Improving Productivity, Cycle Time, and Operating

Performance

By:

Fletcher L. Groves, III

Vice President

SAI Consulting

FastForward™

Where is the homebuilding industry headed over the next five to ten years?

How will the industry handle issues like competition, growth, consolidation, alternative delivery systems, and

integrated value streams?

An Industry Perspective

Reference PointOur Survey of

Management Practices in the Homebuilding Industry

� Cycle Time� Growth Strategies� Consolidation� Supply Chain

Management� Value Disciplines� Customization� Recruiting, Rewarding,

and Retaining Management

“What is your mid-term (five to seven year) estimate of the number of homebuilding companies that will be

active in the markets you serve?”- 1999 Reference Point survey

4549

3538

20

13

0

10

20

30

40

50

60

1997 1999

FewerSameMore

“Within the same timeframe, where do you think your own operation will be?”

- 1999 Reference Point survey

6871

3027

3 20

10

20

30

40

50

60

70

80

1997 1999

Larger

No Change

Smaller

“What will be the primary contributor to your growth?”- 1999 Reference Point survey

41

21

39

00

5

10

15

20

25

30

35

40

45

Overall

Geographic Expansion

New Market ShareAdditional Market Share

Vertical Integration

“What will be the primary contributor to your growth?”- 1999 Reference Point survey

63

30

38

0

60

4338

10

19

0 0 00

10

20

30

40

50

60

70

Custom/Semi-Custom Semi-Production Production

Geographic Expansion

New Market ShareAdditional Market Share

Vertical Integration

“Long-term (beyond 10 years), can you see the type of drastic consolidation in local homebuilding operations

that has occurred in other industries?”- 1999 Reference Point survey

55

71

77

46

29

23

0 10 20 30 40 50 60 70 80 90

Custom/Semi-Custom

Semi-Production

Production

No

Yes

“Long-term, can you foresee the type outright circumvention of established delivery systems that has

occurred in other industries?”- 1999 Reference Point survey

46

50

58

55

50

42

0 10 20 30 40 50 60 70

Custom/Semi-Custom

Semi-Production

Production

NoYes

“Long-term, do you see homebuilding companies taking the lead in managing all of the activities that go into the

process of creating the housing product?”- 1999 Reference Point survey

82

71

83

18

29

17

0 20 40 60 80 100

Custom/Semi-Custom

Semi-Production

Production

No

Yes

What does it all mean?

� The demand for housing cannot profitably support this aggregate level of anticipated growth.

� The untapped opportunity is in vertical integration.

� The battle will increasingly be fought over productivity-driven improvements in operating performance.

I. Making the Connection

The relationship between Productivity, Cycle Time, and Operating

Performance.

The impact of faster Cycle Time on the operation of a homebuilding

company.

II. Seeing the Big Picture

Improvement is a process - not a destination.

Understanding what it is you are trying to improve - and how you will measure

your progress.

The right approach.

III. Getting Horizontal

The process perspective.

Eliminating non-value-added work from operating processes and freeing

capacity.

Making the rest of the work flow evenly and continuously.

IV. Getting Results

Finding the constraint.

Managing the constraint and improving its performance.

More-for-Less: Taking advantage of the improvement in productivity.

What happens to the money?

� Throughput (T) is the rate at which a builder generates money through sales.

� Inventory (I) is all the money a builder invests in things it intends to sell.

� Operating Expense (OE) is all the money a builder spends turning Inventory into Throughput.

Productivity

� Productivity is the ratio between Throughput (Contribution) and Operating Expense - the ratio between money generated and money spent.

� It increases when you produce the same revenue at a lower fixed cost, or more revenue at the same fixed cost.

Cycle Time

� Conventional view: It is the length of time it takes to complete a home.

� New view: It is the ratio between Units-in-Process and Units Completed over time.

� It is reduced only by generating more money (Throughput) while spending less money (Operating Expense).

Operating Performance

� Operating Performance is determined by the impact of operational decisions on Throughput, Inventory, and Operating Expense.

� It improves whenever Throughput is increased and Inventory and Operating Expense are decreased.

Crucial Connections

� Productivity, Cycle Time, and Operating Performance are linked by Cause-and-Effect - they mean nothing apart from one another.

� They are also linked by their common elements - Throughput, Inventory, and Operating Expense.

Cause-and-Effect

When Cycle Time gets . . .longer . . . shorter . . .

Throughput

BacklogWorking CapitalWork-in-Process

Operating Expense

Building faster . . .

. . . reduces Cost - both variable and fixed

. . . increases Production Capacity

. . . improves Cash Flow

. . . reduces Working Capital Requirements

. . . reduces Work-in-Process

. . . improves Quality and On-Time Delivery

. . . shortens Lead Time

. . . increases NOI and ROA

“From contract to closing, how long does it typically take your company to complete a home?”

- 1999 Reference Point study

160

209

150

170

127

151

0 50 100 150 200 250

1997 Overall = 141days

1999 Overall = 168days

Production

Semi-Production

Custom/Semi-Custom

“How long does it take your company to complete work in the following sub-processes?”

- 1999 Reference Point survey

41

38

38

54

119

105

126

145

0 50 100 150 200 250

Overall

Production

Semi-Production

Custom/Semi-Custom

Contract-to-StartStart-to-CompletionCompletion-to-Closing

The Problem with Estimates

Estimates are not accurate - builders almost always under-estimate their cycle times.

Estimates tend to reflect averages, and average cycle time is not a useful

measure.

Estimates and averages do not provide any useful insight into Operating Performance

and Productivity.

