Although they have somewhat different meanings, waste and variation live in everything we do--our work--as individuals, as teams, and as enterprises.
There is a cost.
SAI has been mapping business processes--documenting, analyzing, and improving workflow--in the residential construction industry for almost 20 years. During that period, we have managed dozens of engagements, across a range of geographical markets and builder types, multiples of processes, involving thousands of discrete steps.
Most of our clients are well-structured, well-managed home building companies, some of them exceptionally so, by the standards with which this industry is judged; the list includes National Housing Quality (NHQ) Award winners and Builder and Professional Builder Builders of the Year.
Nevertheless, the totality of the data from these engagements, anecdotal or otherwise, suggests that fully 25% of the work these builders perform adds no value whatsoever; the actual percentage is certainly far higher. No two process steps have equal weight, but the percentage of non-value-added work has validity in assessing the design and management of workflow.
Step back, to the most basic, most universal proposition of business: The goal of an enterprise is to make money; the way that it makes money is through the value that it delivers to its customers; that value is delivered by the work that the enterprise performs, and that work is performed in some method of workflow.
The best effort--any effort--to deliver customer value costs a home building company something. The point is: What are badly-designed, poorly-managed processes and project portfolios unnecessarily costing you?
Set aside from consideration the sub-process known as Start-to-Completion. The cost of that part of the effort to deliver value--including the cost of wasted effort associated with scrap, jobsite conditions, jobsite mistakes, scheduling conflicts, design issues, etc.--is not included, since Cost of Sales should be a direct, variable cost.
Cost of Sales is a converted or transformed cost; the cost of non-value-adding effort is passed on, largely hidden, in the form of higher pricing from the sub-contractors and suppliers. The cost of non-value-adding effort contained in Cost of Sales diminishes Gross Income; it depletes the value delivered to the home buyer, who paid more to receive the same benefit; it is real, it is significant, and it is expensive.
But, it is not the issue here.
This discussion is about the indirect, non-variable consumed cost of non-value-adding effort, reflected in a building company’s Operating Expense. Whether you choose to view Operating Expense as a productivity issue or an excess capacity issue--a consumed cost that should be leveraged (our preference) or one that should be reduced--there is an unnecessary cost associated with valueless effort.
That cost diminishes Net Income.
For the past 20-plus years, the Shinn Group has produced its Financial and Operations Study. In this study, between one-third and one-half of the participating builders report Operating Expense of more than 25% of Revenue; Shinn’s recommended target is 25% of Revenue; according to Shinn, the most profitable builders keep their Operating Expenses below 20% of Revenue.
Consider a likely over-favorable scenario: a builder with modest overhead (20%) and a low level of valueless effort (25%). The cost of variation and waste is five-percent of Revenue; for every million dollars of Revenue, the cost of wasted effort is $50,000, removed directly from Net Income.
If you are D.R. Horton, that’s $4.8 billion per year in lost-but-potentially-recoverable Net Income.
If you are a home builder with Revenue of $100 million--an amount, incidentally, bracketed by two of the consistently successful builders that we took through the effort to map their business processes, and whose data is included in our calculations (Charter Homes & Neighborhoods, Eagle Construction of Virginia)--and, unlike Charter and Eagle, you do nothing to remove the waste and variation associated with the current state of the processes you depend upon to deliver value to your home buyers--the bogie is around $5.0 million in sacrificed Net Income, every year.