BUILDING FASTER Reducing Cycle Time in the Contract-to-Closing Process

1. BUILDING FASTERReducing Cycle Time in theContract-to-ClosingProcess By: Fletcher L. Groves, III Vice President SAI Consulting

2. “Yep - it’s one of our biggest challenges. We take way too long to get a house started and built - we need to build faster.” “You’re not alone. But - if you don’t mind - what’s your cycle time now?” “Well - it should be about 165 days - 45 days to get a house started and 120 days to build it. But - right now - our average job takes 210 days. By the way - measuring cycle time is a big step for us - we used to estimate it.” “Really? Figure that one out all by yourself?”

3. “Oh, sure. It was simple - our schedule tells about how long it should take. As for our current cycle time, we track the exact length of every job and figure cycle time as an average.” “Which means - what?” “If average cycle time is getting shorter, we know we’re building houses faster. That’s why we measure it - it’s a lead indicator for us. If we build faster, we’re more profitable.” “And - cycle time tells you that? Fascinating.”

4. “Well - eventually.” “I think you’re right - but let’s talk about average cycle time. How does knowing average cycle time - or for that matter, the actual cycle times of individual jobs - help you? What do you do with that information?” “I’m not sure we know the answer yet. Start with what we do know. Shorter is faster, and faster is better. Job scheduling is our biggest problem, followed by subcontractors, then we have all the problems at the front end . . .”

5. “But - in operational terms - what would your company look like if it was selling, starting, and closing homes in 165 days?” “Operational terms? You’re starting to lose me.” “Chad - it’s a simple question. How does your understanding of cycle time - which you define as the time it takes your company to build a house - help you make better operating decisions?”

6. Building faster . . . . . . reduces Cost . . . 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

7. “Okay - let’s start with the basics. First of all, your cycle time needs to be calculated - not estimated, not measured. “Cycle time is a productivity measure over time - which means you can calculate it. That implies a relationship. “So - in operational terms - cycle time is the relationship between . . .” “ . . . what we’re working on and what we’re producing. Homes under construction and homes completed.”

8. “Exactly. Cycle time is calculated as the average units-in-process divided by the number of units completed, multiplied by the number of days in the period.” “Units-in-process? Units completed? I build homes - not air conditioners.” “Look at the process, Chad. Presale Start-to-Completion - what are your units-in-process?” “Homes under construction - the WIP. Units completed are homes we closed. Contract-to-Start would be contracts and starts.”

9. “But - Jack - I don’t know about this !@#$%&. I just made a quick calculation on last month’s Start-to-Completion - those numbers are different from our measures.” “Remember - cycle time is a productivity measure over time. What happens to your average cycle time when homes extend over different time periods? Besides - the issue is usefulness. So - in operational terms - what would your company look like if was selling, starting, and closing homes in 165 days?”

10. “Well - we’d be more profitable. And - our production would be smoother.” “If we calculated it, I’ll bet we’d find that your monthly cycle times - even your quarterly cycle times - are all over the map.” “You’d be right - unless we had a recount. We’ve had significant fluctuation in our cycle times - even the way we measure it. Not only that - our cycle time has also steadily increased during the past three years”. “Which means?”

11. “We’re building slower”. “Probably - but that’s the wrong perspective. What’s happening to your throughput and inventory?” “You mean our units completed and units-in-process. In our case, our closings are pretty consistent , but we’re carrying 50% more WIP. “The fluctuation in cycle times and the higher WIP - do they give you any ideas where to look if you want to solve this problem?”

12. Understanding the Connection • Productivity, Cycle Time, and Operating Performance are linked by Cause and Effect. • Productivity, Cycle Time, and Operating Performance are linked by the common elements of Throughput, Inventory, and OperatingExpense.

13. The Impact on Profitability and Economic Return Productivity = Throughput ÷ Expense Inventory Turns = Throughput ÷ Inventory Net Profit = Throughput - Expense ROA = Throughput ÷ Inventory

14. Avoiding Confusion Throughputand Inventoryare two sides of the same coin. • The operational perspective of Throughput andInventoryisUnits Completed and Units-in-Process. • The financial perspective of Throughput and Inventory is Contribution and WIP.

15. What happens to money? • Throughput (T)= the rate at which a builder generatesmoney through sales. • Inventory (I) = all the money a builder invests in things it intends to sell. • Operating Expense (OE) = all the money a builder spends turning Inventory into Throughput.

16. Productivity • Productivity is the ratio of Throughput (Contribution) to OperatingExpense - the ratio of money generated to money spent. • Increases when you produce the same revenue at a lower fixed cost, or more revenue at the same fixed cost.

17. Cycle Time • Conventional view: Average length of time required to complete a home. • New view: Ratio of Units-in-Process to Units Completed over time. • Reduced only by generating more money (Throughput) while investing less money (Inventory).

18. Operating Performance • Operating Performance is determined by the impact of operating decisions on Throughput, Inventory,and Operating Expense. • Improves whenever Throughput is increased and Inventory and OperatingExpense are decreased.

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

20. “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

24. “I like this method of looking at cycle time. But - I have a question. Should we be targeting a cycle time of x-days - or should we look at cycle time as the relationship between what we’re working on and what we’re producing?” “Cycle time - in days - is just an outcome. It doesn’t drive anything. Tell me - which numbers can you impact? Days or measures of production? Which measure is more - purposeful?” “The one that tells me if we’re making money.”

