When complexity exceeds capacity, everyone loses. Here's the first step in fixing a broken process
Since last spring I have employed this forum to explore the critical nature of process in home building. We’ve identified the key processes that account for the greatest waste, analyzed them in some detail, and, most recently, addressed how to prioritize process improvement when everything seems like Job No. 1. So let’s assume you’ve determined your top process constraint and are now ready to solve it.
I’ve spent much of my career helping builders create and manage systems and processes to increase profit while building great homes for delighted customers. One of my biggest epiphanies was the day it dawned on me that there are only a few approaches to remedy a broken process and our instincts inevitably lead us to pick the wrong way first.
Processes break down for a variety of reasons. Fast growth can do it. A change in product line can turn them upside down—single-family to multifamily is a classic example. Another culprit is turnover in key personnel, where the person who really knew how to work that thing has fled to other, perhaps greener, pastures. Opening in another city is also a common cause of process failure, an inability to cope with all the changes and new requirements. Whatever the source of your process pain, here are the responses I commonly observe, usually in this order.
1. Denial: Mirroring everyday life, the message is “This is only temporary, so just keep on keepin’ on. Everyone work harder!” I once heard a company president with 40 employees say, “If everyone works just one additional hour each week, 12 minutes a day times five days, that’s a free headcount with no salary or overhead!” Heck, I thought, why not just add an hour a day and gain five more “head counts” for free? This, of course, rarely solves anything, and things rapidly grow worse.
2. Bodies: Throw people at the problem. Perhaps we’ve already squeezed all of the blood from the stone, so let’s hire a couple of new estimators, or an IT tech, maybe a sales administrator, another CAD operator, one more field superintendent, or a warranty guy. We just added a load of overhead and although this move may bring temporary relief, it usually only masks the ultimate problem of an inadequate process. More Band-Aids.
3. Black box: Buy some technology! Software or iPads or maybe a Dr. Emmett L. Brown Flux Capacitor! (Google it. Time travel solves everything.) There is an abundance of great software out there that can make a builder’s life easier, but Rule No. 1 in “Industrial Engineering for Dummies” is: Never automate a bad process. IT vendor advertising is full of promises for miracle cures, but implementing any new system is very hard work. If you don’t clean up the process first, it’s exponentially more difficult to do and much more likely to fail.
4. Simplification: This is not merely “make it simple,” where simple is an adjective describing a characteristic or state of being. This is “simplification”—a process in itself—that reduces variation in any process or system. Variation is anything that induces static, confusion, uncertainty, rework, conflict, or “collisions” among the process elements. In fact, failure in a formerly effective process can most often be traced to excessive variation overwhelming the process beyond its capacity to cope.
Consider traffic flow—a simple example we’ve all experienced. The old Mancini Freeway in Philadelphia was built in the 1980s to handle 10,000 cars per hour through the intersection with Dersin Drive. After a couple of housing booms, that same freeway is trying to process 15,000 autos per hour and is stretched to absolute capacity and beyond during rush hour. Now the slightest glitch, from a rain shower to a truck losing a tire tread to a policeman’s flashing lights from a simple traffic stop, throws the entire system into chaos. One tap on the brakes quickly compounds to 50, then 500, then 5,000 cars slowing, and within minutes the average speed drops from 65 mph to 15, which backs up all of the inbound ramps and every road upstream.
How do we fix that? Engineers conclude that there simply isn’t room for more lanes, and making it a double-decker freeway is cost-prohibitive. Most cities, and in some cases entire states, such as my beloved home state of Michigan, do what amounts to no more than Response No. 1: nothing. You could throw bodies at it (Response No. 2), with more police patrols, service trucks, patching crews, and traffic copters, but that just plugs holes in the dike. The black-box department installs road sensors, traffic cams, central monitoring, and electronic traffic signs, with the primary result being that instead of wondering why you’re sitting in traffic, you now know exactly what’s ruining your day. That’s progress.
So we’re left with Simplification, which is right where we started. That’s a greater challenge because it requires more thinking. But we know how much variation the Mancini Freeway was designed to handle. Could we get back to that by reducing the inputs into the system? There are myriad solutions—anything from metering entrance ramps to even-flowing the inputs, to redesigning exit ramps to get cars off more quickly. We might open up a secondary route to pull traffic away from the Mancini or structurally encourage ride-sharing with HOV lanes. Could we subsidize or incentivize mass transit and save net dollars? The current rage is, on the surface, a black-box approach: electronic vehicle control. Yet the aim of that technology is to greatly reduce the variation in the system, allowing it to cope with far more vehicles—another form of simplification. Whatever the approach, simplification is virtually always the least expensive option and it gets the fastest results that have staying power.
Complexity vs. Capacity
Here’s the trick: The system impact of variation doesn’t go up arithmetically as variation climbs. Rather, it goes up exponentially with an ever-steepening curve that exceeds its ability to cope. That insidious climb is what leads so many to experience “shock and awe” over how quickly a process can blow up. The good news is that the reverse is also true. Once you begin simplification, the variation comes down at that same exponential rate and process owners are equally amazed at how quickly things get better. In fact, reducing the variation frequently eliminates the formerly believed need for bodies or new technology altogether. In all cases though, reducing the variation lessens the requirement for personnel fixes and greatly eases implementation of any new technology.
