One of home building operations’ true gurus focuses on an ROI-based approach to changing ‘the way we’ve always done it.’
By George Casey, Stockbridge Associates
I spent a lot of last year working on ideas, knowledge, business models, and all things automation when it comes to housing.
It is an exciting space transcending modular and manufactured housing created primarily in factories, components of houses created in factories, also, and the rise of new technologies and robotics to do things like 3D printing of houses, robotic installation of brick and block, and the advent of sensors, connectors, and networks for the roll out of Internet of Things in homes.
Some of this stuff will make a difference in the short run, but most will take years to roll out to any scale that is meaningful in terms of bending the cost-time curve for the creation of mass housing.
The bottom line is that we will be stuck using close variants of the current model of creating housing with a mix-and-match conglomeration of subcontractors, trade partners, suppliers, manufacturers, and consultants for a longer time than many currently think.
This system will be bumping up against the skilled labor shortages across all of the major components of the industry, driving costs higher; probably faster than overall incomes of the population and continuing the ever-growing housing affordability and availability crisis that we are witnessing.
One can see that the long-term solution has to be a drastic improvement of productivity in the creation of housing that more people can afford. More house for less labor and material dollars and delivered way quicker than we do right now.
The only proven long-term solution is the creation of housing in factories using high levels of automation and continuous improvement of the design, engineering, and manufacturing processes.
But this will take time, a rejiggering of who does this work, new capital, new partnerships, new leadership, and new business models.
We can see hints of this future in the actions of Clayton, Entekra, Proto, Katerra, the various Japanese acquirers of US builders and developers, and the nascent combinations of traditional manufacturers and suppliers with technology suppliers to create more efficient solutions to the creation of housing and housing components.
I am not smart enough to know whether this transition will take 2 years, 5 years, 10 years or 30 years. I only know that the trend will continue with acceleration and that it is probably not reversible.
The industry and its key players will change and giant opportunities from this change will emerge. Fortunes will be made and lost in the transition.
For those driving the change it will be a series of steps, mis-steps, failure, learning, success and exciting times.
For those being disrupted, it will be jolts of angst and ultimately decisions of whether (or how) to adapt or the decision to fold the tent and try something else.
Buggy whip guys as the cars came in. Butch and Sundance wondering “who are those guys?”
That is the long game.
But there is a short game out there that should not be ignored, for in it lie opportunities for existing builders who are willing to adapt.
One of the simplest lessons I have learned from watching the off-site solution companies is the value of integrated design and engineering alongside trade partners in the creation of the plans and construction documents for houses.
Using the integrated approach with the help of BIM software helps to value engineer from the start in conjunction with wise and creative design. This collaboration and documentation take cost, error, and time out of the housing production process, whether components are built in a factory or on-site.
It involves a different way of attacking the front-end of the housing creation process and means some different skill sets, but is relatively easy to implement and does not cost a lot.
The ROI is worth it.
Many builders are adopting this approach currently.
A deeper and even more productive change involves a re-think of the construction process on-site.
If the near and intermediate future of building still involves most of the work done on-site with subcontractors and suppliers, there are two approaches that can take time and cost out of the current system.
The first involves bringing critical trades and processes in-house to help create more efficient workflows and a consistency and predictability of process and stability of workforce.
If process can be controlled and the players in the process can remain consistent and be trained up, there are huge opportunities for cycle-time reduction as well as cost reduction.
But it is a change, although not impossible. DiVosta Homes in Florida is probably the poster child of this method and has put up some of the best numbers in terms of margin and return on assets that I have ever seen.
It takes investment and management willpower to adopt this system, but it works if you are willing.
The second involves a set of deeper partnerships with a smaller group of trade contactors, suppliers, and manufacturers coupled with a commitment of industrial engineering to make the existing on-site building manufacturing process more efficient and less wasteful of time and money,
Integrated upfront collaboration in design and engineering is a start. But carrying that collaboration to scheduling and process improvement are the next steps to gain efficiency.
Over 20 years ago, I utilized such a system in several home building companies and master planned community builder/developers that I ran. Cutting cycle-times by more than 50% to well under 100 calendar days and driving unleveraged returns-on-assets from the mid-teens to over 100% per year were achieved in less than two years of implementation time and with scheduling software that was stone-age compared to that currently available.
But it involved a different approach and organization. A process control and improvement department provided the “industrial engineering” across not only our internal processes, but those of our trade partners, to drive away waste and inefficiency for all of us.
It was not easy, but it worked. Many of those who learned this system still use it, vowing never to go back to the “other way”.
Again, it took a dedicated focus on a different business model, an intensity of collecting and using field data to change the way things were done, and a continual drive to reduce cycle time and increase customer satisfaction at the same time to get the results.
The investment in a different kind of overhead was nowhere near as expensive as building a factory, but it had an unbelievably high ROI.
This is what the short game for builders would look like IF they wanted to become much more efficient, productive, and profitable.
But it would not be business as usual.
Collaborations with existing suppliers and manufacturers could help fill in the skillsets needed for industrial engineering and process control. There are opportunities for new programs that could open new relationship and revenue sources for the suppliers and manufacturers, if they chose to rethink the supply chain relationships with builders, evolving from selling commodities to selling solutions. Advance thinking firms like IBACOS are working on these business models as we speak.
The smart builders, trade partners, suppliers, and manufacturers will be playing both the long and the short games. It will be exciting for those choosing to play and evolve by thinking differently.
It will provide an interesting pathway forward and, who knows: the short game might end up evolving to be the long game solution along the way.
But you will never know unless you choose to play the new game.
Who wants to suit up?
Originally published on February 4, 2019, Builder https://www.builderonline.com/builder-100/strategy/short-gains-can-be-part-of-your-long-game-george-casey-looks-ahead_o