This is the narrative and one of the seven exercises used in the RB Builders: Lessons from the Pipeline© business case at the most recent Pipeline workshop™. It offers a glimpse into the most intense, demanding, interactive, challenging home-building production management learning experience on the planet.
Share it with your team. If it intrigues you, the next workshop is April 5-6, 2017, at the Ponte Vedra Inn and Club, in Ponte Vedra Beach, Florida.
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THE HISTORY OF RB BUILDERS:
It is the first quarter of 2016. RB Builders is aiming to extend its reputation as a builder thriving on both the margin and velocity sides of Return on Assets, having expanded into another new geographical market, via the late-2015 acquisition of its third pre-existing home building operation.
Like previous years’ acquisitions, the newly-acquired building division has historically generated lower operating results and business outcomes than what RB Builders considers acceptable.
RB Builders is confident that it can continue its track record for unifying, developing, and improving the capabilities of existing teams at acquired divisions, to ones reflecting the savvy, motivated, and mutually-accountable home building team that defines the parent operation.
This road has become a familiar path for RB Builders.
Eight years earlier, at the beginning of 2008, shortly after the end of the halcyon period known as the Age of Home Builder Entitlement®, RB Builders had begun its own transformation process, with the objective of extracting itself from what it self-described as “the tar-pits of averageness”.
RB Builders had essentially used four initiatives:
- a team-based performance compensation plan directed at achieving targeted results above a baseline to a single business outcome, paid-out on achievement of a series of progressively-weighted milestones;
- a method of sharing numbers that produced full operational and financial transparency;
- an accounting system that connected operating performance to business outcomes via actionable data;
- and a focused process of continuous improvement consisting of a prioritized series of consecutively-ordered initiatives, with short durations aimed at achieving targeted, defined, measurable results.
As a result of these efforts, RB Builders had made massive strides.
During the ensuing five-year period (2008-2012), annual Revenue more than doubled, from $50 million to more $121 million. During the same period, the number of closings had increased by a similar margin, from 200 houses per year to 453 houses per year. Despite the margin pressure from increasing market share so dramatically, overall Gross Margin had increased from 22% to 24%; Gross Income had grown from $11 million $29.5 million.
Operating Expense had also increased 30% (from $8.5 million to $11 million), but that was far less than the same-period increase in Revenue.
As a result, RB Builder’s Net Income had risen from $2.5 million to $16.5 million, more than six times what it had been before the company began its transformation; Net Margin had almost tripled, from 5% to 14%.
In 2008, RB Builder’s cycle time had been 180 days; by the end of 2012, cycle time had been reduced to 65 days. The average amount of work-in-process had been 100 houses under construction; the company been able to reduce its average WIP to 80 houses under construction. The reductions in cycle time and work-in-process had occurred despite more than doubling the annual number of closings.
In 2008, RB Builders had targeted an inventory turn of 2.5x, which was actually an improvement from the preceding year; in 2012, by keeping its work-in-process at 80 houses and closing 453 houses, RB Builders had been able to more than double its physical inventory turn, to 5.7x.
In 2008, RB Builders turned the value of its assets two times; in 2012, it turned the value of its assets almost five times. Because it had managed to maintain margins while improving velocity, RB Builders saw its main barometer of economic return – Return on Invested Assets--increase almost six-fold during the five-year period, from 11% in 2008 to 64% in 2012.
- In 2013, RB Builders had moved all of its raw land holdings and developed lot inventory off of its balance sheet, and into subsidiaries, which would have served to further increase both Asset Turn and ROIA, had those measures been restated to reflect the remaining assets.
It had been a remarkable transformation.
The two divisions that RB Builders had previously acquired have remained solidly on-track towards meeting their own two-year plans of significantly increasing closings and Revenue without any increase in Operating Expense, while maintaining lower levels of work-in-process and operating under smaller construction lines of credit.
THE NEWLY-ACQUIRED DIVISION:
Near the end of 2015, RB Builders acquired its third home building operation. In its last year of independent operation, it had closed 64 houses, and generated $16 million in Revenue; with $12.16 million in Cost of Sales now reflecting only its direct, variable costs, the operation had generated $3.84 million in Gross Income, producing a 24% Gross Margin.
With its $2.56 million in Operating Expense now reflecting only its indirect, non-variable costs, the newly-acquired operation had produced $1.28 million in Net Income, resulting in an 8% Net Margin.
Since it carried an average work-in-process of 32 houses under construction during 2015, the division had a calculated cycle time of 180 days, despite job schedules that were typically 120 days; 64 closings and average work-in-process of 32 houses under construction meant the newly-acquired building operation turned its physical inventory exactly twice in 2015.
By moving all of its raw land holdings and developed lot inventory off of its balance sheet, and into subsidiaries, the newly-acquired building operation showed a restated average work-in-process of $4.24 million; Revenue of $16 million gave it an asset turnover ratio of 3.8x.
With its Net Margin of 8% and its restated asset turn of 3.8x, the new operation had shown an ROIA of 30.4%.
For the upcoming year (2016), your newly-acquired division will be expected to sell and close 90 houses, an increase in sales volume that is not expected to result in a diminution of Gross Margin. The level and cost of the internal resources that comprise your operating/production capacity will remain unchanged from the previous year.
Your construction line of credit is being reduced, from its current $4.5 million to $4.0 million, effected as closings occur during the first quarter. At yearend 2015, there were actually 34 houses in various stages of completion and construction funding, and the LIP balance on the construction line of credit stood fully-drawn at $4.5 million.
- Operationally, what will these targets and changes require you to do? What steps will you have to take?
- What will the comparative operating statements (2015-16) for your division look like, in terms of Revenue?
- Presuming the decisions you make result in the achievement of these objectives, what will the operating measures (productivity, cycle time, inventory turn) be?
- What will the business outcomes (Net Income Margin, Return on Invested Assets) be?
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