Pipeline Workshops: Thriving on the Velocity Side of Return on Assets

In order to succeed in the industry that is slowly emerging from the worst recession in three-quarters of a century, homebuilders have to learn to focus on more than the margin side of the business.  How much a builder makes on every house – i.e., the ability to generate a sufficient margin – will no longer be enough to assure success;  success will have just as much to do with how many houses a builder can build with a planned, finite, and controlled amount of production capacity.

Consider this:  a homebuilding enterprise that generates a Gross Margin of 24% and turns its inventory twice a year will be outperformed – by a 2:1 margin – by a homebuilding enterprise that generates a Gross Margin of 18% and turns its inventory four times a year;  outperformed in terms of Net Income;  outperformed in terms of Return on Assets.

The former is the picture of a slower, marginally-productive homebuilding company, and the latter is the picture of a fast, highly-productive homebuilding company;  the later generates twice the Revenue and half-again more Contribution.  Someone might suggest that the example of these two homebuilding companies presents a contrast that is unrealistically stark, a 180 day cycle time vs. a 90 day cycle time.  Then, also consider this:  an 18% Gross Margin with a 4x turn is the exact equivalent of a 24% Gross Margin and a 3x turn;  90 days vs. 120 days.

In the face of clear differences in economic outcomes, it is important to note that the homebuilding companies in all three scenarios are exactly the same size, when the real measure of size is the amount of work-in-process they each have to carry;  they have the same resource overhead, the same working capital requirements, the same risk profile.

For the most part, homebuilding is a build-to-order process, which tends to regulate short-term supply.  Moreover, the demands of higher productivity are so tough, require so much rigor, so much discipline, so much resolve, that most builders are discouraged from doing it.  So, it is reasonable to conclude that the price elasticity of supply and demand that would reduce prices in the face of wide-spread, capacity-driven increases in supply is not going to happen.

It’s not a choice between higher margin or higher velocity;  it’s the challenge – and the opportunity – of producing higher margin and higher velocity.

Pipeline workshops are a two-day immersion into the production physics – into the principles and disciplines – that enable homebuilders to thrive on the velocity side of economic return, that enable builders to thrive on the velocity side of Return on Assets.  The understanding and expertise delivered in a Pipeline workshop pulls extensively from The Pipeline: A Picture of Homebuilding Production.

 

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