8 Metrics of Quality: How to Steal $10K More in Profit per House. Glenn Cottrell, VP and Director, Builder Solutions

Transcription

1 8 Metrics of Quality: How to Steal $10K More in Profit per House Glenn Cottrell, VP and Director, Builder Solutions

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4 Architect A professional skilled in applying creativity to help solve problems

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6 Cost of Quality How much should builders expect to pay for quality?

7 The average construction firm spends up to 7.1% of sales on quality-related costs

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11 Scott Sedam, TrueNorth Development Tim Vermillion, Laing Associates Steve Baden RESNET Alan Mooney, Criterium Engineers Eric Timmis, TrueNorth Development George Casey, Stockbridge Associates Theresa Weston, DuPont Paul Cardis, Avid Ratings John Tooley, Advanced Energy Denis Leonard, Business Excellence Consulting Jim Loeffler, LegalEye A variety of Builder friends who wished to remain anonymous

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14 1 qual i ty noun \ˈkwä-lə-tē\ : how good or bad something is : a characteristic or feature that someone or something has; something that can be noticed as a part of a person or thing : a high level of value or excellence

15 Dr. W. Edward Deming Quality = Results of work efforts Total costs

16 American Society for Quality 1. The characteristics of a product or service that bear on its ability to satisfy stated or implied needs; 2. A product or service free of deficiencies.

17 Justice Potter Stewart, U.S. Supreme Court (1964) I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description ["hard-core pornography"], and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that. Citation: Jacobellis v. Ohio 378 U.S. 184 (emphasis added)

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19 Rework Delays Warranty Satisfaction Litigation Insurance Reputation Valuation Cycle-Time Turnover Audits Training Value Engineering Documentation Contracting Violations Jobsite Waste Inspections Safety Supervision Testing Incentives Referrals Engagement

20 Rework Delays Warranty Satisfaction Litigation Insurance Reputation Valuation Cycle-Time Turnover Audits Training Value Engineering Documentation Contracting Violations Jobsite Waste Inspections Safety Supervision Testing Incentives Referrals Engagement Failure

21 Rework Delays Warranty Satisfaction Litigation Insurance Reputation Valuation Cycle-Time Turnover Audits Training Value Engineering Documentation Contracting Violations Jobsite Waste Inspections Safety Supervision Testing Incentives Referrals Engagement Failure Prevention

22 Rework Delays Warranty Satisfaction Litigation Insurance Reputation Valuation Cycle-Time Turnover Audits Training Value Engineering Documentation Contracting Violations Jobsite Waste Inspections Safety Supervision Testing Incentives Referrals Engagement Failure Prevention Assessment

23 Rework Delays Warranty Satisfaction Litigation Insurance Reputation Valuation Cycle-Time Turnover Audits Training Value Engineering Documentation Contracting Violations Jobsite Waste Inspections Safety Supervision Testing Incentives Referrals Engagement Failure Prevention Assessment Consequential

24 Jobsite Waste Value Engineering Construction Oversight Cycle-Time Warranty Employee Satisfaction Customer Engagement

25 Total Revenue $200M Homes per Year 500 Average Size (sqft) 2,600 Employees 120 Average Sales Price $400K - Land (18.6%) $75K - Construction (61.7%) $246K - Financing (1.4%) $5K - G&A (4.3%) $17K - Sales & Marketing (4.7%) $19K - Profit (9.3%) $37K

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27 Scott Sedam, TrueNorth Development Job-site waste = $300-$500 usable material per dumpster NAHB Average # of dumpsters = 3+ per unit Average waste removal costs = $1,200 per unit

28 ASSUMPTIONS 50% jobsite waste reduction thru: Upfront design Accurate take-offs / Trade partnering RESULTS $600 savings in usable materials per unit $600 savings per unit in waste removal fees

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30 Tim Vermillion, Laing Associates Average (per plan) hard cost savings = 5% Major opportunities in concrete and framing Division Purchasing Lead for Top 20 Builder Multi-year focus / commitment to partner with trades and share in the win Over 3 year period, reduced construction waste (thru VE and poor take-offs) > $15K per unit Results go beyond cost savings => Better overall home for the customer Mr. Katchmar; 8 th Grade Math Teacher, Springfield Middle School 20% Reduction (25% FF down to 20% FF) in wood (R-0.5/in) in a wall replaced by insulation (R-4.2/in) results in effective thermal performance increase of 5%

31 ASSUMPTIONS 1% hard cost savings per plan RESULTS $2,460 savings

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33 Steve Baden, RESNET Average HERS Rating cost to the builder = $450 Alan Mooney, Criterium Engineers Home inspection costs to the builder per visit can range $250-1,500 Division Purchasing Lead for Top 20 Builder Average # of homes carried by Field Manager = 25 versus for others in the local market

34 ASSUMPTIONS $350 is the bundled cost of two field visits required to complete a HERS Rating Reduce # of 3 rd -party field visits by 1/2 (HERS Rating or any other inspection service) Increase # of units under construction carried by a single field manager by 40% Annual salary of Field Manager = $100K RESULTS $175 savings per unit for fewer inspections 3 fewer Field Managers needed = $300K annual savings = $600 savings per unit

