Epcon Experts Series With Scott Sedam of TrueNorth Development

 

Scott Sedam, founder of TrueNorth Development, discusses lean process implementation and much more in this episode of the Epcon Experts Podcast.

“If you look at the most efficiently‑run builders, if they allow change orders at all, they have really established dates. After getting the darn deal signed, there’s nothing more important than managing the customer to those dates.

Host: Today we welcome Scott Sedam of TrueNorth Development. Scott, thank you for joining us today.

Scott Sedam, Founder of TrueNorth Development: Nice to be with you.

Host: Can we start with a little bit of your background and how you work with builders across the country as head of TrueNorth Development?

Scott: I’ve been around a long time now.

I went to US Steel and production and learned anti‑quality and everything not to do in both management and process. Got a graduate degree, went to Motorola, which back in the early ’80s was an absolute leader, worldwide leader, and saved their company through the quality movement.

Those were very heady times then. Hired away by a consulting firm and I spent eight, nine years with a couple consulting firms, and worked in quality implementation. That’s where I started to get into Lean, L‑E‑A‑N, Lean process. I got extremely intrigued with that.

Toward the end with that, I had this crazy thing coming along and with Pulte Homes that wanted to hire a national VP of quality. I started there in January of ’89. At that time, no one had ever heard of a VP of quality in home building.

Fortunately, Bob Burgess, who was the president then, who had come from the outside and had a lot of experience, and built Pulte himself, really were bought into this idea and got bought into me. I came on board and spent the next eight‑and‑a‑half years as Pulte’s VP of quality.

During that time, we started implementing more facets of what we call Lean process today. They expanded. They went from being one operation to, when I got there, there were 16 or 17 and were getting big.

I had an impossible task, but I had a lot of help. Amazingly enough, the year that I finally decided that I wanted to go out on my own, and I had really strong support from Pulte to do that, they were great that way.

I got TrueNorth going. I had some really great clients I started out with, that I had some good long‑term contracts with. We accidentally became huge in the training business. We ended up with about 24, 25 training courses we developed for home building.

In 2007, we had 4,500 students as the downturn started to hit. In 2008, we had exactly zero, which for the owner of the company and kids in college and more coming to college, it was brutal. It was very painful, but it opened the door.

I’ve always been, or as one of my sisters says, I’m not a glass half full kind of guy, I’m like a glass 90 percent full kind of guy, always looking for, “OK, who do we got here that would enable us to do this?”

When that went away, because everyone’s laying everybody off, no one’s going to train anybody, that opened a door to Lean. We could say to a builder, “Look, here’s the deal. We’re going to charge you a fee for this. If you don’t find at least 10 times that fee, you’re under contractually no obligation to pay us.”

We still do that. We don’t think we have to now, but we still do that because we think we’re the only people in the country that do.

It takes some guts to say 10 times your fee or you don’t have to. We’ll even give you the expense money. Then the first ones we did was David Weekly Homes and Larry Webb, his company. We said, “Don’t give us anything up front. You wait till everything’s done, then if your team says, ‘Yeah, we found the money using their measurements, then you can pay us.'”

That was brutal. We did it, and we always got paid. When we’ve done something like 227. We have four coming up in the next six weeks. We’ll break that 230. We always get paid. It’s not because we’re geniuses, we’re pretty darn good at process.

Host: I know many builders inside and outside of our network that have gone through that process before, and all of them attest to the fact that you back that up well. You find the savings for them and it’s transformative for their businesses.

I respect how you make the industry better. I enjoy seeing all your social media content where you post some of the silly things that you see out in the field and the opportunities to learn and improve there.

Scott: You said something though, I want to jump on quick, because I think it’s important. You said about how you have done that, like TrueNorth has done that. I school our guys. There’s five key guys in the company. Then there’s some carefully selected architects and engineers we’ll bring in. They aren’t part of TrueNorth, but we hire them to consult on the projects.

What we say is that, our builder clients, using our process, and to some degree our coaching, our guidance, process coaching, working together with their suppliers and trades find the money, but we also emphasize it’s finding value.

The old engineering definition of value is V=B/C, which most engineers and most people who do value engineering, which is a part of Lean. It is under the Lean umbrella, but under the umbrella, not the whole thing. They figured about the B.

