Where Best Builders Are Headed

Where will you be five years from today? We ask that of prospective employees, to gauge their drive and ability to think strategically. But do you ask yourself the same question?

As CEO, your ability to gaze into the future and see the forces that will shape housing competition five years from today can make or break your home building company. How will successful builders be organized, and what will they be doing, in 2005?

To give our readers a little help, Professional Builder asked some of the best in the business for a peak into their crystal balls. Recently PB and the NAHB’s Research Center hosted a roundtable conference in Chicago on the direction of management practice in home building. We asked what the future may hold for companies who stay on the cutting edge. Participants included some of America’s top home builders as well as leaders from manufacturing and service industries.

At the end of the day, a broad consensus emerged that many of today’s pressing problems -- such as skilled labor shortages, increasing government regulation and local no-growth movements — will still be around in five years. But not surprisingly, there were divergent ideas on how to beat competitors at the nitty-gritty of building and marketing new homes.

For instance, some builders predicted electronic commerce will remove Realtors from the new home sales equation. “I would rather be a builder five years from now than a Realtor,” said Indianapolis builder Paul Estridge, who suggested future customers might rely on Web sites and the builder’s salaried sales facilitators to guide them through the buying process. Facilitators will have a more consultative attitude toward the consumer when they no longer get commissions, said Estridge, “and they won’t make $175,000 a year.”

“I think Realtors ... are a dying breed,” said Tom Brick, director of construction quality for U.S. Home Corp. “We had 8 million Web-site hits in 1998. Just look at the car market. More and more people are buying cars electronically. My only concern with Internet (sales) is that it adds more fuel to turning a house into a commodity. We’re already seeing values shifting. People who used to put all their money in a house are now buying less house than they can afford.”

However, the NAHB Research Center’s Ed Caldeira disagreed: “You know that a Volvo is a good car. Home buyers don’t have the same confidence in home builders’ products. Part of why they shop for homes is to develop confidence in the builder. Until homes can be branded as defect-free as Volvos, you’re not going to see homes sold in the same way, over the Internet,” said Caldeira.

Big-Box Retailing?
Still in the sales arena, large builders at the roundtable predicted a growing role for the centralized design and selection centers many are now using to sell options and upgrades. “We may see builders consolidate sales into one location with 15 to 20 different model homes, next to the corporate office, rather than having a model or two in 15 different communities scattered around town,” said Chicago builder Ken Neumann, who builds 700 homes a year.

“Maybe they’ll find us over the Internet, visit our sales center, and we’ll only take them out to the neighborhood to show them a home site after they select a house. We’ll get away from these little sales centers spread all over the place.”

Panels & Even-Flow
On the production side, all of the builders expressed concern regarding immediate labor shortages and the prospect that the situation might get even worse. So some are looking to panelization and component manufacturing to reduce their need for skilled on-site labor.

“We’re now panelizing 100% of our houses,” said Denver builder Pat Hamill of Oakwood Homes, which will build more than 800 houses this year. “We’re panelizing all wall components. That’s a big change for the Denver market, which has never seen much panelization.

“We frame a house in seven to 10 days, start to finish. We do all our own job drawings for each wall component. We invested over $250,000 in Argos software to do that. We use three different component manufacturers. Our job drawing tells them exactly how to make every cut and the exact dimensions of every piece.”

Hamill said panelization reduces both cycle time and the labor cost of building but that even-flow production is even more critical: “Because of our consistency of production, we were able to build 243 more house last year -- with exactly the same labor.

“With even-flow, you can staff for almost one-third less people in the work force. That’s how we were able to build a couple hundred extra homes last year with the same people.

“Cycle time is not the deal; it’s consistency. You have to manage day-to-day activity. If a trade contractor comes to our job site and it’s not ready, we fine our builder $50, and we pay it to the crew in cash. If a trade crew doesn’t finish on time, we fine them $50.

“The real opportunity for lowering costs and improving quality doesn’t rest with us but rather with our manufacturing facility — our trade contractors. How we get them better and into a learning environment is what’s critical. We have to create adaptive companies to meet consumer needs,” said Hamill.