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36 Eric Timmis, TrueNorth Development 1 day saved in construction = $500-$800 per unit thru effective use of overhead (resources) George Casey, Stockbridge Associates 10% reduction in build cycle = $500 saving per unit thru effective use of working capital (less $ tied up in WIP), OR $1,900 added margin per unit thru increased volume using same working capital constraints Division Purchasing Lead for Top 20 Builder Easily several hundred $ savings from trades efficiency

37 ASSUMPTIONS 100 day build cycle 5 day (5%) reduction RESULTS $3,000+ savings per unit in overhead leverage $950 added margin per unit in more effective use of capital

38 Theresa Weston, Dupont $7,200 (average) accrual per unit $2,200-$16,000 range across 13 publics ( ) National Risk Manager for Top 20 Builder 50/50 split between claims paid and defense costs $2,800 per unit New Homes & Building Materials Warranty Report, Warranty Week (May 8, 2014) trend of new homebuilder accruals at 1.1% of sales

39 Theresa Weston, DuPont $7,200 (average) accrual per unit $2,200-$16,000 accrual per unit range across 13 public builders ( data) National Risk Manager for Top 20 Builder 50/50 split between claims paid and defense costs $2,800 per unit New Homes & Building Materials Warranty Report, Warranty Week trend of new homebuilder accruals at 1.1% of sales (May 8, 2014)

40 ASSUMPTIONS 1.1% of sales spent on warranty over 10 years 10% reduction in claims / claims paid RESULTS $550 savings per unit

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42 Society for Human Resource Management (SHRM) Contributing factors to job satisfaction: #1: Overall compensation Within Top #10: The work itself; Organization s financial stability, Overall corporate culture, Meaningfulness of job ROI Institute Cost to replace (as % of annual salary) Professional = 75%-125% Supervisor or Team Lead = 100%-150% Middle Manager = 125%-200% Division Purchasing Lead for Top 20 Builder With more than a decade focused on operational excellence we ve seen an increase in pride across our culture (both job satisfaction and engagement) and a reduction in turnover

43 ASSUMPTIONS Annual salary of Field Manager (FM) = $100K 25 FMs on staff (1 FM for every 20 units) Annual FM turnover reduced 10% RESULTS Annual turnover reduction of K (150% salary) = $375K = $750 savings per unit

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45 Paul Cardis, Avid Ratings Every 1 (%) point decrease in customer satisfaction results in an average 8% increase in customer service requests the following year High performing builders experience 25% or less the warranty requests of lower performing builders Product Satisfaction is the strongest predictor of actual customer referrals JD Power and Associates (2006) A1 (%) point increase in customer satisfaction levels can yield 0.17 additional recommendations per homebuyer 20% of overall customer satisfaction is driven by the builders warranty / customer service => Their experience living in their new home John Tooley, Advanced Energy A single call-back costs an HVAC contractor between $250-$400

46 ASSUMPTIONS Improve quality results in a 1 (%) point increase in overall customer satisfaction Average warranty service requests per unit = 15 Average cost (to the builder) per request = $250 Improved quality also yields 0.17 extra recommendations per buyer; 5% conversion of referrals to sales RESULTS $300 in savings per unit due to 1.2 (8%) fewer service requests per unit 500 buyers x 0.17 added recommendations = 85 prospects 85 prospects x 5% conversion rate = 4+ added sales with limited M&S 4 added sales x $37K (9.3%) profit per unit = $148K / 500 units = $300 added profit per unit

47 Jobsite Waste $ 1,200+ Value Engineering $ 2,400+ Construction Oversight $ 775+ Cycle-Time $ 4,000+ Warranty $ 550+ Employee Satisfaction $ 750+ Quality Spend per unit Customer Engagement $ 600+ $ 10,275+ spend per unit 27% increase in profit margin per unit QUESTION: How to attack it?

48 Investments to ensure good quality versus Spending due to poor quality

49 Investments to ensure good quality versus Spending due to poor quality

50 Investments to ensure good quality 1. Commit & Engage 2. Simplify & Standardize 3. Document 4. Train 5. Measure 6. Recognize, Reward & Celebrate 7. Repeat & Refine

51 National Housing Quality Award Winner 4 Years worth of data Year 1: Pre-crash Year 4: Midst of the crash Analysis looking at the nature of their quality spend over time

52 Year 1 Year 4 Hms $ %TQS %Sales Hms $ %TQS %Sales Volume Sales 120M 63M ASP 240K 280K TQS 1.66M K 0.89 P+A ($) 248K K 35 F+C ($) 1.42M K < TQS as %Sales ASP: Average Sales Price TQS: Total Quality Spend P: Prevention A: Assessment F: Failure C: Consequential QUESTION: What is this in real $s?

53 Year 1 Adjusted Year 4 Hms $ %TQS %Sales Hms $ %TQS %Sales Volume Sales 63M 63M ASP 240K 280K TQS 873K K 0.89 P+A ($) 130K K 35 F+C ($) 743K K 65 ASP: Average Sales Price TQS: Total Quality Spend P: Prevention A: Assessment F: Failure C: Consequential 314K net savings in TQS: 64K investment in P+A 378K reduction in F+C $5.90 return for every $1 invested

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56 Thank you! Thanks to many others! Glenn Cottrell