The B is benefit. V, value equals benefit B, over cost. How do you increase value? You have multiple ways to do it. We hold the cost the same and we increase benefit. Will customers like that? Absolutely. The benefit might be to the trade that follows you, it makes his job easier.

Or that might be to the trade before you, because now doing it this way, you’re not going to risk damaging his stuff anymore. There’s a lot of ways to look at benefit. Increasing benefit’s always good.

Obviously, anytime you can decrease cost and keep benefit the same, that’s also good. We love that. That’s the first thing we talk about with builders because builders, and I’m not being critical of this, but it’s reality. The first thing on their mind, for only 96 percent of them is, show me the money. Now we start to talk about benefit.

Learning to challenge ourselves. Challenge the engineer and challenge the architect. Then our relationship with our suppliers and traders, which we always thought was as good as it could get.

Host: It’s a mindset shift and takes a lot of discipline on their part. Just like when somebody comes to us and they want to do something a little bit different than they’ve done in the past.

Scott: We do a lot of that kind of work, and training of people in the field and people in the company. A huge part of our business now is doing these four‑ and five‑day, actually, there’s a three‑day, depending on which version you’re doing for which audience, but three‑, four‑, or five‑day workshops on the Lean process.

We go to a builder, and usually there are a couple of us there, one version there’s three, when we bring the architect and engineer, and we bring the suppliers and trades through in turn. They get their time slots, which might be an hour, might be an hour and a half. We work with them with the builder team and go through the product and the plans.

They bring their homework with them, which is amazing. They actually do it. 90, 95 percent of them will do all the homework because they get excited about making their input. They see it as improving things for themselves, not just improving it for the builder.

That’s important to them, the builder, because that helps guarantee more business. Hey, if they see themselves getting better using this process, then they really get into it, and they keep bringing the goods.

That’s most of what we do. We do the training, various forms of that. A hot button of mine is variance, I’ve been pushing variance. I have a standing bet with any builder in America that in five minutes I can prove to them that they’re measuring less than half the impact of variance.

In most cases, it’s three, four, five times what they’re measuring. Then in five minutes I can prove that. I’d say, “We’ll go to the nicest restaurant in town, and if you win, I pay.” I’ve never lost that bet yet. I know I never will.

Teaching people to understand the true total cost impact of variance. Then, how do you eliminate variance? In the workshop we did with your folks, we talked about how, if you don’t get things like your plans, your specifications, upfront, right and nailed down, you are going to have variance. Then you’re going to have schedule gaps.

The more variance you have, the harder is to maintain your schedule, and that’s a vicious circle. When your schedule starts slipping, what do you get? More variance. It builds on each other.

Host: A lot of those old purchasing habits die hard. I am glad that you brought up that workshop. I know we all really enjoyed it. Something I wanted to ask you to elaborate on, you mentioned Dr. Deming earlier. You shared a quote from him in the workshop, that the enemy of quality is uncontrolled variation.

As you work with builders, what are one or two examples of the type of uncontrolled variation?

Scott: If you look at the most efficiently‑run builders, if they allow change orders at all, they have really established dates. Their sales people know, “We have to manage the customer to those dates.” After getting the darn deal signed, there’s nothing more important than managing the customer to those dates.

If you have a design center, they’ve got to be part of that.

Host: That is an efficiency killer.

Scott: Absolutely.

Host: We bent some rules during the recession when I was with Ryan Homes and allowed some late change orders. Always lost money, always screwed it up, and it kills you.

Scott: The trades never make money on those either. They hate them.

By the way, life happens. It’s the exception proves the rule. Somebody had a death in the family or they had a sick child in the hospital, we’re going to understand that, but that’s a couple percent of them, if that.

Usually, it’s because we aren’t managing well up front. We aren’t making sure. If we’re in the design center and the customer has picked their flooring, when they’re going out, we absolutely know, let’s say, that the spouse was not comfortable with a couple of choices. We just know that.

We got them signed, going on. You’d be so far ahead of the game saying, “Why don’t you come back in a couple days, even if you have to stay late to do it or whatever you have to do, and think about it. Let’s look at that again so we can get this nailed up front.”

Not having someone come back after you started construction down the road and start saying, “We have to change this carpet. We have to change these cabinets, this countertop,” whatever it is.

