Uncategorized Archive

Pipeline Workshops™: Improvements to the Pipeline Game™

Posted March 3, 2019 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)

“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)

Simulating production principles is a big part of every Pipeline workshop™.  We hear, over-and-over, 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, the Pipeline game™ is what makes Pipeline workshops™ so intense, so interactive, and so competitive.

The Pipeline game™ has always been a tremendous tool for teaching both production and business principles, but we are never content.  We constantly improve it, introducing significant changes over the past five years that make it 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 outsourced nature of homebuilding production as it is universally and currently performed.

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) as Revenue.  In the improved version of the Pipeline game™, we restored Revenue and Cost of Sales to the picture, making Throughput (i.e., Gross Income) the residual;  in effect, we now account for the margin side of Return on Assets.

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 vastly more 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 trying to improve the learning;  as a result, the Pipeline game™ keeps getting better and better.

For example, at a recent Pipeline workshop™, we introduced a scenario that contrasts the currently 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 March 20-21, 2019 at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  Cost is $895.00;  for team pricing, inquire here:  flgroves@saiconsulting.com).

Delivered by SAI Consulting and Continuum Advisory Group.

Sponsored by MiTek Industries and Specitup.

Details:  www.buildervelocity.com

 

Velocity Accelerators®: Critical Chain Project Management

Posted February 23, 2019 By Fletcher Groves

One of the areas we single-out for deeper discussion in a Pipeline workshop™ – what we call Velocity Accelerators® – deals with the imperative of replacing the current method of scheduling houses under construction.  Not one house.  Not every house, independently.

No – this is about the method of scheduling the entire portfolio of houses a builder has under construction at any point in time.

That’s because the nature of the workflow in homebuilding production is project portfolio management, managing what can be large amounts of work-in-process, managing what can be a large number of construction jobs.  Yes, there is workflow performed in processes, but those processes are a different type of workflow, and they are generally embedded in, and enabling and supporting of, the larger, more primary scheme of managing a project portfolio.

The process of building a home – what we call Start-to-Completion – is actually the management of multiple projects that share resources.  It is the structuring and the management of a portfolio of job schedules, with inter-dependencies and interactions of tasks and resources.

At its core, homebuilding is multi-project management.

The current method of project scheduling is known as the Critical Path Method (CPM), which evolved from the Program Evaluation and Review Technique (PERT) in the 1950s;  it has been in existence for almost 70 years;  it is the method used in every homebuilding ERP.

PERT and CPM were designed for one-off programs with large, complex structures (Polaris weapons system, the Manhattan Project), but the Critical Path Method has become the de facto standard for scheduling all types of projects:  aerospace/defense, software development, product development, research, and – yes – construction.

The problem with CPM is that it was not designed for managing a portfolio of projects, and it was not designed to function in environments where velocity is important, where faster cycle time and higher inventory turns are critical drivers of business outcomes.

Where it must contend with variation and uncertainty, CPM offers only a buffer of additional time – individual task durations lengthened to protect the completion date of each task, but not necessarily insuring the completion date of the project.

And – what is the cost of that added safety?  What is the cost of specifying 95% probabilities of completion over mean (50%) probability?

Statistically, it lengthens the job schedule by a factor of 1.64.  Which is how 90 day job schedules become 150 day job schedules.  Built-in safety that three well-known, yet typically un-checked, types of human behavior then conspire to waste.

For the most part, builders are oblivious to the effects of variation on their production system.  Yet, the cost of that variation is apparent and simple to calculate;  it is the Gross Income lost from all of the closings that never occurred, from houses that were never built with the capacity that was available;  for a profitable builder, it is Gross Income that would have certainly become Net Income, and ultimately, Net Profit.

It’s a lot of money.

Moreover, CPM considers task dependency (the predecessor-successor relationships of tasks) in its work breakdown structure, but it does nothing to resolve resource contention;  it does not consider situations in which tasks of different projects/jobs depend on the availability of resources that do not have sufficient capacity to meet the demand being placed upon them.

