Improving Productivity, Cycle Time, and Operating Performance

1. Improving Productivity, Cycle Time, and Operating Performance By: Fletcher L. Groves, III Vice President SAI Consulting

2. 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?

3. Reference Point Our Survey of Management Practices in the Homebuilding Industry Cycle Time Growth Strategies Consolidation Supply Chain Management Value Disciplines Customization Recruiting, Rewarding, and Retaining Management An Industry Perspective

4. “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

5. “Within the same timeframe, where do you think your own operation will be?”- 1999 Reference Point survey

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

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

8. “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

9. “Long-term, can you foresee the type outright circumvention of established delivery systems that has occurred in other industries?”- 1999 Reference Point survey

10. “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

11. 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.

12. 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.

13. 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.

14. 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.

15. IV. Getting Results Finding the constraint. Managing the constraint and improving its performance. More-for-Less: Taking advantage of the improvement in productivity.

16. What happens to the money? • Throughput (T)is the rate at which a builder generatesmoney 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.

17. Productivity • Productivity is the ratio between Throughput (Contribution) and OperatingExpense - 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.

18. 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 (OperatingExpense).

19. 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 OperatingExpense are decreased.

20. 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.

21. Cause-and-Effect When Cycle Time gets . . . longer . . . shorter . . . Throughput Backlog Working Capital Work-in-Process Operating Expense

22. 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

23. “From contract to closing, how long does it typically take your company to complete a home?” - 1999 Reference Point study

24. “How long does it take your company to complete work in the following sub-processes?”- 1999 Reference Point survey

25. The Problem with Estimates Estimates are notaccurate - builders almost always under-estimate their cycle times. Estimates tend to reflect averages, and average cycle time is not a usefulmeasure. Estimates and averages do not provide any useful insight into Operating Performance and Productivity.

26. “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

27. Calculating Cycle Time

28. 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

32. 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.

33. 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.

34. 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.

35. 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.

36. 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”.

37. 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?

38. “How long does it take you to complete a home? How many days could the CTC process be shortened?”1999 Reference Point survey

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

40. “If you started a project to improve cycle time, how would you allocate resources to the effort?”- 1999 Reference Point survey

41. 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.

42. 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

43. 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.

44. 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.

45. Systems as Chains

46. 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.

47. 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.

48. 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.

49. 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