Three Ways to Measure the Pipeline

(excerpted from The Pipeline)

The intrepid, results-based consultant helps RB Builders understand how to measure its production system:

“We need to create a visual reference”, said the intrepid, results-based consultant. “Whether we choose to call it an analogy, a concept, or a metaphor, the clearest picture – the best visual image – we can convey of the RB Builders production system is that of a pipeline.

“We live in a world of systems. A homebuilding company is not some loosely-connected set of independent, and unrelated, parts. It is not some collection of processes, departments, systems, resources, policies, and other isolated pieces of a whole. A homebuilding company is both a system, and a part of a larger system. It is a set of interdependent parts that must work together to accomplish a stated purpose.

“Viewed as a pipeline”, she said, “production systems have neither unlimited capacity nor unlimited size. If you increase the level of work-in-process, the only way the system can hold the additional work is to lengthen the pipe. The diameter of the pipe is fixed. If we put more work-in-process in the pipe, it does not become a bigger, wider pipe. It just becomes a longer pipe. So, what is the length of the pipe?”

“The length of the pipe is the time it takes to build a home”, replied the VP of Construction. “It is cycle time.”

“That’s right”, she said. “Duration, or cycle time, is the measure of the length of the pipe. The longer the pipeline, the more time it takes to get from one end of it to the other. In fact, given the same amount of effort, the added friction and the increased number of corners resulting from the added length actually tends to reduce the output.”

One of the superintendents raised his hand. “Okay. So, are you saying we need a bigger, wider pipe?”

The intrepid, results-based consultant quietly smiled. “Well, that depends”, she replied. “Does your production pipeline have a cost?”

“Everything has a cost”, said the VP of Construction, turning to the CFO. “Am I right?”

The CFO smiled wryly, nodded affirmatively, and replied, “Yes, everything has a cost.”

“So – what is the cost of your pipeline?”, she asked.

“Well, we have never thought about it that way”, the CFO responded. “I suppose the cost would be whatever we spend to have a pipeline in place. The nature of a production pipeline is that of a relatively fixed object, heavy and difficult to move. I would say that the cost of our pipeline is all of the non-variable cost we incur every year, to have the capacity to build homes.”

“Yes”, she replied. “The cost of the pipeline is what RB Builders pays every year, in the form of operating costs and resources, to have the use of it. You pay for the cost of the pipeline, whether you use it or not. That puts the cost of the pipeline squarely in the category of non-variable costs.

“In order to understand productivity and production capacity, you must first understand how costs behave in relation to Revenue, and, more importantly, how you manage those costs on the basis of that behavior.

“On the one hand, you want to control your direct, variable costs – you want to reduce the cost. Really, though, what you want to do is extract maximum value from it. Value is the difference between the price you sell a house for, and what it cost you to deliver it.

“On the other hand, you want to leverage your indirect, non-variable costs. Those are the costs you expect to incur regardless of the Revenue you generate, and you want to produce as much output – as much Revenue, as much Gross Income – as you can from them.

“So, would a bigger, wider pipe cost more than your current pipe?”

Thinking for a moment, the CFO replied, “Yes, it would. There is a connection between the size of a pipe and its cost. There is also a connection between the size of a pipe and its capacity, but that is an issue of utilization. When we invest in a pipe, the cost of the pipe is related to its size.

“So – yes – a bigger, wider pipe would cost more than our current pipe.”

“Wait a minute. I want to talk about utilization”, said the VP of Construction. “Our production pipeline is usually full. Are you saying that we do not utilize our production capacity?”

“No. Well, maybe”, said the CFO. “I do not know how effectively or efficiently we are using the capacity the pipe was designed to achieve. All I am saying is that there is a relationship between the size of the pipe we design or buy, and what it costs us. The price of the pipe is related to its size. It is up to us to utilize the investment, to use the capacity.”

“There are three ways to measure the pipeline”, said the intrepid, results-based consultant. “Its size is defined by the amount of work-in-process it is intended – it is designed – to carry. Its length is determined by its cycle time. Its capacity is defined as the rate of output – the rate of throughput – that a pipeline that size can produce, with a planned, finite, and controlled level of work-in-process.”

One Comment

  1. Ping from Leslie:

    Once again you strike right to the point….The unseen issues…I await the continuation of the article.

    Leslie M. Day