These two factors – dealing with variation and resolving resource conflict – should be anathema to homebuilders.

CPM was never designed to contend with the production environment homebuilding presents.  It is not the problem (the problem is variation and resource conflict), but CPM is benign to the solution.  ProChain Solutions’ Rob Newbold (Project Management in the Fast Lane) told me that he would go further, saying:  “CPM supports values that perpetuate the problems of homebuilders.”

Which brings us to Critical Chain Project Management.

Developed in 1997, Critical Chain addresses both task dependency and resource contention, and it replaces the padded durations intended to protect the completion date of every task with a smaller project buffer that is fully-capable of protecting the completion date of the project/job;  in the process, CCPM becomes much more aware of system capacity and constraints.

Understand what this different, changed approach means:  it means that Critical Chain substantially reduces the duration of projects – the cycle time of houses under construction – without impacting the reliability of their completion dates.

Consider the explanation of an exercise excerpted from the RB Builders: Lessons from the Pipeline© business case study being used in the upcoming Pipeline Workshop™ No. 11:

“RB Builders’ newly-acquired division has a construction schedule of 120 calendar days, but its calculated cycle time is actually 180 calendar days.  It is widely agreed that the division should be able to build its homes in far-less than the 120 days called for by the schedule, because that duration reflects ‘highly certain’ task durations.

“Switching from CPM to CCPM would immediately reduce the schedule from 120 days to 97 days, cutting the schedule by almost 20% with no diminution of confidence;  it would reduce the actual 180 day cycle time by almost half (46%).”

Critical Chain Project Management does more than just reduce the length of construction schedules.  It also specifies a set of rules preventing behaviors that consume (and waste) the safety CPM builds into task durations.  It installs a release mechanism that “pulls” starts into the system and keeps work-in-process at the levels required to produce faster cycle times.

It implements simple, visual tools to manage production.

Builders can put a number of these practices into place without changing the scheduling algorithms from Critical Path to Critical Chain.  They can use add-on applications that convert existing scheduling applications from CPM to CCPM.  They can implement standalone CCPM software applications.  However – Critical Chain will not be a complete, integrated solution for the homebuilding industry until its management technology providers wake up and address it.

It all starts with obtaining the knowledge necessary to insist on that change.

Come.  Participate.  Learn.  Insist on change.

 

Critical Chain Project Management is one of three Velocity Accelerators® (along with Business Process Improvement and Epic Partnering™) that will be explored at the next Pipeline workshop™, March 20-21, 2019, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

Delivered by SAI Consulting and Continuum Advisory Group.

Sponsored by MiTek Industries and Specitup.

Cost is $895.00 per person;  for team pricing, inquire here (flgroves@saiconsulting.com)

Details:  www.buildervelocity.com

 

(published on Escape from Averageness® every year since 2009;  updated, incorporated, and republished, here as the first in the five-part series)

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

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

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

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

Yes, it does matter.

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

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

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

Not only the truest picture, but the only picture.

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

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

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

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

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

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

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

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

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

 

(variable costing and the Contribution Income Statement format are addressed at every Pipeline workshop™;  learn more here:  http://buildervelocity.com or http://saiconsulting.com/buildervelocity-pipeline-workshops/)

 

At every Pipeline workshop™ we have ever done, one of the most important takeaways, one realized by practically every homebuilding company executive in attendance, is simply this:  something has to be done with the notoriously fragmented value stream that defines their industry, if they are going to have any hope of managing production as a system.

In their landmark 1996 book, Lean Thinking, Jim Womack and Dan Jones defined a value stream as “the set of all the specific actions required to bring a specific product through the three critical management tasks of any business.”

They went on to describe a set of processes, which they termed tasks:  a problem-solving task, an information management task, and a physical transformation task.

