Living or Get Busy Dying”, I have analogized this question of expansion and consolidation through merger and acquisition as the prospect of Life on the Serengeti.

The analogy begs the question:  What happens to the lions when there are no more zebras, impalas, or wildebeest?

What happens when there are no more easy (and, in this case, willing) targets?

Would big still be good enough?  How big?  Would well-financed be sufficient?  How sufficient?  Cash-laden Balance Sheets?  How much?  Access to equity markets?  Adoption of so-called “industry best practices”?  The relatively easy existence found in a “more-for-more” proposition, in which an increase in the number of units built and sold simply requires commensurately more work-in-process and more production capacity?

Progress achieved only on the margin side of economic return?

Necessary, but not sufficient.

True, sustainable competitive separation is the result of doing what your competition will not do, what they cannot do.  Things that are too tough, that require too much rigor, too much discipline, too much resolve.  Margin is important, but it is not the difficult part;  it is the more natural part, where builders’ inclination lies.

True, sustainable competitive separation requires much more;  it requires the difficult part, the part to which builders are less-inclined.  It requires continually and relentlessly finding ways to become more productive, finding ways to do more without more.  It requires being as proficient on the velocity side of Return on Assets as the margin side of ROA.

In and of itself, size has not a single attribute that is to be coveted, or any advantage that cannot be overcome.  From a competitive assurance standpoint, size assures nothing.

Velocity is the antidote to size.

 

Pipeline Workshop™ No. 17 is in the books, another very successful workshop, completed with a very engaged group of builders and sponsors in attendance.  We will offer, here, a few observations attributed to the most recent class of distinguished – now degreed – Pipeline graduates.

“I realized I know how to build a house, but I have a lot to learn about the business of homebuilding.”  (Travis Kuhlmann, Alvarez Construction)

“The Pipeline is a great class to learn the real science of homebuilding, and how it relates any business.  As a manufactured rep, this class helped increase my knowledge, while also learning how to apply it with everything I do.”  (Ruben Garcia, James Hardie)

“This workshop not only increased my understanding of the homebuilding process, but it challenged the traditional process of construction.  By questioning the status quo, Pipeline Workshops™ will influence companies to explore new ways of accelerating performance, and ultimately drive results to reach new heights.

“The workshop offers attendees a chance to think of their business in ways they likely have not before, and that’s a GREAT thing!”  (Adam King, James Hardie)

“Fletcher, first, I appreciate you and the work that you have created to help [homebuilders] and industry professionals learn the concepts you incorporate into your publications, workshops and mentorship. You make a significant impact on homebuilding!

“There is no perfect company, nor perfect process, to address the many challenges of homebuilding, but learning and implementing the approaches taught in your Pipeline Workshop™ can help advance a builder to the front of the pack, in terms of gaining operational efficiencies and impactful savings across each project.”  (Rita Martin, Epcon Franchising)

“Being an Area Manager spending most of my time in the field, I don’t get involved in the business side of our company very often, so the business case exercises were very helpful and enlightening.”  (Michael Smith, Alvarez Construction)

“The Pipeline workshop™ is a great way to get your team on a good path to have your business be targeted, profitable, and forecastable.”  (Cody Miller, Charis Homes)

 

Future opportunities for higher education . . .

The next Pipeline workshop™ will be held October 12-13, 2022, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  Attendance is limited to only 30 attendees.  Early registration will open in early July, when pricing will also be announced.  For team pricing, inquire here (flgroves@saiconsulting.com).

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

For more details:  www.buildervelocity.com

 

“Risen”

Posted April 17, 2022 By Fletcher Groves

(the intrepid, results-based consultant is the main character in both editions of The Pipeline: A Picture of Homebuilding Production©;  updated and re-posted on Escape from Averageness® every year, on Easter morning)

The intrepid, results-based consultant reclined into the natural seat, formed at the back edge of one of the dry-eddy pools, where the beach resumed its slope more steeply, toward the upper dunes.

Easter 2022, Ponte Vedra Beach, Florida

She dug the soles of her topsiders into the sand, still damp from the last high tide.  It always felt good – unfailingly restorative – she thought.  Resting her arms on her knees, she gazed eastward, where the sun was just beginning to rise into a brightening sky with low-lying clouds, on what was a warm mid-April morning in northeast Florida.

She was completely in her element.  A seventh-generation Floridian, she loved the waters and land of her native state.  She wished she could have seen for herself, more of the Florida her father describes – the mid-twentieth century Florida of his youth, the Florida he loves, the Florida with one-tenth the current population, the Florida before air conditioning, interstate highways, and theme parks.

This was her routine, every year, on Easter morning.

She reached over and removed her 35mm SLR from its backpack;  vintage-digital, she mused, recalling how she learned photography old-school, at her father’s insistence, with a manual 35mm camera and Kodak film.  She waited, patiently, until the time was right, and then switched the mode to manual, adjusted the aperture and exposure, partially depressed the shutter and studied the image in her viewfinder.