Bundled Buddies?
Another approach to reducing labor costs is “bundling” trades. This can involve such radical approaches as forming teams of allied trades, having the first one do prep work for the next one due on site. “We now have the concrete contractor doing trenching for plumbing and electrical,” said Diane Rivera, quality assessment manager for Shea Homes’ San Diego division. “We’re taking the same approach in our own office -- redesigning work teams to create a better flow.

“For example, our permits department now reports to land acquisition, but the people who need the permits are the ones who build the houses. So we’re going to move that function down to the construction department. It’s all part of a conversion to “cell design” — which is something manufacturers are now doing — to streamline teams cross-functionally. You want departments that must work with each other to be physically close.”

Quality Imperative
One conclusion drawn from the roundtable seemed unanimous — despite labor shortages, builders believe it is imperative to deliver defect-free houses consistently long before 2005.

“Manufacturers of consumer products from television sets to cars keep raising the expectations of consumers,” said Pittsford, N.Y., builder Gilbert Veconi of Cannon Development. “We don’t have any choice but to meet their quality expectations.

“We really run two businesses,” said Veconi. On the customer relations side, we’re in the entertainment business -- from the time they walk in the door, said Veconi. “Once they sign a contract, we’re in the manufacturing business, where we have to think about even flows and scheduling.”

One dilemma builders face today will be even more of a problem in five years: While buyers expect defect-free homes at closing, they show a declining interest in maintaining their homes.

“People are buying homes that are advertised as zero-defect, and they think that means they are maintenance-free,” said Tom Newton of roofing and siding manufacturing giant CertainTeed Corp. “They don’t understand the service requirements. You can buy the best HVAC system in the world, but if you don’t change the air filters, it will prematurely fail.”

The builders at this roundtable are all wrestling with this problem, but many seem to believe that extended warranties — and perhaps service contracts — might be the answer.

“We are very close to doing a three- to five-year, door-to-door warranty,” said Estridge. “We’re going to have to do it to differentiate ourselves in the market.”

“Part of our strategy, within two years, will be to make sure there is a weekly report on builders’ customer satisfaction ratings in the (local) newspapers,” said Neumann. “Then we plan to offer packages of services to extend buyer warranties to 10 years. Package A might cost $780 a year. Package B would be less, depending on what services the buyer wants to purchase from us. If the owner wants to do painting, we’ll just look after major mechanicals.

“Customer satisfaction ratings and service packages will force much higher quality and longevity into our products. We’re not going to put the least expensive things into a house that we have to service for 10 years. We can’t afford to do a free, 10-year, door-to-door warranty, but we can sell services to buyers at reasonable rates and protect our reputation at the same time.”

Raising Satisfaction
Neumann also revealed his intention to raise the bar in Chicago on the buyer’s ability to customize his production-built homes: “Within about six months, buyers will be able to walk in and sit down with an architect and customize one of our homes right on the spot. Move doors, walls, windows, you name it. They will instantly know what the price is and walk away with a 3-D video of the home.”

Customer satisfaction is huge, and it’s really based on service as well as defect-free delivery, said Neumann. “Our 15/24/7 program is an internal time commitment we don’t publicize. We expect our people to respond to any customer request in 15 minutes to simply let them know that we understand the problem. We solve 90% of the problems within 24 hours and the final 10% within seven days.”

Neumann’s information system has an SOS module that allows anyone taking a call to click on the SOS, which instantly logs the date, time and information on the problem. Whoever takes the call takes ownership of the problem. “You have 24 hours to solve it,” said Neumann, “because once the SOS module is on, it has to be clicked off, and then it literally changes color on the screen. It doesn’t matter who takes the call. We’re a team.” Controlling ‘Final Mile’

Estridge called attention to what might be the most interesting opportunity of the next five years: “As builders, we install the streets, curbs, water lines, etc., that connect our houses to the world. We control the final mile. Thanks to deregulation, we can provide access to a lot of consumer eyeballs.

“AT&T, the TV networks, AOL -- they’re all going to want strategic alliances with us. Why not install the conduit or actual wire that connects buyers to them? It’s mind-boggling how much bandwidth we can provide for very little cost. We can create a new solution for our homeowners, who are often very dependent on being able to connect home computers to their networks back at the office. We can provide connections as fast or faster than what they would have in their local area network at the office.”