27 Jul 4 Processes that Affect Your Bottom Line – The Production Process
Have you noticed the number of houses going up in certain parts of your area? Residential building is alive and well and the number of houses going up in my area continues to climb.
If you’re a homebuilder, there’s a lot to do to build a house. It starts with buying a lot, then you have to grade the lot, then you pour the foundation. After that, you go vertical with first the framing, then the sheetrock, trim, windows and doors and finally the flooring, paint and appliances. Before you know it, the house is built, but maybe 90-120 days has passed.
You know the old saying, “Good, Cheap, Fast, pick any two?” The best ways to affect your bottom line with your production process is to focus on cycle times and eliminating mistakes. Whether you’re building houses or manufacturing a product, these two areas will impact your profitability.
What if the homebuilder wanted to shorten the cycle time it takes to build a house by 10% from 90 days to 81 days?
Let’s pretend he had 5 crews that each could build 4 houses a year or 20 houses. If he could shorten his cycle time by 10% if everything else is equal that means he builds 2 more houses per year. If his average profit per home is $20,000 that means his bottom line increases by $40,000 due to improving his cycle time. If he could shorten his cycle by 20%, it would double the profit increase.
There are some traps when you shorten cycle times. You can’t add labor to do it because that eats up your profit. The existing crew has to go faster. To do that you have to look at the areas that eat up a large portion of the time and go after those first. When you go faster, safety and quality can come in to play.
The other way to improve your production process is to eliminate mistakes. Let’s agree nobody’s perfect. We all make mistakes, but mistakes consistently interfering with your production process can eat in to your process and actually lengthen cycle times. If you don’t do it right the first time, you certainly don’t have time to go back and fix it.
Let’s pretend I’m the rookie framer and it’s my first day framing a house as part of the construction crew. The supervisor shows me what I need to do and is in a hurry to get me started (he might be trying to shorten his cycle times). However, on the second or third board, I pick up the wrong dimension of wood and after half a day, the supervisor comes back only to find out that I’ve used the wrong board and others have built on and around what I’ve built. Well, the crew then not only has to tear out what I did, but what they did also.
The mistake compounds and pretty soon the entire day was lost, maybe 2 because we had to tear out the mistake and rebuild it correctly. If similar or other mistakes were made by other crews then the builder is looking at a loss of maybe 10 days or more which will eat in to his profit margin. If the builder makes $5,000 per day (annual net profit/360) and has lost 10 days in cycle times then he has to deal with $50,000 worth of mistakes over the course of the year.
The key to improving the bottom line with your production process is through use of technology, job site efficiency and more effective interfacing of people, materials, equipment and information. In addition, establishing a scorecard that measures the performance against the goals of the organization. Effective performance measurement can drive efficiency, which can dramatically improve profitability.