Ted Garrison's May 2013 Report

TED GARRISON'S MAY 2013 REPORT

Lean Construction

Earlier this year, Garrison Report #2013-1 provided eight questions that contractors and designers should ask themselves regarding strategy. If you haven’t read that report, I strongly suggest you review it before reading this one. While many companies within the construction industry have adopted innovative approaches to their businesses, it is still true that virtually every contractor and designer could further improve its performance and profitability by putting to use the practices found in Construction 3.0™ Strategies. To assist in this effort, Garrison Reports #2013-3 through #2013-6 discuss each of the four critical practices that make up Construction 3.0™ Strategies. These four practices and their scheduled reports are as follows:

• Blue Ocean Contracting (TGR #2013-3)
• Integrated Project Delivery (TGR #2013-4)
Lean Construction (TGR #2013-5)
• Best-Value Procurement (TGR 2013-6)

Lean Construction
Maybe the most misunderstood concept concerning Lean Construction is that it is not about doing things cheaper. It is about adding value for the client by doing things better through the elimination of waste. Waste increases project durations and costs and often results in quality issues. This is an important difference. Some are opposed to Lean Construction because they think it will cost jobs, but this is an unwarranted concern. Henry Ford found out that every time they increased efficiency, they needed to hire more people because the business grew.

In an interview, Glenn Ballard, cofounder of the Lean Construction Institute (LCI), said, “In Lean we are looking at fundamentally delivering value to customers, giving them exactly what they need, when they need it, within their constraints of cost and time with ever-decreasing waste.” Lean is different from many programs. While improved productivity is obviously an essential part of the effort, Ballard added that it’s also about safety, quality and meeting the customer’s needs. Click here to listen to Ballard’s entire interview.

In the April 2013 issue of Harvard Business Review, Michael E. Raynor and Mumtaz Ahmed wrote an article entitled “Three Rules for Making a Company Truly Great.” From their research, they concluded that the three rules to making a company truly great are as follows:

1. “Better before cheaper—in other words, compete on differentiators other than price.”
2. “Revenue before cost—that is, prioritize increasing revenue over reducing costs.”
3. “There are no other rules—so change anything you must to follow Rules 1 and 2.”

Lean Construction is totally consistent with those three rules. First, lean is about better, not cheaper. Second, when contractors are more efficient through lean practices, Ballard reported they consistently experienced a 15 to 20 percent reduction in costs plus other benefits for owners. If the construction industry would consistently reduce costs by 15 to 20 percent on every project, it would experience a significant upturn in the demand for its services.

Unfortunately, the conventional approaches to controlling construction costs are actually counterproductive and result in higher costs. Numerous studies from all around the world have found that the main reason that the construction industry hasn’t improved productivity for the past 50 years is a result of the practices that attempt to reduce the costs of each function of the industry in both design and construction. Edwards Deming argued in the 1950s that suboptimization was a bad practice and usually resulted in higher costs. Yet the construction industry still employs this practice. Lean practices provide a better approach, namely examining the entire system as a whole to improve system performance. The problem with focusing on individual subsystems is that a change to one subsystem may have a detrimental impact on the other subsystems greater than the savings achieved in one activity.

An example is reducing the design team’s fee to save money. This will usually result in lower-quality drawings. Poor drawings will result in additional construction costs that far outweigh the savings in the design team’s fee.

Of course, cost is always a factor in the value equation, but simply doing things cheaper doesn’t necessarily increase value for the client. Even the term value engineering (VE) has become a euphemism for cost cutting. However, a more accurate definition of VE is an organized approach to the identification and elimination of unnecessary costs. Unnecessary cost is that which provides neither use, nor life, nor quality, nor appearance, nor customer features. VE and lean construction are kindred spirits because both are about removing unnecessary costs through the removal of waste that does not contribute value to the client.

Integrated Project Delivery, which was discussed in the previous report, is in total harmony with lean. IPD’s collaborative and holistic approach to design and construction eliminates a great deal of duplicated effort, which by definition is non–value added or waste. Many people recognize the benefit of eliminating this waste, but others don’t recognize the inconsistency of reducing value by substituting a cheaper product to lower the initial construction cost while at the same time causing an increase in operational, energy and maintenance costs. Worse, some contractors embrace the chaos created by waste as a means to generate change orders. This is a disservice to their clients.

Of course, some buyers believe they are forced to accept lower quality because they cannot afford anything else. Lowering quality to reduce construction costs but increase future operational costs doesn’t necessarily serve the client’s best interest. Further, a lower cost product doesn’t mean that quality must suffer. Philip Crosby defined quality as “conformance to specifications.” A properly installed plastic laminate countertop may actually have a higher quality than an improperly installed granite countertop. While the granite top is more luxurious, it is not necessarily better quality. If the plastic laminate top satisfies all the specifications, then anything beyond those specifications adds little or no value and could, therefore, be called waste.

Another misconception about Lean Construction is that it’s about the tools. In an NCS Radio interview, Greg Howell, cofounder and managing director of LCI, stated, “It is really important not to start with the tools. Rather start with the people and begin to develop the capability in the company to learn from what’s going on and to see differently to take those new actions.” To successfully implement Lean Construction into a company, it must be initiated from the top and implemented from the bottom. This means everyone must be involved in the process. Lean construction is more about creating a culture of eliminating waste than it is about tools. Click here to listen to Howell’s entire interview.

My colleague Ed Anderson of Lean Implementation Services of Florida expressed frustration in his observation that too many companies want to take a shortcut to implementing Lean Construction. They don’t want to invest in properly training their people and spending the necessary time to develop the skills. Then they complain Lean just doesn’t work. While there are certainly some low-hanging fruit, those benefits are not sustainable unless a Lean process is established. Lean Construction is journey, not a destination.

If a contractor wants to compete on value, then Lean Construction is a must. How can you tell a prospect that you deliver the best value if your process is full of waste? However, by better performing the construction process through Lean your company will generate a significant payback. One of my clients has reported a 30 percent reduction in labor costs. He further reports that while his competitors are laying people off, he is hiring and revenue is increasing. He is also moving into new geographical areas because he has proven methods to beating the competition.

Increasing the value for the client is better than trying to do things cheaper. Lean will allow you to grow your business instead of trying to cut costs by eliminating training and/or by paying people less. Both of those strategies are contrary to Lean and doing things better. Worse, they discourage qualified people from entering or remaining in the industry. Peter Drucker wrote, “The first sign of decline of an industry is loss of appeal to qualified, able, and ambitious people.”

The good news is that history reveals that Lean practices improve morale and attract quality people. If the construction industry wants to increase profitability, increase the amount of work and deliver greater value to its clients, then it needs to turn its ship around.

Next month’s issue will focus on Best-Value Procurement.

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