Downturn Revisited—Why Efficiency Wins Every Time for Your Business
In July 2019, Pro Builder published my column, “The Next Housing Downturn—Is It Too Late to Get Ready?” In it, I responded to an industry pundit who had proclaimed that unless a builder began two or three years prior, it was too late to prepare for the next downturn.
In September, I followed that column with “Survivor! Home Building Edition,” offering recommendations on how to survive a housing slump. October brought “Lessons Learned From a Downturn,” with sage advice from venerable industry veteran George Casey. I finished up the series with columns in November and December focused on the supplier/trade side of the survival equation, exploring how to overcome price competition and offering a radical approach to capturing builder business in the face of tough competition, which I termed “Strategy Z.” (You can find all of those columns in the "Related" links, below.)
My futile attempt at “public service”—helping builders, suppliers, and trade contractors prepare for the predicted economic downturn—was rendered completely moot in early 2020 by, of all things, a global pandemic. If you had asked any industry expert to anticipate the housing implications from such a plague before one finally arrived, all would have predicted bad times for housing. With skyrocketing unemployment and major elements of the economy shut down, illness and deaths climbing, and no vaccine in sight, who would possibly buy new homes?
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When news of the rapid spread of COVID-19 dominated the airwaves in February 2020, scores of builders began to retrench, suppliers shut down plants, and my own firm, TrueNorth Development, had eight booked projects placed on indefinite hold—some of which have only recently been rescheduled. The biggest question was: Will this economic slowdown be as bad as, or worse than, the great housing recession of 14 years ago? At the beginning of the COVID outbreak, my five columns closing out 2019 still appeared timely.
Predictions for the Next Economic Downturn? Not Here
The rest, as they say, is history. With record low interest rates and people either needing more room to work from home, feeling overwhelmed by such close family togetherness, or just being sick of their present living quarters, housing sales soared, along with both sales prices and builder profits. Shortages of materials and trade contractors soon grew far beyond previous levels, with costs for commodities and labor increasing, sometimes dramatically, as in the case of lumber. Yet the past two years have seen so much money chasing so few homes and other goods in the economy that we now have near record levels of inflation. That’s the bad news.
The good news is nearly everyone is working, and the vast majority of hourly workers now earn substantially more than the $7.25 per hour federal minimum wage. Overall, despite the supply-chain challenges, the past two-plus years were pretty sweet, as the kids say, for most home builders. No one is yet predicting a housing disaster, but the markets are slowing, with significant drops in volume both month to month and year over year. Given current inflation levels, interest rates are more likely to go up than down, so here we find ourselves again, contemplating a downturn.
If you seek a prediction on how deep the downturn will take us, don’t look here. In fact, don’t look anywhere. You can read any take you want by the analysts, from mild to epic. Some experts describe a seven-figure housing shortage bolstering the market, yet at least one well-respected authority insists there is no shortage at all.
Meanwhile, the work-from-home trend has leveled ... but will it regress to some degree, as executives follow Elon Musk and demand that workers return to their jobs? A recent CNBC poll found “50% of companies want workers back in office 5 days a week.” Will this reduce demand for new housing? Student loan forgiveness may help free up some cash for a down payment, but don’t put good money on that bet—either that it happens, or that it will increase housing demand.
So, pick your pundit, but buyer beware. At this year’s PCBC in June, some old friends and industry veterans were ruminating on these issues over dinner, and the predictions were similarly all over the map, with little consensus on where the markets will go. Down, yes, but down just slightly or a drop of real significance? The question of what actions to take also found little agreement. Toward the end of the meal, one of the guests proclaimed, “Whether the market drops by 5% or 50%, the only thing guaranteed to work is greater efficiency.” For the first time that night, everyone nodded agreement.
There Are Many Roads to Efficiency, but Start With the Essentials
After dinner, neither Uber nor Lyft responded to my ride requests to my hotel, leaving me an extended, solitary walk back, during which I mulled over that comment about efficiency, a subject that has occupied much of my career. I had just finished reading several of the late Eliyahu Goldratt’s books I’d previously missed. Goldratt is the father of the Theory of Constraints, and his first book, The Goal, published in 1984, remains groundbreaking and is completely applicable to home building today. (A graphic novel version of The Goal was published in 2017, and I highly recommend it.)
