Part II: "Quite the Poster Child for Your Lack of Productivity"

(inspired and excerpted from The Pipeline)

One of the sales representatives looked at the superintendent, and just laughed. “Which one of the Productionally-Transmitted Diseases would you like to have? PTD, she owns you.”

The intrepid, results-based consultant smiled politely. “In a previous session”, she said, “someone said RB Builders closed 200 homes in 2007, on an average work-in-process of 100 houses, which is also the baseline for 2008. But, everyone also agreed that the system should be capable of producing 240 closings on 100 units of work-in-process. Later, someone else mentioned that the building schedules averaged 120 days.”

Moving to the erasable board, she wrote the following data in a table:

2005:
WIP = 100
CLOSINGS = 225
CYCLE TIME = ?

2007:
WIP = 100
CLOSINGS = 200
CYCLE TIME = ?

2008:
WIP = 100
CLOSINGS = 240
CYCLE TIME = ?

“Someone calculate RB Builders’ cycle time”, she said. “How many days?”

After a minute, the sales representatives looked up from her calculator, and said, “If I am doing this right, I calculate that, in 2005, our cycle time was 160 days. In 2007, it was 180 days. And, for 2008, we are targeting 150 days.”

The intrepid, results-based consultant completed the cycle time column with the calculated cycle times, but added two more rows with identical values.

2005:
WIP = 100
CLOSINGS = 225
CYCLE TIME = 160

2007:
WIP = 100
CLOSINGS = 200
CYCLE TIME = 180

2008:
WIP = 100
CLOSINGS = 240
CYCLE TIME = 150

WIP = ?
CLOSINGS = ?
CYCLE TIME = 120

WIP = ?
CLOSINGS = ?
CYCLE TIME = 120

“Okay”, she said. “Tell me what your production system looks like with a cycle time of 120 days.”

“There are two ways to look at it”, said the superintendent. “We could be closing 240 homes with 80 units of work-in-process. Or – we could be closing 300 homes with 100 units of work-in-process.”

The intrepid, results-based consultant added the new calculations.

2005:
WIP = 100
CLOSINGS = 225
CYCLE TIME = 160

2007:
WIP = 100
CLOSINGS = 200
CYCLE TIME = 180

2008:
WIP = 100
CLOSINGS = 240
CYCLE TIME = 150

WIP = 80
CLOSINGS = 240
CYCLE TIME = 120

WIP = 100
CLOSINGS = 300
CYCLE TIME = 120

“Remember the earlier discussions on margin and velocity?”, she asked. “This is where that thinking works. There are two ways RB Builders can increase the amount of Throughput – the amount of Gross Income – it generates. Margin is how much money we make on every home we close, and velocity is about how many homes we can build and close in a period.”

On the erasable board, she wrote:

MARGIN
VELOCITY

“Most of the time, there are improvement opportunities that permit us to attack margin and velocity simultaneously”, she said. “Much like the DuPont formula shows when calculating economic return (Return on Assets), Gross Income is a composite of both margin and velocity. We want the best blend of margin and velocity. They do not often conflict, even though there are sometimes tradeoffs, and times when we might be better served focusing more on the one than the other.

“On occasion, we are forced to make a choice on where to focus, more when we are facing an external (market) constraint than when we are facing an internal (production) constraint. What’s the difference? Where was the constraint in 2004-2005? The constraint was in your production system. It was an internal constraint.

“The velocity part of the choice decision lies in how well RB Builders is utilizing its true production capacity”, said the intrepid, results-based consultant. “The margin part is determined by the condition of the housing market, and whether that market is going to allow us to use – to economically leverage – that capacity. We can control truly-variable direct costs, and we can extract more value, but – at the end of the day – the market dictates the price you get for a house.

“And, a lot of people are thinking 2008 might be that kind of year – imagine – barely a year removed from the recent, final, halcyon days of the “Age of Homebuilder Entitlement””, she said.

“The point is, we have to learn to manage this relationship. We have to find the best blend of margin and velocity, the composite that generates the greatest amount of Throughput. We have to generate the greatest amount of Gross Income that we can, given the reality of our playing field, given the parameters imposed by the market.”

2005:
WIP = 100
CLOSINGS = 225
CYCLE TIME = 160

2007:
WIP = 100
CLOSINGS = 200
CYCLE TIME = 180

2008:
WIP = 100
CLOSINGS = 240
CYCLE TIME = 150

WIP = 80
CLOSINGS = 240
CYCLE TIME = 120

WIP = 100
CLOSINGS = 300
CYCLE TIME = 120

“Back to the issue of variation and uncertainty”, she said, gesturing towards the data table, and then looking toward the VP of Construction. “Earlier, you noted a widely-accepted sense that RB Builders should be capable of building every house in less than 90 days.

“Not 180 days, not 150 days, not 120 days”, she said, pointing to each number.

“In 90 days.”

She wrote the following questions on the board:

WHERE IS VARIATION BEING BUFFERED?
WHAT DOES VARIATION COST?

“Variation is the deviation from the standard. Variation can be applied to duration. It can be applied to cycle time. The standard cycle time is 120 days, and some of you think it should be 90 days. However, it takes you anywhere between 150 to 180 days to build your houses. Quite a bit of deviation from the standard, I should say.

“Your cycle time is quite the poster child for your lack of productivity.”

The intrepid, results-based consultant gazed intently around the room, and then asked, “Considering both your gut-instinct and your interpretation of the data in the table, exactly how and where do you think RB Builders’ production system is buffering itself – protecting itself – from all of this variation and uncertainty?

“And – how much do you think this variation is costing your company?”