Think back to when you first heard the saying, “What gets measured gets done.” It sounded like an accurate description of what happens in the real world and just plain good advice. If you want to get something done, measure it, and people pay attention. Hang some money on it and you’ll get a laser focus, for better or worse. My more than 35 years of business experience confirms that old standard, but suggests a warning to go along with it: When the wrong thing is measured, the wrong thing gets done. We are often reminded to be careful what we ask for. We also need to be careful what and how we measure. With the right metrics, we can get our processes to talk to us, telling us what is wrong. With the wrong metrics, our processes are perfectly capable of lying and sending us astray.
There’s a simple truth in business: Metrics drive behaviors, which range from positive, productive, and helpful to negative, ineffective, and even subversive. My first month in the industry 22 years ago, I sat listening on a speaker in the office of a VP of construction in an eastern state while his CFO more than 1,000 miles away harangued him for having only two starts the past two weeks. The CFO would not acknowledge the record snowfall that virtually everyone in the country was talking about. He had his metrics and reality be damned, he was going to meet them. This would shortly cause the local construction VP to order a batch of 12 starts that turned into a production nightmare, taking longer and costing far more than if he had simply waited until the snow cleared. Superintendents deal with such consequences each day at the local level, under the thumbs of bosses that have made unrealistic commitments. Meanwhile, private builders struggle with bankers looking for love and money in all the wrong places, forcing sales of land and product that with even a modicum of strategic patience would have produced considerably less loss and perhaps even profit, for all.
This does not suggest financial measures are unimportant, but they can miss or disguise what is happening in operations, both good and bad. We are frequently asked, in the face of current business conditions, how do we implement process-oriented Lean operations in a world fixated on short-term financial results?
The reality is that financial and operations measures must run in parallel, with full recognition and consideration for each, but we are far better at the former than the latter. Examples abound such as “hard costs” in construction — a percentage number that executives love to toss around. The first hurdle is that not everyone includes the same costs in that number. Assuming you are counting the same way, there is the problem of land cost, which results in “fuzzy math.”
Metrics drive behaviors, which range from positive, productive, and helpful to negative, ineffective, and even subversive.
Some years ago, I sat dumbfounded at an industry executives’ meeting where CEO-types played one-upmanship with each other, bragging about their low hard costs. Doing the most chest pounding was a southern builder in an overheated market. I had worked with one of his strongest local competitors and thus knew his seemingly low hard-cost percentage of 45 percent had nothing to do with how cheaply he purchased materials or how efficient his field operated. He was merely paying a fearsome price for land, forcing hard costs as a percentage of sales down artificially — a simple math trick. Incredibly, no one challenged him. I could just imagine some number of these CEOs flying home to issue directives to the field to achieve that same 45 percent post haste.
In more recent times, this scenario has played out repeatedly in successive rounds of rebids. To meet financial targets for gross margins, demand letters of 5 percent, 10 percent, or even more are issued to suppliers and trades across the board. Because the technique worked almost universally in 2007, and perhaps again in 2008, many builders continued this approach through 2009 and into 2010. Today, there’s no more left to give and suppliers and trades alike teeter on the edge of survival. All the while, measures of efficiency are rarely considered, and we all know what happens when something isn’t measured — not much.
What's a Saved Day Really Worth?
At TrueNorth, we spent years developing an interactive “Saved Day Calculator” Excel template to show what each saved day in the schedule is worth when applied to production of additional units. With the input of more than 20 CEO, COO, and CFO types, this instrument consistently demonstrates $500 to $800 impact per day per unit.
This is dramatically more than the $100 to $150 per day builders routinely use, primarily through the more accurate capture of the absorption of fixed costs.
To use the Saved Day Calculator, a builder enters about 20 factors, most of which are commonly available from the financial statements. Let’s take a sample builder projecting 100 closed units selling at $225,000 with a gross margin of just under 20 percent. Their current pre-tax net is a less-than-satisfactory $5,000 per unit. Our builder wants to double the pre-tax net. He’s been through multiple rebids, taken everything he can out of the houses, cut back to his “A” players, and downsized the office. Five thousand dollars is about 2.2 percent of retail, or about 4.5 percent of his house cost. With the cost of shingles, drywall, and a few other materials rising, this means he has to ask for 6 percent or more from the other suppliers and trades to get the additional $5,000. In 2011, this is just not going to happen, and if he tries, the collateral damage will be enormous. Is there another way?
