Well-Oiled, Efficient Machines

Builders participating in the most recent Harvard Distribution Study significantly downplayed the contribution that improved operating efficiencies have had on their bottom line growth. Yet it’s precisely those efficiencies that may end up helping pull them through the current market doldrums.

Respondents to a Harvard survey that was conducted for the Distribution Study were among the country’s top 150 builders that reported closings of 500 or more single family homes in 2004. While the study’s authors had noted analysts’ predictions of an ensuing downturn, the actual study was conducted and released before the market started to deteriorate.

When asked to identify what contributed most to financial performance success, over half of the respondents pointed to strong housing market fundamentals, and nearly a third cited land assembly strategies. Another 13 percent considered improved customer satisfaction as key to profitability. In contrast, few respondents attributed their success to shorter construction cycles, savings on product purchases and on-site construction costs, and other operational efficiencies.

However, authors of the Harvard Study noted that the adoption of innovative practices related to product distribution and assembly was improving the operational performance of large builders along such dimensions as construction cycle time and customer satisfaction.

“Operating efficiency groundwork gained during the boom times will help the larger builders during periods of weaker housing activity,” according to the study. “Innovative operating practices help large builders not only run their operations more efficiently and use their market power more effectively, but also better manage risk.”

Four innovative operating practices identified as contributing most to increased efficiencies included the following:

• Coordination with Subcontractors. Innovative builder practices in this area include such initiatives as making scheduling information easily accessible to subs, automatically notifying subs of schedule changes, and frequently updating the job site production schedule.
• Component preassembly. Preassembling major components such as roof trusses allows greater precision in manufacturing and often provides cost savings by substituting semi-skilled off-site labor for skilled on-site labor. The preassembly process is also more efficient when done off-site, thereby creating the potential for shorter construction time.
• Supplier installation. In many product categories, builders have begun to purchase installation services from the manufacturers or distributors. Supplier installation helps to limit product disputes over the source of any problems. In addition, this practice can reduce construction labor needs since product manufacturers and distributors typically serve broader geographic areas than subcontractors.
• Supply chain management. Supply chain management covers a broad range of practices from price negotiations for products and value-added services to the implementation of information systems to support purchasing and inventory management. Supply chain management is an area where scale economies give larger builders an obvious edge over their smaller competitors.

In today’s environment where housing market fundamentals no longer add up and speculative land holdings seem more like a burdensome ball and chain, large and small builders alike can benefit from focusing on improving operating efficiencies.

Click to view the Harvard Joint Center for Housing Studies report: “The Evolving Home Building Industry & Implications for Consumers”