Goldratt describes many of the keys to unlocking efficiency and productivity, yet his work remains largely unknown in home building. Also on my mind was the sad and untimely recent loss of Fletcher Groves, a friend and “like mind,” and an exceptional industry consultant. Fletcher’s “pipeline” model for home building production explains flow, cycle time, constraints, and their impact on ROA (return on assets)—a far more telling measure of builder performance than simple net profit—at a level few in our industry understand and even fewer practice. To help builders increase efficiency, I resolved to integrate both Goldratt’s and Groves’ insights even more deeply into our consulting work at TrueNorth.
No one is yet predicting a housing disaster, but the markets are slowing, with significant drops in volume both month to month and year over year. Given current inflation levels, interest rates are more likely to go up than down, so here we find ourselves again, contemplating a downturn.
On the flight home from San Francisco to Detroit, I resisted watching a movie and instead reread my five columns from 2019 on “Preparing for a Downturn.” They revealed two significant observations: first, everything I advocated and reported from others three years ago still applies today. The pandemic may have suspended the old rules for a period, but now we’re back in a tougher version of the building game. As my colleague and mentor, the late Dave Ebling used to say, “When the volume stops, you find out the baby’s ugly!” Sales and closings are falling, and many of our babies will never win a beauty contest. So, what now?
As I reread those columns, I also noted everything that directly increases efficiency. Many other great ideas focus on sales, marketing, land asset management, and even culture building. All are important and all support efficiency in their own ways and I hope they bring insight, but here are the 10 points that focus directly on improving the elusive efficiency equation. (What follows is just a brief description. I’ll tell you how to get more detail at the end of the article.)
10 Efficiency Essentials to Help Your Business Weather an Economic Downturn
1. Lean culture. In some ways, this means everything because if you get this right, everything else follows. Yet it’s a rare thing to find. TrueNorth has run more than 200 Lean Process implementations over the past 15 years with builder teams and their suppliers and trades, helping builders find more than $500 million in waste to eliminate. That’s a huge impact on efficiency and productivity. Yet we frequently hear from participants the very best thing about Lean is its positive impact on builder culture, both internally and with suppliers and trades. If you ask me to name the 10 best builders we’ve ever worked with, the one thing all share is Lean culture.
2. Final, fully accurate plans and specifications, including options. This is, inarguably, the key component of efficiency. There’s an old saying, “Nail it before you scale it,” and nowhere does this apply more than plans, specifications, and options. Having plans and specs accurate and final has improved over the past decade, yet it’s remarkable how often we still find shortfalls here. With so much good software available, there’s really no excuse to not have this nailed down.
3. Exceptionally well-trained field staff. I am completely serious about the word “exceptionally” here. Being in the top quartile, even the top 10% of builders with well-trained field staff won’t cut it if efficiency and productivity are your goals. Shoot for the top 5% and—no matter what it costs you—you’ll pay yourself back in spades, not to mention in saved lost days, better supplier-trade relations, reduced site waste, greater customer satisfaction, and on and on.
4. Reliable, predictable schedule. Yes, a great schedule has been more difficult to achieve during these past years of worsening labor and material shortages. We have data showing that 85% to 90% of suppliers and trades employ a “scout”—someone who checks jobsites to see if they are really ready for a delivery or crew the next day. At this juncture, crews don’t trust the schedule, simply because it is so often wrong, and don’t count on your online portal or a piece of software to fix the problem. The only way to solve the scheduling issue is to update each house in the field every day by
3 p.m.—but not earlier than noon—confirming the present state of the unit and giving vendors time to adjust. Make that an absolute, unassailable rule and, in time, your suppliers and trades will learn to trust it.
5. Reduced cycle time. Although they go together, it’s best to consider the length of the building cycle independent of schedule accuracy (No. 4, above). No matter what your cycle time, accuracy is critical. Achieve that first. Then begin the continual, relentless search for cycle-time reductions by creating a detailed flowchart of the entire process, including input from suppliers and trades in the effort. Schedule days are worth far more than most builders realize (you’ll see how to request our “Saved Day Calculator” Excel template to measure yours at the end of this article). As I mentioned above, ROA is a far better measure of builder performance than net profit because it takes cycle time into consideration. Improved efficiency is hopeless without both accurate schedules and tight cycle times.
