Part III: ”Quite the Poster Child”

(excerpted from The Pipeline: A Picture of Homebuilding Production, originally posted on Escape from Averageness in June 2010, updated and reposted here)

“Remember our discussions on margin and velocity?”, she asked.  “This is where that comes into play.  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 house we close, and velocity is about how many houses 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 identity shows when calculating Return on Assets, Gross Income is a composite of margin and velocity.  We want the best blend of both;  margin and velocity 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, like when we are facing an external (market) constraint as opposed to 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 – allow us to economically leverage – that capacity.  We can control truly-variable direct costs and 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 final, halcyon days of the ‘Age of Homebuilder Entitlement’”.

“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 days

2007:

  • WIP = 100
  • CLOSINGS = 200
  • CYCLE TIME = 180 days

2008:

  • WIP = 100
  • CLOSINGS = 240
  • CYCLE TIME = 150 days

 

  • WIP = 80
  • CLOSINGS = 240
  • CYCLE TIME = 120 days

 

  • WIP = 100
  • CLOSINGS = 300
  • CYCLE TIME = 120 days 

 

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

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

The intrepid, results-based consultant gazed intently at everyone around the room, and then asked,  “Based on your interpretation of the data in the table, exactly how and where do you think RB Builders’ production system is buffering itself from all of this variation?

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

 

(The Pipeline: A Picture of Homebuilding Production is available on the publisher website (virtualbookworm.com), and the author website (thepipelinebook.com), as well as amazon.com, barnesandnoble.com, and booksamillion.com)