Reactions in a Recovery where Demand exceeds Capacity

“Art Rutenberg wants to know if you ever return your telephone calls.”

It was 1991, and the question came from Bill Kendall, then-EVP at Arthur Rutenberg Corporation and my direct report.  The question stung, because it was a sad truth.  Since then, I have had a policy of returning every telephone call (and replying to every e-mail message) within 24 hours.  Just one of the many lessons I learned from this man.

More than twenty years later, little has changed with him.  So, when I sent him an Escape from Averageness post on a subject matter (architecture) in which I thought he would interested, Art, as usual, responded within a day.  In his reply, Art offered that business was good, that ARH enterprise revenue volume for 2013 was expected to produce a year-over-year increase of more than 40%.  Mark Refosco, an ARH Regional Vice President and one of the ARH franchisees in northeast Florida, gave more or less the same report;  his franchise is about to surpass all of 2012’s revenue, and it’s only May.

They are not alone.  The anecdotal evidence of a housing recovery is wide and plentiful;  check the Q2 earnings reports on companies like Toll Brothers, and you get a similar picture.  However, while the evidence is wide and plentiful, so is the concern, and the reaction to that concern, among homebuilders.  Look no further than the NAHB/Wells Fargo BSI, which fell in May for the second time in five months.

The concern is that current capacity cannot meet current demand, and the reaction is interesting;  a reduction in the rate of starts, an increase in prices, and a search for the resources that will increase capacity.

While it’s somewhat of a welcome problem to now have, an increase in demand puts pressure on current capacity.  Refosco concurred:  “It is a tough problem.  I told my building company president to increase prices, to slow things down.  We are, and have been, adding staff.”

To which I replied:  “In the production thinking of most executives – for certain, most homebuilding executives – there is a tendency to elevate the constraint before exploiting it.  There are a lot of reasons for doing just the opposite – a lot of argument for exploiting the constraint before elevating it, for getting as much as possible out of whatever is limiting throughput before spending additional money to own more of it.”

A better move – a smarter strategic move – would be to increase resource productivity/utilization, before acquiring more resource capacity.  As part of a homebuilding company’s overhead, those under-utilized resources are already being paid for, and they already know the system.  In the majority of homebuilding companies, there is a lot more productivity/utilization to squeeze out of their operations.

More-for-the-same, not more-for-more.

Next:  “There are only two choices.”