First, ask this builder if he can build more units without hiring new personnel and he will almost certainly say yes. The Saved Day Calculator reveals that a schedule reduction of one workday applied to 100 units is worth $40,000, pre-tax net, if those 100 extra days are used to build more units. Our experience shows that saving 11 work days from their current 81-day schedule is an achievable goal. If those saved days are used to build 15 incremental sold units on the new 70-day schedule, he creates an additional $500,000 pre-tax net. Now our builder has doubled profit without asking suppliers and trades to give up an additional dime or dumbing down the houses.
So which approach is likely to be more successful: one more round trying to whip 6 percent out of his suppliers and trades, or reducing the schedule by 11 work days and closing 15 more units? For 2011, the answer is obvious, but you have to think and measure for Lean to achieve it. Consider what has happened here. We have taken a list of financial measurements and applied them to the critical process of schedule, and now it talks to us, telling us the true costs and inspiring action for improvement. (Note: If you would like a free copy of our Trip Cost Calculator, email [email protected].)
There are myriad potential operational process metrics that provide voices for the elements of Lean. Among the most telling are material audits on a regular basis in the field. A close examination of variance purchase orders (sometimes called field purchase orders or exception purchase orders) often reveals extra money spent on concrete repair. Walk over to the warranty department and see if they have every concrete failure broken out by date, time, location, type, concrete supplier, labor provider, cause of failure, cost, whether or not you were billed for it, and if you recovered anything through a back-charge. Most do not, so asking if this important information is used by purchasing for bidding purposes or by accounting to determine the true cost of concrete in a house is moot. So you need to reduce cost? You could send out another 5 percent demand letter to the appropriate trades and suppliers for foundations and flatwork. Or you could track the process in detail, measure the failures, let it talk to you, and determine the root cause. Then, get busy improving the process with those involved and save money for everyone. What’s the better method?
When was the last time your field managers took the temperature and ran a slump test on a batch of concrete and reported the results to the driver and the supplier? These tests might take 10 minutes a month after an initial series of weekly tests to get the word out that you are paying attention. Once the supplier knows you care and are measuring, what happens back at the yard? They know that things had better be right, and if your concrete mix is right and it arrives at the correct temperature, 90 percent of your surface cracking, scaling, and pitting rework goes away. How much is that worth?
In Lean operations, similar monthly audits on incoming quality and quantity are vital for lumber and trim, brick and block, roofing, siding, and drywall — and don’t fool yourself that going turn-key eliminates the need. When you understand Lean, you understand that every penny borne by your trades is a penny ultimately carried by you and then ultimately by your customers. It all counts, so you go after all of it.
Drywall is a huge source of waste, made worse by builders who pay labor by the installed sheet, providing almost no incentive for efficiency. Here are two ratios that a builder must know for each model offered:
No. square feet drywall surface area
No. square feet living space
No. square feet drywall purchased
No. square feet drywall surface area
Why would you calculate these? Using the first equation, you find out how efficient a given plan is with drywall. This reveals design-induced waste. Basic geometry determines that smaller rooms use relatively more drywall per square foot of living space than larger rooms, but even granted that reality, you’ll find dramatic differences in efficiency in similarly sized homes. Any time you see an other-than-even dimension, you suspect waste. Any time you see a room that is 10 feet, 2 inches or 12 feet, 2 inches you know that you are ripping up good money.
The second equation pinpoints installation-induced waste. How much of the board that you purchase actually ends up on a wall or ceiling? Any time the drywall hanger boards-out a house using a single size of sheet, you are almost guaranteed to be paying more than needed. Any time you see closets, pantries, and small hallways hung before bedrooms and large living areas, you know you are wasting money. Anytime one crew asks for more board for the same house than another crew requires, you can bet there is an application problem.
