The Lean Builder Blog: PO vs. VPO – Another ‘voice of the process’

December 13, 2011

One of the requirements in Lean Operations is harnessing the “Voice of the Process.” Your processes can teach you so much and hence save you a lot of cash … IF you know how to get them to talk to you. How do you do that? Metrics, of course, but usually not the old tired ones that don’t provide much illumination. You have to dig a little deeper. Here is a great example. How many of you have ever looked at the ratio of how much business you do under VPO (Variance Purchase Order) vs. PO (Purchase order.) Perhaps you use the term FPO (Field Purchase Order) or EFP (Exception Purchase Order) – whatever, we are talking about how much of the work on a house is done as planned up front, vs. how much was done ad hoc, filled in as the house is built.

Begin with this inarguable premise: You make more money on well-planned and executed work. Conversely, when work has to be done outside the plan whether due to a late change order, a mistake, error, remission or rework – margins are compromised. We all know that, right? We know that the more work done under VPO, the less profit. Consider two builders with similar product. Builder A has a VPO/PO ratio of 20%, i.e., 20% of the work on a house is being done under VPO. Builder B has a ratio of 5%. Whose schedule goes better? Which company is more organized? Which one do their people work more reasonable hours? Which one has happy, sane, suppliers and trades? Which one makes more money? The answer is obvious.

There is one more question, though. Exactly what are you measuring? I suggest you have to do it two ways. One is to simply count the number of PO’s vs. VPO’s issued per house. Yes, this can be messy, but if you issue your PO’s and VPO’s consistently using the same rules, the ratios will work regardless. The second method is to use dollar value of VPO vs. PO. This will give you a somewhat different picture of the same issue. Looking at both of these will tell you what’s going on out there and done well, can serve as an early warning system.

So if measuring this makes so much sense, why don’t we do it? You got me. The value is clear, isn’t it? It is not at all difficult to do and imagine what you will learn. It can be done by model, by project, by company. You can even compare suppliers and trades. Your processes begin to talk to you. You learn. You get smarter. You make more money. Can you come up with a good reason not to? I didn’t think so. After you get some numbers, please send them to me and I guarantee anonymity. Once we get enough data, we can establish some norms and trends. Should be very, very interesting, indeed.

President

Scott Sedam is president of TrueNorth Development, a consulting and training firm that works with builders to improve products, process, and profits. A senior contributing editor to Professional Builder, Scott has written award-winning commentary on all aspects of the business of home building and won the 2015 Jesse H. Neal Award, business journalism's most prestigious prize, for his commentary in Pro Builder. Scott invites you to join TrueNorth's LeanBuilding Group at linkedin.com and welcomes your feedback at scott@truen.com or 248.446.1275.

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PB-Estimating,PB-Building Materials,PB-Financial
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