6. Minimal variance. Put bluntly, virtually all builders believe they measure variance fully and accurately, yet 99% do not, and it’s easy to prove. Your variance is at least double—often triple—what you think, and it’s common to find it is quadruple or more. Variance is insidious. Besides both the direct and indirect costs, it negatively affects cycle time, as does every other element in this list. If you don’t believe me, let’s make a bet: Request our PDF on cycle time, study it, and if you can prove me wrong, I’ll buy you a nice dinner ... and eat crow in a future column. And if I’m right, you’ll buy for me. (Hint: Seafood is my favorite and I generally avoid gluten.)
7. Supplier/trade base. More than 30 years ago, I learned from my best mentors that the strength of a builder’s trade base is critical and requires continual care and nurturing. To those mentors, becoming the builder of choice was a daily mission, never a cliché. Any shortfalls here in capacity, quality, or relationships detract from efficiency. Want to reduce cycle times? Without a truly strong cadre of suppliers and trades, you’re wasting your time. Want to take those relationships to a new level and see the impact within a quarter? Schedule one meeting each week with one supplier or trade in which the only subject is, “What can we, the builder, or any other suppliers or trades, do to help you reduce trips to the building site?” And consider both the number of planned trips and those extras due to specification errors, plan omissions, trade damage, theft, late change orders, trades working on top of one another, or any of the other myriad causes. Both types are ripe for reduction, and as your suppliers and trades reap the rewards and cost savings, you become their builder of choice.
8. Fully deployed, highly functional systems. Whether software-based or not, all builders have a host of systems for managing contracts, variance, scheduling, warranty, paying suppliers and trades, and so on. As in the example above in No. 4, on scheduling, so many of those systems are inadequate, inaccurate, and incomplete. This may apply to the system itself, the deployment, or both. These systems provide the structure and support for construction efficiency. Neglect them at your peril.
9. Seek off-site solutions. We are now in the fourth phase of “the technology that will change home building forever.” I’ve witnessed this evolution of off-site solutions over the course of my 33 years in this business. The first three rounds fizzled out, but this one is real, and you’d best get in front of the adoption curve. Trade shortages will ease with the downturn, but they won’t go away. I’ve written extensively about this. (See the end of this article for details about how to get a PDF of these columns.)
10. Senior management’s full support for the goal. Periodically, I’m asked, “What’s the single most important factor that determines builder success in adopting any new system, process, or technology to improve the business?” I realized the answer sometime in my 30th year helping management teams with such implementations. My formerly long list of factors boiled down to just one: senior management will. If the will—which includes the will to learn, to be wrong, to be open, to change, and to fully support the builder team while adopting new strategies, techniques, and methods—is truly there, the improvement method moves forward and produces results, whatever goal has been set, every time. Without that will, implementation fails and some person or condition, or the system itself, wrongly gets the blame.
The Universal Factor in the Business Efficiency Equation
Those are the 10 most direct requirements needed to build a genuinely productive, efficient company and beat the competition. Initially, there was an 11th factor: measurement. But it became obvious you must measure, track, and evaluate each of the 10 factors above, without exception, if efficiency is your goal. Measurement is thus the universal element in the efficiency equation.
I first presume you build quality homes that compete well in your target market because they offer great elevations, strong plans, and are in good communities. Be honest, though; most of your competition—and certainly the best of that lot—do the same. Those are the “table stakes” to even be in the game, boom or bust. Given that, the winners will be those home builders that are the most efficient operationally, from design through construction through warranty, with similarly efficient internal staff to support each function.
Most readers have seen the charts showing home building productivity significantly lagging that of every other industry since the end of World War II. How can we continue to ignore this failure? There are answers. There are solutions. Earlier in this column, I referred the reader back to those five original columns I wrote. Read them, digest them, get your team to absorb them, develop questions, and discuss. True competitive advantage awaits.
MORE INFO: For a PDF of this column, along with the other files and templates mentioned, email your request to [email protected] and include “Downturn Links” in the subject line.