How important is managing complexity for builders? One of the rules of thumb of a legendary business consultant, the late Lee Evans, is that to be successful, a home builder needs to gross at least $1 million per full-time-equivalent employee. That number grew with retail sales price prior to the home building crash, then fell precipitously, and is now back to about where it was pre-downturn. Many things can warp that ratio, such as how you are organized, what you sub out, if you have your own sales staff or exclusively use real estate agents, the type of product you build, your location, and—don’t forget—cycle time. This makes apples-to-apples comparisons between disparate builders difficult if not impossible. Where the ratio of sales to employees can teach us, though, is by comparing two very similar companies that are building like product in the same or comparable markets. Some years ago I had two such clients, Builder A grossing about $600K per employee with Builder B hauling in $1,800,000 per staff member—three times as much! Logic predicts that the people at Builder A were underworked, maybe even bored, while those with Builder B ran around each workday and most weekends with their hair on fire, desperate to keep up. As it turns out, it was the exact opposite.
I was initially baffled by this situation, but it didn’t take long to decode. Builder A had a multitude of systems, but few worked as designed. The president was hearing none of that, however, thus the staff spent half its time on workarounds to just get the houses out. The other half of their time was spent tricking the reporting mechanisms to show what really happened. Along with the system breakdowns, there was continual frustration among employees, suppliers, and trades alike, with countless extra trips and constant rework. Turnover was high, and as a result, many didn’t understand their job. To meet what Builder A perceived as customer requirements, the firm constantly added plans, options, selections, and colors; so many that a large percentage of the design center offerings were mis-spec’d, mis-priced, or not priced at all. Buyers were not happy! In short, the complexity of Builder A far exceeded its capacity to deliver. Builder A had completely overwhelmed its processes.
Builder B was different in every way. It determined what customers really wanted and offered just that. It provided a good choice of options, selections, and colors, but kept it as simple as possible and 100 percent up to date. Builder B never added anything without asking the question, “Will this help us sell one more house at a profit to a happy customer?” If you saw it in the design center, it was spec’d, priced, and contracted. You want Door #3 in “burnished plantation oak” with two sidelites (presuming it was offered)? Press the button and it’s done.
At Builder A, after sorting through hundreds of combinations of doors and options, the customer request then entered the estimating queue until the bid requests went out, then back to estimating, then out for approval, then back to estimating, then...then...then. Meanwhile, the customer lost patience and the design rep had Estimating hating her for all the phone calls she made bugging them for prices. Everything at Company B was laid out in a process, everyone was trained, and new people weren’t turned out on their own until they had things down. Builder B constantly evaluated, updated, and purged plans, specifications, and options. Everyone respected and followed the processes, including senior management. Thus Builder B was able to keep capacity in line with complexity. That, combined with good planning, trained field staff, and a solid corps of suppliers and trades, resulted in Builder B’s schedule running like clockwork.
Builder A was awash in complexity, a continual “who’s on first?” mentality. Builder B looked for every opportunity to simplify, even when its plans and options grew to meet market demand. The results? Builder A realized gross margins of 15 percent and a sub-5 percent net. Builder B grossed close to 30 percent with a net above 14 percent. Who would you want to work for? Who would you want to invest in? Whose house would you want to buy? These are not isolated cases by any stretch and I have seen the same scenarios played out for nearly three decades in the business. When complexity exceeds capacity, everyone loses. So let’s simplify things. Easy to say, easy to spell, harder to do than we expect.
The Secret Life of Product Waste
Process waste is rampant in home building and is the single greatest drain on profit. To make things worse, a great deal of what we commonly call product waste is actually the result of bad process. To cite just one example, I was recently in the field with Vic, a sharp young project manager, and—as is my habit—we climbed up on a Dumpster to have a look inside. I’ve learned not to be surprised at anything I find in Dumpsters, but this one had a huge pile of TJI cut-offs, so many that I insisted we count them. In total there were 85, each 27 inches long. Some quick math showed that at $1.50 per foot, we were looking at just over $250—not counting the labor to carry the cut-offs to the Dumpster or the disposal fee. So call this a $300 bill.
I asked Vic to categorize this waste, and he immediately described it as material waste—product. I disagreed and suggested that it was, in fact, process waste. Why? Because the cut-offs were 27 inches long. In some markets, you can order precision-cut TJIs to the fraction of an inch, and in others you can purchase in 1-foot increments, but I knew that in this market you have to buy them in even, 2-foot lengths. Thus, by definition, we should have had 3-inch cut-offs, not a full 2-foot increment more at 27 inches! If they were 12 footers, they should have been 10 feet; if they were 20 footers they should have been 18 feet.
How does that happen? Any number of explanations are possible, from a plan error to a takeoff error to a lumberyard mistake, among others. But the day before, I’d listened to a group from this same firm complain how they’d relaxed their discipline, allowing customers to bump out room dimensions almost at will, with little regard to cost or how the house would be built. Both estimating and drafting were overloaded and unable to keep up. They had to get so much out the door so quickly that they couldn’t follow their established process. The takeoffs suffered; expensive mistakes were routine. The culprit: complexity that overwhelmed the capacity of a previously functional process.
It’s an age-old rule, not just in home building but in every business, that, left alone, complexity outpaces capacity. Profits melt away while everyone works overtime, too busy to determine the real problems. Simplicity is not just controlling plans, options, and selections, it similarly affects land development, marketing, and accounting—all aspects of the business. Under the banner of simplicity, many builders have done little more than dumb down their houses, making them cheaper to build but harder to sell. That is a bastardization of the philosophy, to put it kindly. The goal is to create and maintain robust processes that enable good people to manage and grow the business at a profit, building great homes. So before you hire that next body or sign the deal for another black box, first think, “Simplify!” The entire organization will reap the rewards.