The Industrial Revolution changed shoemaking. Once the province of cobblers, working individually in shops, it evolved into large-scale manufacturing in factories. Shoemaking was revolutionized. Costs fell dramatically, and everyone could afford a pair of shoes; most people could afford several.
Large-scale home building is in a similar process of transitioning from an artisan-driven business to a manufacturing business. Builders have completed the first step—getting big. With size comes the benefit of scale economies. A builder buying lumber for tens of thousands of homes can do so at a lower unit cost than builders buying lumber for hundreds of homes. Many large builders, and their suppliers, are still in the middle of this step and have yet to figure out the most efficient way to capitalize the benefits of scale.
However, getting bigger, or achieving scale, is only a small piece of industrialization. True cost savings will come from changing the way you do business. This first step is the equivalent of buying all the cobblers in town and moving them to one building, but still having them make shoes one at a time by hand. The large-scale shoemaking company is able to see some cost savings in their material and some in sales and distribution, but the only place they are able to achieve dramatic savings is in overhead.
See the rationale behind the Pulte/Centex merger. Unfortunately, the overhead costs are only a small part of the overall costs. If you are a home builder wondering how to take the next step, productivity gains are critical to survival. Productivity gains, and lower costs that come with them, will come from three places: Lean manufacturing, variability reductions, and the use of technology.
The opportunities that emerge by bringing lean manufacturing to home building have only just begun to be explored. Inspired by Toyota's production model, lean manufacturing is removing everything from a manufacturing process that doesn't add value to the end customer. Here's what you achieve:
The second principal place to look for productivity gains is in variability reduction (see graphic).
The final key to a new low-cost business model is to utilize technology. New technologies and construction techniques will have a similar impact on home building as they did in the shoemaking industry. This realm has barely begun to be explored but will ultimately be driven by the specific situation of each builder.
The ultimate goal of these transformative efforts is to create a new business model for home building to occur at a substantively lower-cost level. Now is the time to revolutionize big builder business models.
Steps Necessary To Reduce Variability
Also view the web exclisive Productivity Gains Drive True Cost Savings [PDF] chart.
Robert Held is a partner at The Watermill Group and oversees Watermill Advisors. He is responsible for strategy development, management, and execution for Watermill Advisors mandates. He may be reached via e-mail at email@example.com.