Steady-state production

Once a year several hundred senior US managers come together at Benchmark, a conference managed by the country’s National Association of Home Builders’ Research Bureau at which successful regional players unveil their profitable practices to an audience of peers. Surely not? Well, with national or multiregional builders in the USA being a minority, there is little competitive advantage to be lost by someone building in just one state if they bare all to someone building in another, much more to be won by pooling quality information.

Malcolm Pitcher was the only visitor from Britain to attend Benchmark 1999 in Miami in November. Here, in the first of a two-part special report on Miami’s salient themes, the marketing specialist looks at steady-state production, the emerging quest to raise quality and cut cost through managing out the lumps in the annual cycle.

Case study ONE

“Steady as she goes. The quest for sanity and profitability.”

The clue to the value of the case study from David Schmit, president of Colony Homes was in the sub-title. “Steady-state production” is the art of keeping an even-flow to landbuying, build programme and sales volume. The pay-off should be less crisis management generally for staff, but in particular on sourcing subcontractors, leading to a better quality product built right first time at a more competitive cost. But as Schmit went on to point out, even after many years of developing the idea of steady-state production Colony Homes has still not got it all right.

Schmit’s quest is to build a model than can’t easily be duplicated. He argues that you can read lots about steady-state production but it is as much a cultural thing as a textbook exercise and culture is difficult to copy. This is his list of the fundamental principles:

1. Steady-state delivery begins with land and ends when the customer warranty period is over. It is not just about building.

2. The sales programme can be better forecast if you try to find the “scarcity value” of every development

opportunity. This enables you to work out the optimal build programme to so that each development can operate at optimal capacity.

3. You make more money or lose less money at optimal capacity. The biggest savings are overhead savings.

4. Offer customers choices that optimise the scarcity value.

Importantly, the key messages to staff and suppliers are:

• Be proactive in preventing delays. Don’t just let them happen in front of your eyes;
• Be courageous in sounding the alarm if you think a problem is about to happen; and
• Be disciplined in stopping the line. Never let bad work continue - ever.

Communication plays a major role in the success or failure of steady-state and there is an expectation that suppliers will be Internet friendly if not now then very soon.

• Every week the schedule for the next two weeks is sent to suppliers.
• At the end of every day tomorrow’s work schedule is faxed or e-mailed. (Dell Computer, we were reminded, communicates hourly with all suppliers).
• Suppliers get together with the builder to agree schedules. The same time is allowed for each job in each house. So, for example, if you are starting one house per day and one day is allowed for a particular task then the suppliers knows that there will be work every day. The supplier is able to change the daily crew size according to the size of the home to be worked on during any particular day.

Pressure on suppliers to reduce their prices is incessant in the US market. Schmit sees steady-state as a way of not only reducing prices still further but, because it allows suppliers to work continuously at optimal capacity, their wastage is reduced and profitability rises. This win/win situation is the company’s goal.

David admits that some employees have experienced difficulties with the intense discipline that steady-state involves but he emphasises the need to work with them and allow them to become involved in the processes and their ongoing improvement.

Managing customers too can become an issue. The company fixes a target closing date at contract and has a 45-day countdown programme that the client is aware of. However, should bad weather hold up production for a day then every house on the line is held up by one day - otherwise the steady-state becomes unsteady. So continuous customer communication is used to keep the customer informed. After all, no customer wants to move into a rushed or poorly finished house. But, here the scarcity value is important because it ensures that the customer cannot easily find a substitute home.

Case study TWO

Ara K Hovnanian, CEO of New Jersey homebuilder K Hovnanian Enterprises, told his company’s story of the journey to even-flow production. It used to deliver 50% of its annual production in the fourth quarter and 10-20% in the last two weeks.

The first step was to change the company’s year end to try to smooth the production flow, enjoy a year end when the climate is better for a builder exposed to North American winters and move away from the problem of competing with other builders with December year ends.

It didn’t work. Q4 remained as big a headache.

At this point they realised that Q4 “is not a climate issue. It’s a management and process issue.” Even-flow production was the answer.

The figures speak for themselves.

What has fundamentally changed?

• A new construction scheduling system.
• On-going reviews of forward deliveries.
• Bonus plans moved from an annual to quarterly basis.
• A decision to “bite the bullet” and ignore the Q4 syndrome.
• Total management focus onto the production system.

The system has imposed new disciplines on the business, such as:

• A target of five new homes starts each week, one a day.
• Customer selections must be made within 30 days (orders will be accepted beyond 30 days at a cost penalty of five times list price). This reduces the problems caused by changes to schedules once building has started.

So where did it take them?

• Quarterly smoothing is working quite well.
• Monthly smoothing is still skewed to the last month but they are getting control.
• Weekly performance is still skewed to the last week of the month.
• Within nine months of starting even-flow they were starting four to six new homes every week (ie within +/- 1 of the target) for 80% of all weeks.
• Deliveries are not so smooth – uneven finish was an early problem. This is being brought under control by significantly cutting back on construction schedule changes. The goal is even start-even finish with even steps all along the production schedule.
• Cycle time reductions have been significant. Formally it took 140 days from trenching to completion but with even-flow it takes just 85 days.

They are just entering their third phase of development which will see the following changes:-

• Daily even-flow – multiples of one. That is a particular job is done on one house per day – not one-and-a-half houses today and perhaps half a house tomorrow. (Contractors like the predictability and stability – they know exactly how many roofs or frames that they have to do each day.)
• Same production template/flow for all homes.
• Separate foundations from frame start. This is a winter climate issue. The company has found that it is better to have a stock of foundations available in advance.

Hovnanian sums up the benefits:

• Quality is rising. “Stretched contractors or come and go contractors supply poor quality.”
• Construction costs are down. “Contractors can schedule in advance and offer keener prices.”
• Overheads are down – “You are not staffing just fore the year end peaks”
• Less hassle – people know what they are to do and when
• More predictability.