Fletcher Groves
Run a fast company.
2 MIN READ
In order to succeed in an industry that is slowly emerging from the worst recession in three-quarters of a century, home builders have to focus on more than the margin side of the business. How much a builder makes on every house will no longer be enough, says Fletcher Groves. What is the No. 1 misconception builders have about operational performance?
I think the biggest misconception is that home building production is so different from any other method of production that it cannot possibly be managed as a system, and that the gains in productivity that virtually every other industry has achieved are illusory or unobtainable in our industry. They give up on velocity (presuming they ever considered it), and resign themselves to the belief that margin is the only means of competitive differentiation.
One myth is that revenue reflects the size of a home building company; it doesn’t. The true measure of size is inventory (work-in-process) and production capacity (cost of resources reflected in the non-variable costs that determine overhead). The myth promotes a “more-for-more” mentality, in which the key to more revenue is more of everything else. If instead, builders viewed size as the challenge and opportunity to do more with what they have (more revenue and a higher rate of closings, with a planned, finite, and controlled amount of work-in-process and resource capacity), they would come to the conclusion that they don’t want to be a bigger home building company; they want to be a faster, more productive homebuilding company. They would conclude that they don’t want to grow.
You talk about velocity in the home building industry. What does this mean?
If you look at return on assets, it’s clear that economic return is a function of two co-equal components: Return on sales is the margin component; inventory turn is the velocity component. By the way, velocity is an interesting term; it’s speed in a certain direction, speed with a purpose. Among other attributes, velocity is the antidote to size and unlimited access to capital.
Fletcher Groves is vice president of SAI Consulting Inc. in Ponte Vedra Beach, Fla.