Then, oh my gosh, getting plans and specifications completely nailed down, including your options and option pricing, getting that nailed down, having anything in your design center that is not priced out.

I have another son that’s been in the business. He went to a job with a company out west as the number two purchasing guy. They gave him, as an initial assignment, straightening out their design center.

They had been through five design center managers in the previous three years, and they were a high‑bling company. They had lots, and lots, and lots of options, way more than they needed to keep the customer happy, but that was them. You can do that if you really manage it well.

He called me one day, and I could hear the emotion in his voice. He said, “Dad, 85 percent of the options in our design center, we do not have current pricing on.” 85 percent. That cannot happen.

Host: That’s not only inefficient from a process standpoint, that’s a horrible customer experience if they’re taking the time to be there and you can’t quote the price on it.

Scott: Then you’re coming back to purchasing, and purchasing, it’s already behind, jumping through hoops, run around with their hair on fire, and you’re going down purchasing and you’re squirting kerosene on top of their hair and making it worse.

You got to make a steadfast rule. We will not put up one thing in our design center unless it is priced and agreed to with our supplier and/or trade. By the way, it will have been reviewed by construction, so they agreed that they can build it for that price or whatever. You’re going to have construction’s input as well as purchasing.

Host: It sounds like a lot of the uncontrolled variation that we’re talking about gets into areas where builders want to customize and give into customers. What are the advantages for a builder adopting a production style mentality, similar to what we do, that will allow them to increase quality and decrease variation?

Scott: Consistency. For example, even if you want to do a high degree of personalization, if you call it, some customization you want.

Companies come to Epcon because we tell a lot of these custom guys you need to really look at…Start with 4 or 5, but maybe have a goal of 10 or 12 portfolio homes, we’ll call them. A portfolio home, you can build production right as it sits here.

You’re going to choose your flooring, cabinets and some of that stuff, but you aren’t going to change walls. You aren’t going to change roof pitches. You aren’t going to add on rooms. You aren’t going to kick the family room out three feet.

Now, that’s the portfolio home. If we want to go from there, let’s look at standard options that we know a lot of people would like. Let’s offer two of them. This A and B.

We know a lot of people like the three‑foot bump out on the end of the house would give you three more feet in the family room and three more feet in the master. Here’s what those three feet gets us. Although you might want to look at two feet or four feet, because there’s a good chance that’s going to be more efficient to build with less waste than a three footer, that can vary by the plant.

If you’re going to do that, say, we even have a two‑foot option for X amount, a four‑foot option for X amount. We have sat down with all the trades and suppliers involved, and we know what that’s going to cost. For at least the next year, here’s our price.

In the design center, we got that price and we know. We can say to the customer right now, that’s what it’s going to cost you to do it. You look at your standard options. It starts to get a little trickier with things like plumbing, heating and air.

At least we can have things established up front if we have the standard bathroom upstairs that has a couple kids bedrooms around it. We’re going to run one sink or two sinks. We want to make that an option.

If it’s the plumbers know upfront, countertop knows upfront, cabinets, they all know this upfront, the marginal cost won’t be that much. The customers will love it. “Oh, it comes with two sinks. Love that.”

However, you’re trying to reach a price point, you can argue, and I could argue that, let’s make single sink standard and an extra X amount for the double sink. Just make sure you capture all your costs in that and your margin to do that.

Host: I’m sure the trade partners, if you’re a builder that can stick to this, love this type of approach because they don’t want every house to have different extensions, different numbers of sinks. The efficiency, I’m sure snowballs when people are able to stick to this type of approach by standardizing what they offer.

Scott: One of the problems that I have with architectural schools is that they train architects, by and large…There’s some pleasant exceptions, but not many. They don’t give them projects on what the 99 percent of the people can, want to and afford to buy.

They get them all excited about what the “one‑percenters” or even to some degree, I’d say the half one‑percenters can buy. What’s the market for that? One percent to half a percent. Let’s say 40 percent of people can’t afford ever to buy a new home, if it’s that. I don’t think it’s quite that high, but maybe it is now.

That still would leave you 59 percent that could buy affordable housing at whatever price. Affordable high‑value housing, whether it’s an absolute starter home, or whether it’s a second or third move up, that’s pushing a million if a third move up now in a lot of places. The difference in efficiency we see in 6, 7, 800,000 houses is mind‑boggling.

