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

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

Economic return is margin x velocity.  How much do I make on every house I build?  How many houses can I build with the capacity I have?  It is a mutual, co-equal, dependent relationship.

Is margin proficiency necessary?  Yes.  Is it sufficient?  No.  Does superior margin hold-forth the possibility of achieving any degree of 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 margin side of Return on Assets will always overshadow action on the velocity 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 the operation and management of production systems.

Think you know your stuff?  Prove it.  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 best 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 balances capacity across the resources that perform the work does a better job of optimizing capacity utilization than a production system that unbalances capacity across those resources.
  7. In what three ways does a production system attempt to protect itself from variation and uncertainty?
  8. In scheduling a portfolio of jobs, which algorithm considers both task dependency and resource contention?  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 does not ensure 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 the true cost of variation in a production system?  What is typically mistaken as the 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 what factor?  What multiplier?  In statistical terms, how many standard deviations does this factor represent?
  18. Is trade partnering a program or a process?
  19. True or False:  The NAHB Chart of Accounts Income Statement enables a builder to calculate a breakeven point and a breakeven rate.
  20. How does velocity differ from speed?

(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 operating 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 its underlying principles and disciplines.

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

Come.  Participate.  Learn.

 

The next Pipeline workshop™ will be held on March 25-26, 2020, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.  The cost is $895.00 per person;  for team pricing, inquire here (flgroves@saiconsulting.com).

Delivered by SAI Consulting.

Sponsored by Specitup and Simpson Strong-Tie.

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) False;  (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) True;  (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 wasted or excessive cost, 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) False;  (20) velocity is a vector measure;  it is speed in a specific direction;  velocity is targeted, purposeful speed.