Conquering Complexity: Confronting the Source of Profit Loss
This is the last column in our deep dive into process improvement. In the series, we’ve explored how process—good or bad—drives almost everything in the home building business. In the August issue, we examined how what most builders call product waste is actually the result of bad process. Errors and loss of efficiency in design, purchasing, and construction are symptoms of process failure. The quality of decisions in land development are similarly driven by the quality of the process. Sales and marketing effectiveness also falls victim to process deficiencies.
More than 25 years ago, I first presented on the prevailing concept of “Brute Force Quality,” which I then defined as “Constant Supervision, Mass Inspection, Continual Rework.” That definition remains the same, and it describes a process—albeit a decidedly bad one—that produces an acceptable home at a very high cost. At the heart of it all is the most critical process for any builder: the schedule. As I have written many times, the best builders are the best schedulers, and the best schedulers are the best builders.
To schedule at the top of the game requires a devotion to process from first customer contact all the way though warranty, and beyond. Add that up and you come to only one conclusion: Good process drives sustainable profit. Anything else is gambling.
When process goes awry, as I hear so many builders lament of late, you always find the symptoms of complexity. Yes, you can offer myriad options and choices—even custom structural changes—but if, and only if, you have the systems and processes to handle them quickly, confidently, profitably, and without collateral damage to your customers, suppliers, trades, and your own staff. And here’s the key point, if you take nothing else from this: Until you conquer complexity, your fight to improve process is an uphill battle, accompanied by extreme frustration and burnout, yielding marginal results.
Identify the Origins of Complexity in Your Business and Score Yourself
Presuming you’re convinced, Step 1 is to move from the anecdotal to analysis, based on objective, current reality. This requires a model to help you identify the origins of complexity in your organization and which of those have the greatest impact.
Last month, I concluded my article with a list of 20 specific sources of complexity for you to consider. As you review them, give yourself a score of 0 to 5 using the following definitions. Better yet, ask your team to do the scoring on their own first, then run through it together in a safe environment, showing total support for honesty. Strive for consensus, and expect to be offended. (Our “Complexity Calculator” spreadsheet will help. Email your request to [email protected] with “Complexity Calculator” in the subject line.) I guarantee you’ll turn up at least 10 major action items for 2016.
5 = Out of Control. The process is completely random, outright broken, or nonexistent.
4 = Pervasive. We deal daily with the consequences and costs of excess complexity.
3 = Common. Complexity is an ongoing issue that we manage, but it impacts efficiency.
2 = An Irritation. Complexity rears its head on occasion, but we handle it with minor waste.
1 = Rare Occurrence. Our processes are strong and well-understood, with only an occasional glitch.
0 = Nonexistent. Our processes are bulletproof and followed meticulously by all; always under complete control.
Complexity at the Source: 20 Processes Home Builders Must Confront
1. “Moth to the flame” business strategy. Imagine a restaurant that advertises “Betty’s Shrimp Boat, Gourmet Burgers, Southern BBQ, Dim Sum, Gyros, N.Y. Pizza, Italian Beef, & Fine Dining.” Now imagine the organizational complexity required to complete customer orders. Odds are Betty’s will do nothing well. This scenario isn’t uncommon to builders that can’t decide or commit to what business they are in. Now imagine Doug’s Hotdog Emporium. Doug may have quite a line of hotdogs, perhaps even sausage with condiments and garnishes galore and a choice of buns. It’s predictable that Doug will become the best dog vendor in town and although his market is limited his share is huge. He meets a need better than anyone and his margins show it. For builders, lack of a clear competitive advantage in a product line/market segment results in land/lot purchases driven by price and terms deals rather than an alignment of market needs with builder expertise.
2. Changes in land use/plot plan. When land is purchased without due diligence on community requirements, land restrictions, or simply missing the market, a common result is having to modify plot plans, lot sizes, product distribution, etc. A builder I know decided late to flip-flop from two-thirds slabs, one-third basements to the exact opposite based on a perceived shift in the market (which was hotly debated among his staff). The changes in dirt balance were huge, forcing the builder to pick among several bad alternatives to lose the excess dirt: an expensive rework of the lot and street layout, creating a large park with terrain (and losing lots), reducing the size of the homes, or spending big six-figure money to move the dirt off-site. What had been relatively simple and straightforward was on its way to becoming incredibly complex, with all the requisite collateral damage.