25. “Actually, you need to look at both. The production measures tell you what to change, the number of days tells you what the gap is. “Alright - based on what we now understand about cycle time - what do you need to improve first?” “We need to build homes faster.” “You just don’t get it, do you? Long, fluctuating cycle time is the undesirable effect caused by something - what is it? Cycle time is the symptom - what’s the problem?”

26. “What do I look for? It could be a lot of things. Where would I start? Solve the easiest problem first? Save it until last? Don’t tell me I need to do it all at once. I don’t have the time or the resources.” “Chad - what’s the goal? What is currently keeping you from achieving more of it? It seems complicated - but it’s not. Your constraint - and that’s a good word for it - is like the weakest link in a chain. There might be any number of weak links, but only one weakest link.”

27. Why are you in business? • The purpose of your company - the reason your company is in business - is to make money, both now and in the future. • Everything else is either a prerequisite or a necessary condition to achieving that goal.

28. What happens to money? • Throughput (T)= the rate at which a builder generatesmoney through sales. • Inventory (I) = all the money a builder invests in things it intends to sell. • Operating Expense (OE) = all the money a builder spends turning Inventory into Throughput.

29. How do you “make money”? The name of the game is to make operating decisions . . . that increase the rate at which money is generated (Throughput) . . . and simultaneously reduce the amount of money invested (Inventory) and the amount of money spent (Operating Expense) turning Inventory into Throughput.

30. Why grow the company? • In order to “make money”, you have to make the best operating decisions regarding Throughput (Contribution), Inventory, and OperatingExpense. • Faced with an operating decision in which these measures are in conflict - opt for the one that has the greatest impact on Throughput.

31. Systems-thinking • The definition of a system - a network of interdependent parts that must work together to accomplish a common purpose - certainly applies to a homebuilding company. In a homebuilding company, improvement occurs at the system level.

32. The purpose of your company is to make money - both now, and in the future. • Your company’s operations are linked to its goal by the affect operating decisions have on money in the system.

33. The components of your company - its processes, people, systems, products, markets, suppliers - are like links in a chain. • Just like a chain - the operating performance of your company is not equal to the sum of the performance of its components.

34. The strength of a chain is determined by its weakest link - the performance of your company is determined by its constraint. • Strengthening any link other than the weakest link will not improve the strength of the chain - improving anything but the constraint will not improve your company relative to its purpose.

35. The system’s constraint is the core problem that is the principle cause of all the other problems. • The core problem is not transparent - it manifests itself as the undesirable effects it has on the operation. • If you only treat the symptoms of the problem - the undesirable effects - the core problem will persist.

36. The Improvement Process The process for improving any system - including a homebuilding company - means finding answers to these questions: • What to change? • What to change to? • How to make the change?

37. Identifying the problem. • Identify the core problem - the constraint - by looking for the cause-and-effect existing between the undesirable effects visible in your company’s operations. • It’s usually a conflict between the policies, practices, or measurements everyone considers necessary.

38. Finding the simple solution. • The solution always resolves the underlying conflict. • The solution always reverses at least 70% of the undesirable effect the core problem is having on your company’s operations. • The solution is never broad or complex.

39. Getting there from here. • Figure out how to remove the obstacles from the solution. • Develop a plan for implementing the solution - identify the precise sequence of steps that will remove the constraint.

40. Managing Constraints • Identify the constraint and make certain it only does constraint work. • Protect the constraint and make sure everything else supports it. • Increase the capacity of the constraint. • There is always a constraint - put it in the right place and manage it.

41. The Process Perspective • Processes are the real manner in which work is performed - and the only way value is created. • The natural, horizontal view of a company organized around how work is performed is different. • Speed is a process issue.

42. Building Faster • Identify your processes, and separate the Value Delivery processes from the Support processes. • Starting with Value Delivery, do a cross-functional flowchart and measure the operating performance of the process. • Align (physically) structure with work.

43. Eliminate all of the non-value-added steps and needless complexity - the handoffs, reviews, approvals, inspections, and repetition. • Implement a set of AS-IS standards. • even-flow (sales, starts, and closings) • single-tasking (versus multi-tasking) • upstream accuracy and completeness • clear, concise documents and information

44. Document the revised current (AS-IS) state of the process - we recommend IDEF0-type process mapping software. • structural hierarchy • graphic and text diagrams • parameters - inputs, outputs, controls, etc. • drill down detail

45. Product Development • Use cross-functional design teams - people who use it need to design it. • Consider the feasibility of replacing master plans and budgets with custom design capability. • portfolio support costs v value-added • Pull v Push - another form of inventory?

46. Require consistent architectural standards. • Manage the proliferation of plan versions in your estimating and job budgeting systems. • Cull the portfolio - do not support plans that do not sell (see Push versus Pull).

47. Prospect-to-Contract • Capture the information one time, at its source. • On-line, real-time pricing on standard plans and options, rolling into contract preparation and financing approval. • Put the contract approval authority face-to-face with the buyer.

48. Remember - even-flow production starts with even-flow selling. • If your sales associates are a constrained resource, make sure they are doing only constraint work - working with buyers. • Clear, concise, accurate, and consistent contract documentation - do not place incomplete, inaccurate contracts in the process.

49. Contract-to-Start • Pay attention to the order work has to go through the process - run parallel but do not risk repetition. • The constraint is where the contracts pile up - manage the constraint. • Manage the buyer interface - be proactive and commit resources at the point-of-sale.

50. Do not allow multi-tasking - it increases the lead time of every contract. • Do not let structure get in the way of the requirements of the process - use physical line-of-sight to get work performed. • More complex tasks produce a simpler, faster process.