“[Why don’t you write] something on how to build houses for under $200k? How does a builder retool process to go from focus on higher margin units to lower margin higher volume ones? I know that's sort of what you look at all the time.”
A question from John McManus that flows straight from his February 9th piece (“The Rise and Fall of the Entry-Level Home”) on BUILDERonline.
In that article, he cites three forces at work in the demise of entry-level housing: a shortage of lots that are sufficiently high-density or sufficiently outer-circumference; entitlements that price entry level or starter homes out of reach; first-time buyers that don’t want to purchase entry-level product.
The starter home is only history if builders decide not to write another chapter.
As I observed to John, there are very few opportunities that cannot be seized, and one builder's pass is another builder's opportunity.
What will it require?
In my view, it will require (1) a complete rethinking of the product that underlies the value proposition, and (2) higher velocity--more productivity, faster cycle times, higher inventory turns-- than this industry considers possible. And, guess what? Those requirements transcend the typological question being posed.
That is because this is exactly the type of thinking and action that creates sustainable, enduring, competitive separation. What does not create sustainable, enduring competitive separation is a creeping acceptance of middle-of-the-road averageness; as my Texas clients are fond of saying: “The only things in the middle of the road are yellow lines and dead armadillos.”
Question: Seriously, does the world really need one more average home building company?
On the product design side, builders need to focus more on achieving elegance than extravagance, focus more on creating allusion than illusion (architecture-elegance-and-allusion).
Elegance: design and finish that is refined, tasteful, simple, suitable to its purpose, easily-built, enduring, appropriate; plans that recall the accuracy and practicality of master builders; plans where fenestration makes design sense. Allusion: a meaningful interpretation of historical design; plans and materials that are indigenous, particular, familiar, informal, simple; designs that are re-collective, vernacular.
In the vast production-to-semi-custom span of the builder spectrum, I don’t see the design thinking I have described. What I see is complicated designs with impractical layouts and difficult dimensions; plans with purposeless size and volume; plans with design elements that make no sense; plans with no coherent scale; fenestration without a working purpose; a thoughtless confusion of style, with no connection to geography or history; plans that offer a shallow illusion of architectural style, not a meaningful, interpretive allusion.
Creating elegance and allusion creates a lot of other benefits: it increases value and it decreases cost; it means that margin doesn’t have to be the tradeoff for lower prices and higher volume; it means no longer being compelled to accept C and D lots to preserve margin; it removes--as John cites --the stigma of starter home and entry-level buyer, while making the product acceptable for first-time buyers.
Which brings us to velocity.
Beyond reducing waste and other non-value adding costs, increasing value, and creating benefit, having a portfolio with plans that are elegantly designed and easy to build goes a long way towards building them faster.
That’s a good starting point for increasing velocity, but the journey needs to continue down that road: towards CCPM (critical chain project management) scheduling; towards much more tightly-controlled and finite levels of inventory; towards a much higher use of engineered building products and systems; towards better building and production techniques enhanced by better design.
The most pertinent measure of economic return is Return on Assets; ROA is comprised of two, co-equal, components; Return on Sales is the margin component; Asset Turn is the velocity component. How much do you make on every house? How many houses can you sell, build, and close with a planned, finite, and controlled level of work-in-process and production capacity?
Return on Assets is velocity acting upon margin; in the action that it takes, however, higher velocity is indiscriminate toward the value proposition that drives margin: margin always goes better with velocity.
If improving margin seems challenging, I assure you increasing velocity is exponentially more difficult. Conquering all of the errors, rework, redundancy, and other forms of waste; overcoming the effect variation has on a production system--all of the excess capacity, excessive inventory, excessively-long duration; “more-for-more” as the prevailing mental model.
It is hard, difficult work; that’s precisely why it should be so highly-valued.
If you were really pressed, how much closer to the edge could you operate on margin, if you were able to turn your physical work-in-process eight times a year?
It is these “velocity accelerators," as my colleagues Clark Ellis and Brandon Hart term them, that we cover in Pipeline workshops.
More information: pipeline workshops.