By definition, a value stream does not belong to an industry;  it is enterprise-specific;  each value stream belongs to its enterprise;  thus, every homebuilding company has its own value stream;  it owns that specific set of actions.

Nevertheless, it would be a challenge to cite any other industry, in which the sequence of tasks in the most common versions of that industry’s core-critical process (start-to-completion, i.e., the physical transformation task) is performed entirely by separate entities, as is the case with homebuilding.

Look at the value stream of almost any homebuilding enterprise, and you will find a combination of independent, separately-owned, non-proprietary, non-exclusive, unaffiliated businesses, each having their own goals, that are often at-odds with each other.

We have a descriptive phrase for a completely outsourced building model like this.  We call it “strip-mining the value stream”.

Technology – specifically, offsite manufacturing processes – will improve quality, reduce waste and variation, reduce cycle times, increase productivity.  By all means, consider it.  But, by definition, manufacturing off-site doesn’t unify the value stream, unless you own or joint venture the facility.

In her final comments to the team at RB Builders, before she left them the first time (The Pipeline: A Picture of Homebuilding Production©, Second Edition), the intrepid, results-based consultant reviewed the components of RB Builders’ production management system – the RB-IPS – and said this:

“It is a production management system that specifies the means by which RB Builders fosters epic relationships of mutual interest with its building partners and supply partners.  The RB-IPS provides both the process and the program for progressively transforming subcontractors and suppliers into true partners, into trusted allies, joined by shared, mutual interests.”

Builders attending Pipeline workshops™ consistently emphasize the need for stronger trade-partnering, better coordination, more cohesiveness, a more unified approach to managing the trade side of production.

They acknowledge the obvious:  they do not have the internal resources necessary to perform “the set of all specific actions” required to bring houses through the start-to-completion process, and they are completely dependent and reliant on skilled construction resources that are in short supply;  they understand that they can no longer dictate the terms.

Is vertical integration part of the answer?  We have been suggesting, for almost 20 years, that builders at least consider that possibility, that they find a way to shut-down the strip-mining operation.  That suggestion usually falls on deaf ears, or is dismissed as a radical, undoable notion.

Which is where opportunity always lies, in radical, undoable notions.

Whether or not vertical integration has a future strategic role to play in the homebuilding industry remains to be seen.  At each Pipeline workshop™, the contrast between outsourced and integrated building models is now portrayed in one of the Pipeline games™;  it is an area that has been covered in the Lessons from the Pipeline© business case at previous workshops;  and it was added as its own section in the second edition of The Pipeline: A Picture of Homebuilding Production© (released for publication in 2016).

The outcome of the vertical integration question doesn’t change the underlying imperative.  Success in unifying the effort of even the existing value stream has profound ramifications, on both the margin and velocity components of Return on Assets;  and success in unifying the value stream has profound implications for creating competitive separation.

With or without vertical integration, addressing the issue will require Epic Partnering™.

Come.  Participate.  Learn.

 

Epic Partnering™ – the attributes of the relationships being fostered, the program, the process – is one of the three Velocity Accelerators® (together with Business Process Improvement and Critical Chain Project Management) that will be explored at the next Pipeline workshop™, March 20-21, 2019, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

The cost is $895.00 per person;  for team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting and Continuum Advisory Group.

Sponsored by MiTek Industries and Specitup.

Details:  www.buildervelocity.com

 

Velocity Accelerators®: Business Process Improvement

Posted February 9, 2019 By Fletcher Groves

An overwhelming portion of SAI Consulting’s work, in and out of homebuilding, has been about enabling clients to effectively structure themselves around their core-critical business processes;  it is a fact that Business Process Improvement is the area of our practice for which we are most recognized.

It is a similarly important area for Continuum Advisory Group, the consulting firm that joins SAI in the facilitation of open, sponsored Pipeline workshops™ and Pipeline seminars™.