Fresh Thinking to Get Lean
Lean implementation and Lean metrics require a new mindset. Accounting can tell you the overall profit and loss, but almost never down to the component-level of the house. Variances may be helpful, but what if the original baseline from which the expenditure varied was incorrect? The only way you really get at it is to institute an ongoing system of metrics as close to real time as you can get. Right now your variance on shingles looks perfect on paper, but a drive through the field shows three or four squares left over on the ground, and you don’t see any credits coming back from the supplier. To make it worse, you pay your roofer by the square ordered, not installed. The brick variance looks equally good, but your superintendent knows you have better than a cube and a half left over on each of the single-family units. You have negative variances for lumber on two projects, but you have no clue as to their source. Bad takeoff? Short delivery? Theft? Inefficient crew? All or part of the above? If you are not using a system of field-based process measures, you will never know, and you will never reap the full benefits of Lean building.
There is nothing more endemic to Lean operations than the concept of “flow,” and almost nothing is given less regard by the average home builder. I spoke recently with a builder running at a pace of about 150 units a year. They were in the habit of releasing five or six units at a time. Imagine the foundation contractor who had no work for three weeks and now he gets six starts. Where does he begin? What if two superintendents both tell him that theirs comes first? How many phone calls will transpire? Now imagine a different builder producing 150 per year. They start three per week, always one each on Monday, Wednesday, and Friday. The trades never wonder which comes first and the locations have been thought through by the builder staff so that they make sense from an efficiency standpoint. Now the trade contractor does not have people on layoff for three weeks, then suddenly working 65 hours a week, as if he is three times bigger.
He avoids overtime pay and can plan both the deployment of his people and his equipment. He might even be able to train and keep some good people long term.
There is nothing more endemic to Lean operations than the concept of “flow,” and almost nothing is given less regard by the average home builder.
When we look around the home building industry, we see many people measuring the wrong things and others measuring the right things, but in the wrong way. Lean process demands better. The traditional financial and accounting measures that dominate our business are necessary, but insufficient. For purposes of Lean implementation and tracking, they are the equivalent of driving down the road while looking in your rearview mirror. That’s another old management saying, but one that is rarely heeded. Just imagine if all your car dashboard displayed was the average of your speed, fuel, water temperature, and oil pressure for the past month. When you need current information, the best you get is a prediction on what was going to happen down the road, based on past performance. That’s accounting. But you are out there negotiating your way through dangerous traffic and need to know what is happening right now. What is my speed? Are the systems functioning normally? How much fuel do I have and how far can I go? In this regard, traditional financial measures are little help. We need better information, provided through Lean metrics.
Returning to our simplest definition noted in the first article in this ongoing series on Lean Building, Lean is “The relentless pursuit, identification, and destruction of waste in product and process.” This is the one sure route to profit improvement in the new decade of home building that begins this month, and getting there requires new thinking and new metrics. No matter where you are today, it is entirely possible to double your profit in 2011 if you fully understand your processes and what they are trying to tell you. Use good metrics and your processes will start talking. Listen to what they tell you. Those who respond will reap the rewards.
10 Guidelines for the Measurement of Lean Operations
- All Lean measurements seek to reveal waste. Waste is anything that does not add value in product or process.
- What gets measured gets done. Thus, without Lean metrics you will not implement Lean process.
- Financial measurements cannot substitute for Lean metrics
- The process of selecting Lean metrics is as important as the measures themselves — include everyone who touches the product and process.
- Lean measurements should be friendly, local, and dirty. That is, easily understood, generated by those in the process, and continually updated.
- Flow, and more specifically “even flow,” is critical to Lean and requires measuring process times wherever possible in the field and in the office
- All labor and material must be purchased on the basis of total cost, not initial price
- Lean metrics should be as close to real-time as possible, not averages over months, quarters, or years.
- Lean metrics may change based on each day’s need; they are not “set it and forget it.” Plan on changing them, and plan on removing some as you add replacements.
- Lean accounting is a specific discipline that is evolving to enable and sustain continual improvement. Although beyond the scope of this article, it will be the subject of a future story.