3. Changes in product, models, specifications (after launch). Changes in the products themselves are caused by anything from a shift in market preference—real or perceived—to genuine improvement stemming from value engineering or lean process analysis. More often than we’d like to admit, however, product change is inspired by sheer whim or maybe too much time watching HGTV. Whatever the source, the impact quickly spirals out of control as purchasing and construction try to keep up and sales is no longer sure what it’s selling. It is a lot to sort out, with many competing explanations, but I can say this with confidence: In our work with hundreds of builders, 90 percent of these changes after the project is launched could have been avoided with more thorough research, planning, and design up front along with a “count to 10” philosophy before throwing the card deck up in the air.
4. Creeping elegance. You can find it in any industry, and a classic auto example comes to mind. The Mustangs of the mid to late sixties were among the most beautiful designs ever. They were tight, nimble, a bit sparse, but always eye-catching. By the early ’70s they resembled feed-lot cattle raised on growth hormones and steroids. Overweight, bloated, and festooned with options no one needed, Ford lost that market for years. These days I hear builders continually lament having to bling up the models and do anything for anyone, including custom options. Again, do you have the systems and processes to truly handle it? If not, what you get is complexity—and loss. There’s another option, evidenced by the much-improved Mustangs of recent years: Figure out what a market segment wants, make changes slowly and intentionally, then build your product better than anyone else.
5. Inadequacies in standard plans, options, colors, and selections. There is a fine line between giving customers unlimited choice to get what they want versus having them feel they are getting what they want by providing the carefully chosen options and selections they need. Either way, you make them happy, but the latter approach is infinitely simpler for employees, suppliers, trades, and customers. Builders who handle the rampant complexity that goes with “choice A” are very hard to find. The rest pay the price.
6. Incomplete plans without working drawings, mechanicals, or complete detail. We’ve done entire articles on this, and any builder who doesn’t “get it” simply can’t count. The complexities and costs that emanate from shortfalls in this realm are legion. You either get endless phone calls and questions, or you accept a “build by best guess” approach among your suppliers and trades. Whichever, the results are errors, omissions, and rework that add steps, time, and waste to your process.
7. Insufficient training: salespeople and design center staff. There is a role that everyone who translates a contract into a start package must learn called “sales fulfillment.” (See “Closing the Sales Fulfillment Gap,” Parts 1 & 2,” October and November 2013.) It’s all about getting the details 100 percent nailed down, the first time. In the thrill of the sale and the joy of helping customers spec out their new home, sales and design-center staff often neglect those details. Each one missed causes a chain of complexity all down the line and with that, a lot of the profit we count from option sales disappears into hidden cost.
8. Incomplete house bid packages to suppliers and trades. This is one of the top laments of suppliers and trades—just ask them. They are required to bid without complete information and are forced to guess. (If you were them, would you guess high or low?) When the final specs arrive, they are asked to hold the line on price even if specs have increased. All the changes create uncontrolled variation, bogging down the start-up process and putting the schedule in a hole from the start.
9. Incomplete base contracts with detailed scopes of work. Launching new product without 100 percent complete contracts and detailed scopes of work is more common than not, and there is no excuse for it. Now we are back to guessing, again. Well-done contracts and explicit, two-way scopes simplify everything—presuming they are communicated and followed. Give this one a no-tears look and beg your suppliers and trades for honest feedback.
10. Options and selections not 100 percent priced and agreed up front with suppliers and trades. It’s not at all unusual to find design centers full of options that require purchasing to price them out each time with suppliers and trades. It isn’t just waste, it’s a prescription for complexity. Make a rule: No option appears in the model, design center, or online until it’s priced and agreed upon. Period.
11. Accepting custom and/or structural options beyond process capacity. If you price custom options by doubling the hard cost of every one you accept and buck that up against the true total cost including phone calls, mistakes, rework, lost days in the schedule, and lost time for trades, you discover that many, perhaps most, aren’t so profitable. The costs come from complexity over-taxing your process. So either engage in the hard work of simplification, or bring your processes up to speed and quickly.
12. Incomplete house-start packages for suppliers, trades, and field supervisors. This always follows a lousy bid package, but it’s still possible to get the bid package right and blow the start. Every single specification and detail still open to definition or interpretation increases the complexity of the build. Recall now the lesson in my October column about complexity in process increasing exponentially, not arithmetically. Get it right here or you don’t have a prayer.