There is a very good reason for our firms’ collective focus on improving (and managing) business processes, and it is simply this:

The most basic, most fundamental premise in all of business is this:  the reason an enterprise exists – every business enterprise, certainly every homebuilding enterprise – is to make money;  the way an enterprise makes money is by delivering value to its customers and other stakeholders;  that value can only be delivered through the work that the enterprise performs, work that has to be performed in some manner of workflow;  the most common form of that workflow is work performed in processes.

Make money . . . by delivering value . . . through the work you perform . . . in processes.

From a business standpoint, processes are critically, centrally important;  they exist – they matter – whether homebuilders are intentional about them or not.

How important is Business Process Improvement to a homebuilding company?  Important enough that, sometime ago, we sacrificed one of the highly-regarded Pipeline games™, so that we could elevate improvement of workflow to the level of a Velocity Accelerator®.

At SAI, we repeatedly make the point that Pipeline workshops™ are all about thriving on the velocity side of Return on Assets®, but better process workflow pays off on both sides of economic return;  it drives both higher margins and higher velocity, drives a higher Return on Sales as much as it drives higher Asset Turn.

Consider:

Start-to-Completion (the sub-process within Prospect-to-Closing that is the aorta of workflow in a homebuilding company) is not, at its core, process management;  Start-to-Completion is multi-project management;  it is project portfolio management, with embedded and supporting processes;  it is workflow in which all of the non-supervisory work is performed by external resources (trades and suppliers).

Since it is not managed like a process, we don’t treat it as a process;  we don’t map it like it is a process;  we exclude it.

Nevertheless – even excluding STC – the results from the dozens of process mapping engagements we have  performed over the past two decades show that fully 25% of all the work a homebuilding company does perform – the work that consumes a building company’s overhead – is completely non-value-adding.

Ponder that revelation for a moment.

Here is the bottom-line:

If your Operating Expense represents – meaning it consumes – just eight percent of Revenue, you are throwing away $20,000 of every $1,000,000 in Revenue you generate.

The most visible element of BPI (and BPM) is the mapping of process workflows;  however, process mapping involves far more than documenting – and confirming, accepting as-is – the current state of that workflow;  it includes redesigning those workflows in ways that improve them, which invariably reveals other issues – the root causes, the core problems – that affect profitability and economic return.

Which makes understanding and improving workflow the means to a much more important end.

Business Process Improvement is the tip of the spear, the front-end of a continuous improvement methodology in which the activities and elements of workflow that add value are preserved, the activities and elements that add no value are eliminated, and the remaining activities and elements that enable value are refined to make the workflow more clear, more consistent, more streamlined, more connected, more succinct, more fit for its intended, defined purpose.

The analogy from our Pipeline workshops™ is that we want a shorter, straighter pipe.

Because it is so foundational, it is impossible to overstate the importance of understanding and improving the way work is performed, before starting down the long road on other improvement initiatives, before the process of continuous improvement moves anywhere else.

In addition to being the means to a more important end – and the front-end of a process of continuous improvement – BPI ushers in a new perspective.

It shifts the organizational view away from the internal structure of work performed in functions. towards the flow of work performed in value-adding processes;  BPI shifts the perspective from vertical to horizontal;  it turns a homebuilding enterprise 90 degrees from vertical, lays the enterprise on its side, and aligns its workflow with the value it seeks to create.

It’s about getting horizontal.

Lastly, processes are also the centric element of the operating model that forms any strategic value discipline that serves to deliver exceptional levels of the specific and distinctive value demanded by a narrowly-defined segment of homebuyers.

 

Come.  Participate.  Learn.

Business Process Improvement is one of three Velocity Accelerators® (along with Critical Chain Project Management and Epic Partnering™) that will be explored at the next Pipeline workshop™, March 20-21, 2019, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.

The cost is $895.00 per person;  for team pricing, inquire here (flgroves@saiconsulting.com)

Delivered by SAI Consulting and Continuum Advisory Group.

Sponsored by MiTek Industries and Specitup.

Details:  www.buildervelocity.com