She made her final adjustments, then released the shutter.  She studied the digital image for a moment, waited several minutes, and then took several more photographs as the sun rose a bit higher.  She set the camera aside.

The intrepid, results-based consultant turned her thoughts back, to a point in time more than two thousand years ago, to the pre-dawn darkness of the first Easter morning, as she tried to reconstruct in her mind what the now disillusioned and despairing friends and followers of Jesus of Nazareth must have been thinking and feeling for the better part of their past two days.

Prophecies notwithstanding, when they went to the grave site on the morning of the third day, what did they really expect to find?  By every rational explanation and every shred of evidence, this man of so much promise, in whom they had placed so much hope, was unquestionably dead.

They had been eyewitnesses to His death, and the effects of the torture and humiliation that preceded it;  the term excruciating, she reminded herself, came from the Latin ex crucis, meaning literally, “out of the cross”.

They had been eyewitnesses to his burial, as well, and the unusually intense security of his tomb.

For the friends and followers of Jesus, this was certainly more than the physical death of one man;  for them, it was the death of all Hope.

Her thoughts moved to another time not far removed from the darkness following the death of Jesus, as Peter and the other apostles asserted that not only had they witnessed His torture, crucifixion, death, and burial, but they had also been the eyewitnesses to His resurrection three days later, and to his subsequent appearances over the following forty days.

Rather than abandoning their faith and succumbing to hopelessness, Peter and the other apostles were now stating – publicly, authoritatively, for everyone to hear – that they were willing to live their lives, to give their lives as martyrs, for the lives of others, and for the Faith and the Hope that Jesus’ crucifixion, death and resurrection gave all of them.

In the words of the apostle Paul, penned later to the churches of Galatia, they were all saying, in essence, “I have been crucified with Christ.  It is no longer I who live, but Christ who lives in me.  And, the life I now live in the flesh, I live by faith in the Son of God, who loved me and gave Himself for me.”

That has been the experience of every Christian, ever since, she among them.

She smiled, and whispered, “Risen.”

 

“God’s Kingdom had come, not at the end of time, but within time – and that had changed the texture of both time and history.  History continued, but those shaped by the Easter Effect became the people who knew how history was going to turn out, and because of that, they could live differently.  The Easter Effect impelled them to bring a new standard of equality into the world and to embrace death – as martyrs, if necessary – because they knew, now, that death did not have the final word in the human story.”  (“The Easter Effect and How It Changed the World”, The Wall Street Journal, March 31, 2018)

Everything – past, present, future – points toward, or proceeds from, the fact of the resurrection of Jesus Christ.

And, it is the event in which we rejoice, and for which we celebrate, every Easter.

 

Cycle Time: Measured or Calculated?

Posted April 9, 2022 By Fletcher Groves

(initially published on Escape from Averageness® in April 2014;  updated and republished here)

smartandlean.wordpress.com

It is the most basic, most fundamental business premise for any homebuilding enterprise:  the reason the enterprise exists is to make money;  the way the enterprise makes that money is through the value – the benefit in excess of cost – that it delivers to homebuyers and other stakeholders;  that value is delivered by the work the enterprise performs, that work has to be performed in some manner of workflow, and the most common form of workflow is end-to-end sets of activities called processes.

The fact that the work performed in these processes is also what consumes an enterprises’ resources and occupies its capital, means that we need to pay attention to process workflow.  In particular, we need to pay attention to the duration of that workflow, what we term cycle time, because cycle time is one of the operating measures that informs us on improving productivity, on doing more without more, ideally, doing more with less.

In a homebuilding company, the core-critical process – the aorta of value creation – is the operational process known as Start-to-Completion, even though that process should really be managed as part of a portfolio of projects (we insistently make the point that the nature of the workflow in homebuilding, unlike manufacturing, is multi-project management with embedded, surrounding, and supporting processes).  And, regardless of the makeup of the workflow, we know that all of it has duration;  and, we all know that the cycle time of the Start-to-Completion process is the length of time required to build a house, expressed in days.

There are two distinct methods for determining cycle time;  duration can be measured, or it can be calculated.

When it is measured, cycle time reveals the average duration – the statistical mean – of a specified group (range) of houses that were built.  When cycle time is calculated, it expresses the relationship between two important operating measures – the rate of completions and the amount of work-in-process – over a specified time period.

And, while measured cycle time is simply forming an average duration, calculated cycle time falls into the universal category of production physics (Little’s Law).

The measured and calculated versions of cycle time provide important, but very different management perspectives used for very different purposes.  One is about uncovering the forensics of problems, in order to prevent the further recurrence of errors, rework, and waste;  the other is about managing homebuilding production as a system.  They mutually-beneficial, mutually-essential.

In your respective building companies, how do you treat cycle time?  Do you measure it?  Do you calculate it?

How do you use it?

 

Duration and cycle time is a topic exhaustively covered in The Pipeline: A Picture of Homebuilding Production, Second Edition®, as well as at every Pipeline workshop™.

More information:  saiconsulting.com