Pipeline Workshops: Think you know this stuff? Take the quiz.

“In fact, [asset] turnover is just as important as profit margin.”  Barron’s Accounting Handbook (Siegel, Shim), 1990, 1997, p. 150.

The fundamental understanding that emerges from the DuPont identity:  Remove the financial leverage (equity multiplier) from the equation, and economic return becomes a function of profitability (Return on Sales) and operating efficiency (Asset Turnover).  Economic return is margin x velocity;  a builder’s Return on Assets is always equally dependent upon those two components.

Nevertheless, in the homebuilding industry, interest and action on the velocity side of Return on Assets takes a backseat to interest and action on the margin side of ROA.  As a result of this short-sightedness, whatever operating efficiency ever existed in this industry is constantly being atrophied by disinterest and inaction.

Is margin proficiency necessary?  Yes.  Is it sufficient?  No.  Does it hold-forth the possibility of ever achieving sustainable competitive separation?  No.

Pipeline workshops are aimed at changing that paradigm, changing that illusion.  But, the motivation to attend a Pipeline workshop starts with a willingness to acknowledge and remedy what is a profound lack of knowledge regarding production principles and disciplines.

Think you know this stuff?  There’s one way to find out.  Take a short production quiz (answers are at the bottom).

  1. The best image of a production system is a pipeline.  What is the measure of the pipeline’s size?  What is the measure of its capacity?  What is the measure of its length?  What is the measure of its cost?
  2. True or False:  Even-flow production is an outcome, not a mechanism.
  3. From an operational perspective, there are only three activities that answer the question:  “What happens to money?”  The terms for those activities can be used to fully express – and, therefore, link – the equations for productivity, cycle time, and inventory turn, to the equations for Net Income, and Return on Assets.  What are those terms?
  4. True or False:  A production system with balanced capacity across all resources will do a better job of optimizing the utilization of a system’s capacity than one where capacity is not balanced across all resources.
  5. In what three ways will any production system buffer (protect) itself from variation?
  6. True or False:  In job scheduling, the Critical Path Method (CPM) considers task dependency, but not resource contention.
  7. Calculating the duration (cycle time) of any production process requires the knowledge of two operational measures.  What are they?
  8. True or False:  Task durations (for example, the phases in a job schedule) should have enough safety to insure a high certainty of on-time completion.
  9. Lean Production views homebuilding as a build-to-order process.  Which resource does Lean recommend using to set the pace of production?
  10. True or False:  CCPM (Critical Chain Project Management) does not adjust the job schedule according to when phases finish, whether early or late.
  11. What three human behavioral tendencies tend to waste the time safety built into a schedule?
  12. As a matter of standard deviation, increasing the probability that a task will finish on-time, from 50% probability to a “highly certain” 95% probability, will cause the anticipated duration of the task to increase by a factor of how much?

Like any quiz, these questions represent but a very small portion of the production and business knowledge required to effectively manage homebuilding production, increase operating performance, generate higher Net Income, and improve Return on Assets.

Ultimately, every homebuilding company has to determine how it will manage production within a specific context, within the parameters that comprise its market, its product mix, its choice of an information/management technology system, its financial situation.

But, the ability to manage production starts – it starts – with an understanding of the underlying principles and disciplines.

It starts with what you learn in a Pipeline workshop.

 

(The first Pipeline workshop will be held at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on March 12-13, 2014.  Cost is $750.00.  Early registration (through December 10, 2013) is $600.00)

Delivered by SAI Consulting.  Sponsored by BuilderMT and Big Builder (Hanley Wood).

For more details:  www.buildervelocity.com

 

Answers:  (1) size is a reflection of the amount of work-in-process, capacity is the rate of output produced with a planned, finite, and controlled amount of work-in-process, length is cycle time, cost is all of the indirect, non-variable expenses associated with overhead;  (2) True;  (3) money generated through sales is called Throughput, money invested in whatever will be turned into Throughput is known as Inventory or Investment, and money spent turning Inventory into Throughput is called Operating Expense;  (4) False;  (5) higher work-in-process, longer duration, or excess capacity;  (6) True;  (7) work-in-process and throughput, expressed in units;  (8) False;  (9) the most capacity-constrained resource;  (10) True;  (11) Student Syndrome (wait to start until too late), Parkinson Law (expand to time allowed), and multi-tasking (dividing work between multiple jobs);  (12) factor of 1.64, reciprocal of .61; four out of every 10 days in the schedule are safety to assure on-time completion.

 

 

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