Scott Sedam hosts the Lean Building Forum on HousingZone.com, where each month he interviews those who are implementing the principles of lean operations in home building.
Scott Sedam: Jim, give us a quick overview of your company.
Jim Deitch: We're excited about the coming year and celebrating our 20th anniversary. That's significant because in 1990 we were launching into the last downturn, so we started in this business in down times with humble beginnings. We did 17 homes the first year and have continued to grow primarily in North Tampa, “New Tampa” and Pasco County. We build upper-end, single-family detached homes and more recently luxury villas. Over the past five years we've averaged about 90 homes a year, and in 2010 we plan to build 110. We're going to continue basically with the same product line.
SS: It's a rare builder that didn't drop at least 50 percent in volume in the last five years, and 60 percent, 70 percent and even 80 percent isn't unusual. Why has Southern Crafted been able to withstand the onslaught, compared to most builders?
JD: We dropped off a bit the past 18 months, but the economists tell us that a certain number of homes will be built in the Tampa Bay area this year and many builders have closed their doors. So we have an opportunity to take that share for our size and price point. The Tampa Bay area is not a service-oriented community. There's a lot of military. There's a lot of medical and education here and a lot of businesses relocating. We have a steady and constant influx of primary buyers and with our product and price point, it's a good fit.
SS: So Jim, when we talk about lean methodology, what does it mean to you? What does it mean to say you're a lean builder?
JD: Most view lean as an approach towards efficiency; the low-hanging fruit is to reduce your costs. But really, lean is about, on a daily basis, constantly looking at your product, your processes, your company — not just what happens in the field but what happens in the business office, what happens in the sales office. It's more important today in a bad economic downturn, but we started focusing on this heavily back in 2005-2006 when the market was going crazy and I was concerned about how many dollars we were leaving on the table by not paying attention to the details. So it's really about being the most efficient and effective with limited resources, maximizing profitability, maximizing quality and holding everybody accountable. It requires brutal honesty.
SS: How many direct employees do you have at this time?
JD: I wiped out almost my entire senior and middle-management team and that left us with about 24 employees including the president, myself as COO and the VP of sales. The sales team reports to the VP of sales and the balance of the organization reports to me.
SS: When you say wiped out, was that done because of financial necessity or because these people were not good fits with the direction you were going?
JD: It wasn't out of financial necessity. When I first came on board we built 95 homes in 2005 with 11 people in the construction department. Two years later we built 120 homes with three people in the construction department. Cycle times, costing and quality control were out of whack. The purchasing department was bloated. Too much time was spent looking for new contractors at a lower price as opposed to focusing on having the right contractors at the right price. There were three or four tiers of management in the construction department alone. The question was, why did we need to have managers translate the message from the executive team down to the front-line employees?
SS: Did you also experience that with some of your suppliers and trades?
JD: We had far fewer turnovers in our trades and suppliers. It was a breath of fresh air for them; 75 percent of our trades and suppliers have been here for the entire 20 years. We cherish those relationships. They appreciate our leadership. Not having all the resources themselves within their organizations, if we can demonstrate to them how they can make a better profit they will follow. If you push them around and dictate what their pricing is going to be, they will push back. I've had much greater success with the contractors and the suppliers than I've had with employees.
SS: So your experience is that the trades are often just waiting for someone to come and show them that they are willing to work with them in a different way.
JD: You put them in a room and do the price non-conformance exercise that Philip Crosby used to teach. You look at your top callback item and then you put it up there on the board and you ask [the trade contractors], line item by line item, what it costs [them] to come back and fix that callback item. Their eyes get wider and wider as you add up the costs. Then you compound that over the number of houses they do over a year, and now you've got their attention. They'll start throwing money at you at the end of the exercise. You don't just demand 5 percent off. You go to them and show them how they can save money by being smarter businesspeople and all of a sudden they want to pass the savings through to you.
SS: Companies still send out demand letters saying “give us 10 percent or we'll kill you.” You told me about one case where working with your stucco contractor got you 50 percent, not 5 percent or 10 percent.
JD: Back in 1993 when I was a field superintendent, I got an invitation to join the purchasing department. The purchasing department manager said, “Why don't you come in for four or five days and watch what we do, and if you like it come on in, and if you don't you can stay out there, but this will be good move for your career.” My first day there they had a memo come down from corporate to slash costs by 5 percent, so immediately they called each supplier and trade and told them they had cut their costs 5 percent by the following Monday or they didn't have the work anymore. That's the easy way to do it. [The department manager] got short-term gains and he alienated a lot of people, so while the trades rolled over to keep the business in the short term, they also immediately started looking for new accounts and in the end the purchasing department lost. I made the decision to stay in the field.