“How many days does it take to complete work in these sub-processes? . . . How many homes are in-process at

one time and how many homes do you complete?”- 1999 Reference Point survey

168

8

119

41

224

15

153

56

0 50 100 150 200 250

CTC (overall)

Completion-to-Closing

Start-to-Completion

Contract-to-Start

CalculatedEstimated

Calculating Cycle Time

Calculating Cycle Time in the Contract-to-Closing Process

(Contract-to-Start)

(90 + 96) ÷ 47 x 30 = 59 days 2

(Start-to-Completion)

(228 + 243) ÷ 47 x 30 = 150 days

2

Cycle Time - Days

Feb-99

Mar-99

Apr-99

May-99

Jun-99

Jul-99

Aug-99

Sep-99

Oct-99

Nov-99

Dec-99

Jan-00

Feb-00

Mar-00

Apr-00

May-00

Jun-00

Monthly

Quarter

Linear (Quarter)

Linear (Monthly)

Inventory and Throughput

Feb-99

Mar-99

Apr-99

May-99

Jun-99

Jul-99

Aug-99

Sep-99

Oct-99

Nov-99

Dec-99

Jan-00

Feb-00

Mar-00

Apr-00

May-00

Jun-00

Homes-under-Construction

Closings

Linear (Closings)

Linear (Homes-under-Construction)

Inventory Starts, Sales, and Closings

Feb-99

Mar-99

Apr-99

May-99

Jun-99

Jul-99

Aug-99

Sep-99

Oct-99

Nov-99

Dec-99

Jan-00

Feb-00

Mar-00

Apr-00

May-00

Jun-00

Starts SalesClosings Linear (Sales)

Linear (Starts) Linear (Closings)

Get Horizontal

Processes are the only means by which work is performed and value is created.

The process-centered view is a complete departure from the perspective of most

homebuilders.

Performance improvement starts with the design of your processes.

Change the Way You Work

Eliminate the non-value-added work, free capacity, and make the rest of the work

flow evenly and continuously.

� Focus on the outcomes that meet the buyer’s expectations and eliminate the non-value-added work.

� Create simple processes and populate them with complex tasks.

� Eliminate the stop-and-start, hurry-up-and-wait sequence of work - replace it with a system that produces sales, starts, and closings at a level and continuous rate.

� Stop pushing product through the system - use the productivity gained from even-flow production to reduce dependence on inventory starts to meet production requirements.

� Stop pushing designs into the market - which increases cost and lead time - by only producing the plan designs that buyers order when they order it.

� Move from a vertical functional structure to a horizontal, team-based structure aligned with the flow of work.

� Set specific performance requirements for processes and make the connection with better operating performance.

� Design your processes to meet the specific requirements of a narrowly defined market of buyers.

� Processes don’t perform work - you need to pay just as much attention to the “why” and the “want-to” as you do to the “what” and the “how-to”.

The Improvement Process

The process for improving something requires you to find the answers to three

questions:

What to change?

What to change to?

How to make the change?

“How long does it take you to complete a home? How many days could the CTC process be shortened?”

1999 Reference Point survey

32

43

76

151

170

209

0 50 100 150 200 250

Production

Semi-Production

Custom/Semi-Custom

CTC length

CTC shortened

“How would you prioritize the improvement effort?”- 1999 Reference Point survey

0 10 20 30 40 50 60 70 80

Project Scheduling

Quality Assurance

Partnering Process

Contract Approval Process

Permitting Process

Plan Design Process

Estimate/Budget Process

Construction Documents

Financing Process

Closing ProcessHigh Priority

“If you started a project to improve cycle time, how would you allocate resources to the effort?”

- 1999 Reference Point survey

0 5 10 15 20

Project Scheduling

Quality Assurance

Partnering Process

Contract Approval Process

Permitting Process

Plan Design Process

Estimate/Budget Process

Construction Documents

Financing Process

Closing Process

What’s the Goal?

The reason you are in business is to make money.

The Goal of your company is to make more money - now and in the future.

Everything else is just a necessary condition for achieving that goal.

Measuring Progress

How do you measure progress or - in operational terms - what does it mean to

“make more money”?

Increasing Contribution (Throughput)

Reducing Inventory

Leveraging the investment in Fixed (Operating) Expense

Resolving Conflicts

� In order to “make money”, you have to make the best operating decisions regarding Throughput (Contribution), Inventory, and Operating Expense.

� If you are faced with a decision in which two or more of these measures are in conflict - make the decision that has the best impact on Throughput.

Focusing the Effort

Three basic choices:

Fix the easiest problems first?Sacrificing long-term improvement for short-term gain

Fix everything that needs fixing?Complexity and the reciprocal of 80/20

Fix the real problem?Focus on the constraint.

Systems as Chains

Understanding Constraints

Every homebuilding company has at least one constraint - and probably only one

constraint.

The constraint is usually the company’s core problem - the root cause of most of

the visible symptoms.

You have to know what the constraint is, and where it is located.

Constraints can be logistical, managerial, or behavioral.

Constraints can be external or internal.

Once you understand what the constraint is - and where it is located - you have to

eliminate it or manage it.

Final Thoughts

� Make the Connection.

� Improvement is a process - not a destination.

� Eliminate non-value-added work and make the rest of the work flow.

� Find the weakest link- make it stronger.

� Do more for less.

Questions and Information:

Fletcher Groves is a Vice President with SAI Consulting. He can be reached at (904) 273-9840, or by e-mail

at flgroves@saiconsulting.com