Host: That reminds me of something that somebody on our team says. We have a gentleman who works with Franchise Builders on site selection and development. He always tells them, “I’m not here to win urban land planning awards. I’m here to get you a site that yields the highest number of home sites and is very attractive to your buyers.”

Fortunately, there are some people in our industry that are more focused on the artistry. There is a market for that in some cases with very high‑net‑worth people. We do need to be focused on, as you said, just plug‑and‑play mentality like the auto industry.

Our plan collection, by and large, fits within the same footprint regardless of the structural options that you put on. There’s very little variation there.

I wanted to ask you one thing. As we’re talking about all this advice that you provide to builders, what are some of the things that you get the most push back on when you’re encouraging somebody in a direction that’s going to make them more efficient?

Scott: It is never said in these words per se but, “That’s the way we’ve always done it” or “That’s not how we do it here.” As I talk, having been pure home building for 33 years, been in business a lot longer than that, but in pure home building for the last…Oh my gosh, it’ll be 34 years in January. That’s quite a long time.

I’ve worked with something over 250 builders. If you count divisions of builders, it’s probably more like 400‑plus, so a lot of experience out there.

The pushbacks we’ll get are, “You don’t understand our market.” All these examples just pop into my mind. One might be from last week, and one might be from 20 years ago.

Host: We get a lot of that too being a franchise in so many different markets. The standing response is, “It’s different here.” Personally, I fell victim to this too that as builders, we get latched onto things that don’t matter to the customer in a lot of cases, but we think it has to be done this way because everybody else does it.

I know you advise some technology companies out there that are all working to streamline the industry. Could you give me your thoughts on some of those technologies and what they can do to supplement what you do at TrueNorth and help builders improve their processes?

Scott:  I’m a big fan of Higharc and what they’re doing. BIM in general, BIM, and whether you’re using Ameri‑CAD or Revit’s the most popular one. There are some new ones coming out. There’s one called DigiBuild. There’s a couple others.

I’m personally, and in full disclosure, I do some consulting work with them here and there on the side. I did a presentation a couple of weeks ago to their meeting of all 45, 50 of their people. I did a presentation to them.

I know them well, but when they say they can do everything Revit does a hundred times faster. CEO of Revit is on their board of advisors. I know him well and the guy knows this stuff. He says, “It’s absolutely true, a hundred times faster than Revit.”

If you can have a customer sit down with a salesperson and/or design center, and go through and get everything nailed down on that plan and what it’s going to be for that site. Or if you’re a builder who is not allowing any changes whatsoever to the footprint, at least everything that goes into the house and how it has to be built.

Then get that transmitted, the takeoffs into purchasing, so purchasing can much more efficiently get their takeoffs done on quantities and hook it up with pricing so that the vendors, labor and material, can very quickly get these things priced out. That’s just such a benefit.

I’ll say, look, there’s two things every purchasing person absolutely has to have to do their very best job in purchasing. They have to have final plans and specifications for the house and any option offered.

They’ve got to have that, and they’ve got to have enough time to get those bids put together out there, get it back, so they can get the bids and the contracts and the scopes of work, everything nailed down before you start building the houses.

I’ll say that and say, have any of you in purchasing ever had new plans that you got enough of both of those to do your job well? I never get a hand, never. I’ve asked hundreds and hundreds, I never get a hand.

What’s the result? If I’m a trader or supplier, and I know I don’t have final plans and specifications. I know that because I’ve worked with these guys before, all the changes and all the definitions that aren’t there yet.

It doesn’t have to take more time. If you get the plans and specifications done and make those decisions, purchasing will have enough time if they have what they need. If they don’t have what they need, they’re never going to have enough time.

Host: It’s exciting to see areas like that move into modern times, I’ll say. I was a purchasing manager for a number of years and I never had everything that I needed to really do my job effectively, especially with new product.

Scott: Even one time?

Host: No, especially with new product. We are also working with Higharc in our Indianapolis division right now. It’s been really exciting to see how they can automate the site‑specific plans for us. I know we’re just scratching the surface of what’s possible there, but appreciate your thoughts on that.

Well, thank you, Scott. I enjoy your monthly column every month in “Pro Builder.” Look forward to the next one. Thank you for taking the time to be with us today.

Scott: Thank you. I enjoyed it.