SS: As anyone who's ever worked on the trade-supplier side knows, they have a lot of ways to get even and you can make up that 5 percent very quickly on the downside. One of the things I find remarkable is that I rarely meet a builder — probably only three or four times in the last 20 years — who was good enough to negotiate with the trades for their best specific crews.
JD: My electrician has been with us for 20 years and they do our work and they also do the largest builder in Tampa Bay. I do less than 10 percent of the volume of the largest builder and they get his worst crews and I get his best crews.
SS: And why is that?
JD: Well, we pay our bills on time. We're religious about that — if you turn your bills in you get paid in the next cycle period. No exceptions.
SS: Does a builder ever save a dime by delaying payment to their trades?
JD: No. You have to do more than just pay on time, but that's huge because the perception is that if you float the money [due to] a contractor, you're building homes on their dime. And that's not the way it's supposed to be. We get rewarded for the risk but we're relying on a lot of people for our success. We have to show them respect and not operate our business on their backs. They are a part of the team and we have to treat them like part of the team. They are smart. The best way to do business is don't play games, be honest and be partners. They won't be there for you when you need them if you're not.
SS: Southern-Crafted is a private company and of course we respect that, but can you give us a notion about what the bottom line looks like these days?
JD: I can tell you that if you were to look at Chuck Shinn's best practices, our profit margins and targets are exactly what he recommends.
SS: That puts you in rare company these days. Could you tell readers and listeners two or three things they need to know if they want to seriously launch into lean?
JD: First they need to find a mentor that can teach them if they don't inherently know or have not been through formal training themselves. To go in blind will produce deleterious results. You can really hurt yourself more by just going into a cost-cutting mode, which is the natural way because it's the easiest way.
Lean is a cultural thing: You start with your people and your employees first. It can't be limited to the job site or the project. You have to operate lean in your office. You have to operate lean in your sales offices. This may sound silly, but you use a porcelain coffee cup instead of Styrofoam cups. That's a little thing, but it's lean because you can buy Styrofoam coffee cups every week or you can buy one porcelain coffee cup. That's sustainability, too; it ties into the green side of it, but every single thing that you do has to fall into it.
You've got to make list after list after list of what you can do better in your company; where's your overhead going. But of course the biggest things are the costs that compound themselves. So when you're out there, if you're talking about sticks and bricks, that has a compounded effect. You have your biggest impact there but you've got to teach people what this looks like. You've got to do the mathematical exercises and not run around preaching, but demonstrating. You've got to be the lean cheerleader first.
SS: What's the biggest obstacle they will face?
JD: People. This is hard because if you have one person out there that is against what you are trying to do, they're a cancer. You need to cut [that person] out because they'll make it difficult for you to make progress. Everybody's got to be moving in the same direction.
SS: Thinking back on your experience for the last four years, is there anything you would have done differently if you could go back?
JD: Yes, I would have made certain people decisions much quicker. You know, you always want everybody to come on board and believe in what you believe, but I think I could have made personnel decisions faster than I did.
SS: But if you do it too fast, do you run the risk of losing someone who might have been good?
JD: I'm particularly proud of one individual that I thought I was going to give up on. I stuck it through and that person really turned around and has become a great asset. I mean, there's always the danger that you'll lose somebody that has the potential, but it's a balancing act. For the good of the organization, you can't wait too long. So you use your best judgment.
SS: So what's next? If things go the way you want them to, how would you describe yourselves in a few years down the road?
JD: We are in a growth mode. As we come out of this down cycle we hope to grow the company and build more homes. The challenge, as you bring more individuals into the organization and more trades and do more volume, is to maintain the culture, indoctrinating all your associates including new trade partners. It's making sure that you're able to manage by walking around to see whether what you think is happening is truly happening. Right now I'm in a position where I can see it all on a daily basis. Once you get a certain volume going it's not possible to do that on the level you would like, so there's a lot of trust involved and a lot more training and mentoring of your people. So I'm looking forward to that.
SS: Jim, it sounds like you're going to be around for some time to come and we'll check back with you again. You've given us a lot to think about and we thank you for taking the time to share. For those who aren't completely familiar with how we're doing this, you'll find the complete transcript of this interview posted on www.HousingZone.com/Lean , as well as the live audio interview. See you next month.
|Scott Sedam, host of the Lean Building Forum, is president of TrueNorth Development in Northville, Mich. He can be reached via email at firstname.lastname@example.org . Scott's weekly blog, The Lean Buillding Forum, appears on www.HousingZone.com.|