(The Saga of RB Builders©, written by Fletcher Groves III in 2007, looks back futuristically from the perspective of 2012. It is being republished this year, as a nine-part series in Big Builder. It is a glance into the process of continuous improvement, a glance into the never-ending quest for better operating performance and higher economic return)
Under the new program, the company’s Revenue increased by more than 80%. Gross Income more than doubled. The growth in Revenue and Gross Income occurred with only a 23% increase in the level of Operating Expense; as a result, RB Builders’ Net Income more than quadrupled. Because the level of invested assets had not changed, RB Builders’ Return on Assets had also quadrupled.
Distributions to teammates (i.e. employees) increased from $450,000 in 2008, to $2,025,000 in 2010; additions to Retained Earnings and distributions to owners increased from a total of $900,000 in 2008, to more than $4,000,000 in 2010.
The story did not stop there.
As RB Builders did its now-customary results-based planning and budgeting for 2012, the company found the housing market in mid-cycle, with stronger demand and higher margins than 2007-08, but not as strong a market as 2010-11. It was a different playing field, in part due to market conditions, and in part, due to the company’s improved operations.
In the time since it had started its Results-Based Consulting arrangement five years earlier (the company still used the term, despite its intrepid, results-based consultant having departed two years earlier), RB Builders had clearly become a more productive building operation. The company’s average cycle time had dropped to 112 days (in 2010), and RB Builders now believed it was capable of generating twice the number of closings it had produced in 2007, with the same level of work-in-process and the same amount of production capacity. That would put RB Builders’ average cycle time at 90 days, well below the 180+ day average durations it recorded in 2007.
However, as the company prepared to enter 2012, concerns about market conditions outweighed the possibility of higher productivity, and brought into question whether–and how–RB Builders could utilize any additional capacity or productivity. The Gross Income Baseline for 2012 was set at the actual performance from 2010 (with overhead adjusted for inflation), although using 2010’s performance put the 2012 GI Baseline below what the company had achieved in 2011. However, strategic management agreed that the GI Target for 2012 needed to reflect the results that could happen if RB Builders found a way to utilize the additional capacity and productivity under the anticipated market conditions (Table 3, below).
The housing market had enjoyed a three-year turnaround, following the two-year downturn at the close of ‘The Age of Home builder Entitlement.’ 2012 would see lower sales prices, particularly if the company intended to close almost 25% more homes. If the company achieved its 2012 GI Target, RB Builders would be a larger home building company, but it would not be a more profitable home building one. The prospect of still another downturn in the housing market turned the company’s attention back to risks inherent in a market/industry where capacity exceeds demand.
RB Builders knew that it had never really achieved the ‘more-for-less’ proposition its trusted, results-based advisor had helped them envision back in 2007. The best it had been able to do was ‘more-for-the-same’--more Revenue, more Gross Income, produced with the same level of work-in-process and a slightly higher level of Operating Expense--an improvement from the ‘more-for-more’ proposition it started with, but nowhere near ‘more-for-less’. In the improving housing market of 2009-2011, ‘more-for-more’ had been sufficient; in a deteriorating housing market, it would no longer be sufficient.
- Part VIII: More-for-Less (October 2016)
- Part IX: 2012: Beyond Current Possibility (November 2016)