Pipeline Workshops™: What’s your Production IQ®?

The fundamental understanding that emerges from the DuPont identity regarding Return on Assets is this:  remove the financial leverage (equity multiplier) from the formula, and economic return becomes a function of profitability (Return on Sales) and operating efficiency (Asset Turnover).

Economic return is margin x velocity;  it is a co-equal dependency.

Is margin proficiency necessary?  Yes.  Is it sufficient?  No.  Does superior margin hold-forth the possibility of achieving sustainable competitive separation?  Absolutely not.

We’re not alone in this assessment:

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

“ . . . [improving] inventory turnover . . . increases asset velocity, one of the most under-appreciated components of making money . . . higher velocity improves productivity and reduces working capital.  It also improves cash flow, the life-blood of any business.”  Execution: The Discipline of Getting Things Done (Bossidy, Charan, 2002, p. 17)

Nevertheless, in the homebuilding industry, action on the velocity side of Return on Assets – almost without fail – takes a backseat to action on the margin side of ROA.

Pipeline workshops™ are aimed at changing that paradigm.

The motivation to attend a Pipeline workshop™ starts with the willingness to acknowledge and remedy what amounts to a profound lack of knowledge regarding production principles and disciplines.

The last part of that statement bears repeating.

In the homebuilding industry, there is a profound lack of knowledge regarding production systems.

Do you disagree?  Are you confident that you already know this stuff?  Then, prove it.  You – and your team – take the test.

  1. If a homebuilding production system is a pipeline, what determines the size, capacity, length, and cost of the pipe? What controls the flow?
  2. Is even-flow production a mechanism or an outcome?
  3. What is the most operative, useful measure of size for a homebuilding company?  a. revenue   b. number of employees  c. houses under construction  d. annual closings
  4. There are three activities that describe “what happens to money” in a homebuilding business, the terms for which can be used to express and link the formulae for operating performance (productivity, cycle time, and inventory turn) to the equations for financial performance (Net Income and Return on Assets).  What are the terms for those activities?  What do those activities represent?
  5. What type of workflow is homebuilding?  Is it process management, project management, or a combination of both?  If it is a combination, which element does it favor?
  6. True or False:  A production system that unbalances capacity across the resources that perform the work does a better job of optimizing the utilization of capacity than a production system that balances capacity across those resources.
  7. In what three ways will a production system protect itself from variation and uncertainty?
  8. In scheduling a portfolio of jobs, which algorithm considers both task dependency and resource contention?  Is it Critical Path or Critical Chain?
  9. Calculating the cycle time of a production system requires knowledge of what two operational measures?  Determining the level of necessary work-in-process requires knowledge of what two operational measures?  Estimating the rate of closings requires knowledge of what two operational measures?
  10. True or False:  Building reasonable safety into task durations is the best way to insure a high percentage of on-time completions.
  11. Which measure of operating performance is the reciprocal of cycle time?
  12. Lean Production views homebuilding as a build-to-order process.  Which resource does Lean recommend using as its pacemaker?
  13. What is the difference between measured cycle time and calculated cycle time?  What is the best use for each?
  14. What is – and what is not – the true cost of variation in a production system?
  15. What three human behaviors consume the time safety built into a job schedule?
  16. How does the matrix for managing starts in a push release system differ from the same matrix in a pull release system?
  17. As a matter of standard deviation, increasing the probability that a task will finish on-time from 50% to 95% will cause the anticipated duration of the task to increase by a factor of how much?  In statistical terms, how many standard deviations does this represent?
  18. Is trade partnering a program or a process?
  19. True or False:  The NAHB Chart of Accounts Income Statement prevents a builder from calculating a breakeven point and a breakeven rate.
  20. How does velocity differ from speed?

(the answers are at the bottom of the post)

We know, just a quiz.  Like any quiz, the questions represent 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.

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

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

It starts with what you learn in a Pipeline workshop™.

Come.  Participate.  Learn.

 

The next Pipeline workshop™ is at the Ponte Vedra Inn and Club, Ponte Vedra Beach, Florida, on March 20-21, 2019.  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 

 

Answers: 

(1) size is the amount of work-in-process, capacity is the rate of throughput (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, flow is controlled by the valve that allows starts to occur at the rate of closings;  (2) even-flow production is an outcome, not a mechanism;  (3) c: houses under construction;  (4) 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;  (5) homebuilding is multi-project (project portfolio) management with embedded and supporting processes;  (6) True;  (7) higher work-in-process, longer duration, or more capacity;  (8) Critical Chain;  (9) work-in-process and closings, expressed in units, cycle time expressed in days;  if two are known, the third can be calculated;  (10) False;  (11) inventory turn;  (12) the most capacity-constrained resource;  (13) measured cycle time is the average (mean) duration of a series of jobs;  calculated cycle time reflects the relationship between the inventory (work-in-process) a production system carries and the closings (throughput) it produces;  measured cycle time is about forensics, calculated cycle time is about the system;  (14) the true cost of variation in a production system is not the cost of waste or excess, it is the Contribution (Gross Income) from every house that was not built and closed because of variation in the system, Gross Income that would have dropped straight to the bottom-line as Net Income;  (15) procrastination (student syndrome), expand to whatever time is allowed (Parkinson’s Law), multi-tasking;  (16) the start matrix in a push system determines both the order and rate of starts, whereas in a pull system, the start matrix only determines the order of starts (the rate of starts is governed by the rate of closings);  (17) a factor of 1.64 (reciprocal .61), meaning that four out of every 10 days in the job schedule is padding (safety) intended to assure on-time completion of every task, and, therefore, the on-time completion of the job;  two standard deviations;  (18) establishing epic relationships with trade partners is both a program and a process;  (19) True;  (20) velocity is a vector measure;  it is speed in a specific direction;  velocity is targeted, purposeful speed.