Self-Induced Labor Pains

The medical and home-building industries have at least one thing in common right now: the debate over self-induced problems. The medical community is at odds over just how much physical illness is self-induced.

Similar to medicine, our industry is at odds about how much we have brought on ourselves. Where do the ulcers of home building reside?

One area to consider is government regulation. Many of the laws and regulations that builders have to endure are indeed onerous. Another area that is self-induced is the shortage of skilled trade labor and the high costs that go with it.

In last month's column I described a combination of factors that could conspire to form what was previously believed impossible: falling demand with rapidly increasing costs. Sales are down an average of more than 10 percent nationwide, far worse in some markets. Basic economics would predict that with the decreased demand, costs will fall as well — or so we hope because that's the only way to preserve at least some of the margins.

But there is a catch this time, a potentially devastating one. I described in that column how any aggressive immigration reform measure that managed to get through Congress would cause labor costs to increase dramatically. Somewhere between 15 percent and 30 percent of our home-building labor is illegal — no one knows for sure — and in many of our better markets, that number may approach 40 percent or even 50 percent. Just imagine the impact if it all goes away.

I am convinced there is too much well-placed money out there to let the worst of these proposals pass, because the effects on many other industries such as hospitality, agriculture and health care would be equally devastating. And if we can just keep Congress distracted enough with wars in the Middle East, sanctity of marriage debates and flag-burning amendments until after the November election, the most vocal of the make-'em-all-felons-and-send-'em-back-home crowd should calm down, and we might just come up with a reasonable approach that includes some form of amnesty and a guest-worker program.

Yet, something will pass, and there will be an impact on labor. The reality is even in the very hottest growth years of 2003 and 2004, we actually didn't need at least 25 percent of the trade labor that we used in this industry. A quick analogy will prove it to you.

Imagine you run a plant that makes a large, 150 pound device called a Wizzel. Set up is quite difficult and requires a very strong person working with the machinist at each station. Although heavy, it is surprisingly delicate and not amenable to robotic handling. The result is that the transport and set-up worker can only manage five Wizzels per day moving through production, and only about 1 percent of the population is even capable of handling the weight.

Due to the high incidence of on-the-job injuries and workers' compensation claims from handling Wizzels, you and all the other manufacturers of similar devices now sub-contract this work to outside firms. Your supplier, Monster Lift, provides you with a big dude who loves to lift and never calls in sick or hurt.

For a couple of years, you produce your five Wizzels per day, every day, and things are running smoothly. After a time, demand for Wizzels has grown, so much so that about half of the people who are even capable of lifting Wizzels are actually employed by contractors like Monster Lift.

You now produce an average of 20 per day, so on paper, you need four of Monster Lift's big dudes to get your 100 Wizzels out each week.

But getting bigger has added complexity. Due to circumstances you believe to be beyond your control, an interesting production pattern has emerged. Instead of building 20 Wizzels each day to get your 100 per week in a nice, even-flow production schedule, you build:

10 on Monday

15 on Tuesday

15 on Wednesday

20 on Thursday

40 on Friday

Despite your best efforts, this pattern occurs every week. So you instruct Monster Lift to schedule only two of their big dudes on Monday, three on Tuesday, three on Wednesday and four on Thursday. For Friday, you tell them to send eight of their best big dudes — or you'll be looking somewhere else!

This makes scheduling for Monster Lift very difficult, to say the least. You are not their only account, and it seems that nearly all of the big manufacturers build on the same crazy schedule. You are asking them to be four times bigger as a company on Friday than you want them to be on Monday, and so are a lot of your competitors. None of you ever stop and think, now, just how are they supposed to do that?

This is exactly what we do to our trades in the home building industry and the comparison is only slightly exaggerated. Here is a common builder production run by quarters:

Monthly and quarterly production schedules follow a very similar, back-end loaded production pattern. Here is a key point. If builders owned their own labor, they could not build this way. The expense of keeping these folks around the first week of the month, first month of the quarter and first quarter of the year would simply be prohibitive. We simply lay off the insanity of our scheduling and production onto the trades — then complain about how poorly they handle it.

So how have our trades pulled it off? Just like Monster Lift in supplying the Wizzel manufacturer. Your trades, if they are big enough, have a bunch of smaller accounts that can absorb some scheduling variance. They also have a few crew members who can outwork most other guys, and they send them your way. If your trades are really lucky, they have some accounts that have different fiscal years than you. And of course, there is that time-honored method: they cut corners. Meanwhile, they go find warm bodies, get them trained and hope for the best.

We could spend a lot of time debating the causes and the negative impact of this phenomenon, such as poor quality of the difficulty of attracting good people to the building trades, but the facts are clear. A huge percentage of our trade base requirement is self-induced by our poor scheduling and production practices. Builders have convinced themselves that buyer behavior drives our end-of-the-month, quarterly and yearly "slam dunks." That's simply wrong; I can name builders with fiscal year endings of March, April, September, October and December who all have the same year-end building frenzy. Buyer behavior has nothing to do with it.

Yet there are builders, one of whom I know does 1,600–1,800 units in a single market, who have figured out how to even-flow their sales and production. The trades flock to these folks.

But the fact remains that more home building is being concentrated in fewer and larger builders, most of whom suffer from this back-end loading syndrome. The result is an artificially inflated demand for trades and correspondingly increased costs.

Is there a trade shortage? On the micro level, to an individual superintendent trying to deal with his inability to get a good roofer on one particular project, the answer is, absolutely. But on the company level, absolutely not. It is just good business from the standpoint of cost, quality and operational sanity to get this figured out.

Should the threatened immigration reform debacle come, the only possible solution is for builders to learn how to schedule and thus reduce the relative demand for trade labor. Whether or not we actually experience the perfect storm, this is the one sure way I know to get you out of the weather.