13. No respect for cut-off dates for options and selections. I doubt this requires much explanation, and just reading it sets off acid indigestion for most. I’d guess 80 percent of builders have set cut-off dates. My experience shows less than 20 percent could show these dates are followed to a “T” except in cases of severe customer hardship. Every change order you accept late undermines whatever simplicity you’d managed to establish in your process. Accepting late changes isn’t a home building requirement, it’s a habit and one that, with enough will, can be broken, starting with senior management.
14. Percentage of house cost done under VPO too high. See last month’s article under “Death by VPO” for a more detailed explanation, but every ounce of work done outside of the original house specs that requires paperwork and handling is a failure; a loss that once again stokes the fires of complexity. There is simply no better metric available to determine the severity of suffering from the affliction called complexity.
15. Delays in permits, inspections, approvals. This is a more subtle factor that few builders take seriously, and the delays are often buried in the field. Any delay—whether a difficult approval, slow permit, yellow tag, or red tag—induces complexity with extra phone calls, rework, reflowing schedules, and rescheduling trades. Maintaining the strongest relationships with municipalities and their various officials isn’t an option.
16. Loose schedule with continual changes. A schedule with no predictability at least weeks in advance is only a notion, not a schedule. For every member of a builder team, there are, on average, 20 to 25 others among the suppliers and trades that have to respond to each and every change, and scheduling by the day is continual change, variation, and complexity. Just send out the burn notice to everyone’s bottom line. My great (now retired) mentors Gary Grant and Mike Rhoads got cranky anytime their schedule wasn’t gold less than 60 days out. Can you imagine how much simpler life was for their suppliers and trades? But just get to “damn dependable 10 days in advance” for starters, and everything gets better.
17. High turnover in suppliers and trades. Chalk up one more major contributor to complexity that should be obvious, yet the impact is rarely quantified or used in decision-making. If you’re still buying by bid price alone, losses from turnover are unavoidable. Total cost is the only thing that matters and complexity is a key element to consider … and count. Long-term relationships with the right suppliers and trades always simplifies process.
18. High turnover and inadequate training in both office and field staff. No different than with suppliers and trades, excess turnover costs are rarely measured. Excuses abound, but few stand up to scrutiny. Five percent turnover is a good goal (Jack Welch was dead wrong), and anything above 10 percent is failure. And when you get them onboard, don’t turn them loose on their own until they’re trained and understand your processes. You are paying the price in complexity; you just don’t understand the costs.
19. Lack of comprehensive, proactive customer management. A comprehensive approach means from the first exposure to your company—whether by billboard, bits, or bytes to well-beyond your standard warranty period. Any laissez-faire attitude here creates questions and confusion that inject constant static into your systems and processes across the board, from sales and marketing to purchasing and estimating and on through construction and service. Kill it, before the complexity kills you.
20. Indecisive senior management. It’s fitting that our last weak link in the complexity chain ties back to our first, yet whereas in No. 1 above we addressed strategy, now we consider the tactical side, the day to day. I’ve watched many otherwise able management teams twist and turn in the wind while senior management refuses to make a decision, stick with it, support the troops, then forge ahead with commitment. Anything less forms a breeding ground for complexity.
Can Home Builders Commit to Improving Process by Reducing Complexity?
If you’ve followed this series, you know I am a 30-year student of Eli Goldratt and the Theory of Constraints, whereby process improvement that increases capacity but isn’t focused on the primary constraint, is waste. You either create excess inventory upstream or unused capacity below the constraint. Goldratt is right.
Yet while writing this, I had a revelation: Goldratt’s rule doesn’t necessarily apply when improving process by reducing complexity because complexity always consumes excess resources in time, manpower, and/or material. Yes, we’d rather reduce complexity in the primary constraint, but if simplifying any element in the process frees up resources, we win, and we can direct those newly available resources toward that largest constraint. By this reckoning, each reduction in complexity, anywhere in your organization, is a clear benefit.
So we reach the end of another year in home building, both excited about the moderate but steady growth yet frustrated that margins haven’t kept pace. With trade shortages, increased regulation, demanding cities, more sophisticated buyers, and builder staff on the move, things will inevitably get more complex unless we take specific, intentional action to combat it. You can adopt no better theme in your firm for 2016 than to commit now to break the chain of complexity and find your way to greater profit.
