Transformation at Dura Vermeer using Lean Construction ideas
August 21, 2014
René Aernoudts is director/owner of LMI
Share this article:
I received a call from Ronald Dielwart, the CEO of Dura Vermeer Bouw en Vastgoed, one of the largest construction companies in the Netherlands, who invited me to discuss some of the problems the organization was facing.
Dura Vermeer had been applying Lean management for four years, Ronald explained to me during our first meeting, but despite their efforts, bottom line results were failing to materialize. Moreover, the company was struggling in the wake of the financial crisis, whose core business was building new homes and offices. "What am I doing wrong? Why isn't Lean working?" asked Ronald to me.
I organized a workshop for him and his executive team to try to create a strategic A3. They had reserved two hours for it. I knew full well it wouldn't be enough, but I also knew it was important for them to learn along the way. It didn't take them long to realize we were on to something, and when we had only managed to fill the back box after two hours, they said, "Okay, let's book another six hours next Friday!
"At first, I wasn't convinced about Lean. But after I met René and he told me about the Lean principles and showed me some successful cases, I realized that Lean was actually a vision of business management that made sense to me. I knew it could produce interesting results for Dura Vermeer. I used to think that as long as you had the best people, you would also get the best results. I completely neglected the process side of things. What I learned from René - and this was probably the most important change in my way of thinking - is that you should never neglect the process. With an excellent process in place, it doesn't matter so much how good your people are. The results will come. Having an outside Sensei has a number of advantages: as I learned with my work with the Lean Management Institute, they bring new ideas, thoughts and insights."
The first version of the strategic A3 was, as it often is, fairly straightforward. Over the next three weeks, four versions were produced. In the past, in an effort to formulate a strategy and encourage people to follow it, Dura Vermeer had come up with a 39-page plan. A year later, the results were not in.
During one of my conversations with company management, it became clear that one of the elements hindering the progress of the Lean implementation was the struggle to identify what management itself could do differently to have a greater impact. The 39-page plan had been circulated around the organization with no follow-up or support from management.
"We had been applying Lean for some time, but we had not implemented it as part of our Lean strategy. It started from the bottom up, with a few enthusiastic initiatives on the construction sites, but many people in our management team were reluctant. They were certainly not ambassadors of the methodology. In other words, Lean stood alone. Resistance often occurs before a good understanding of Lean is built."
Our conversations proved extremely helpful in understanding what Ronald and management had been after all along. They wanted to make the work more predictable, and to have the processes under control. "I didn't want to find out at the end of a project, when there is nothing left to do, that we are losing half a million, as opposed to during the process when action can still be taken," Ronald told me.
Observation of the current situation revealed the issues on which we should focus our Lean efforts: the largest seemed to be failure costs, with their negative repercussion on profits.
The most obvious form of failure costs for Dura Vermeer came from the company's tendency to buy land in the hope of ever building on it, an exercise that proved costly and ultimately dangerous with the financial crisis. It became clear that some of the costs of the branches (Dura has eight branches in four regions) could be better managed: for example, they could work around a certain budget, or plan a certain number of working hours or the materials they would need. At the end of the road (in this case, at the end of the project), the company would measure which items and metrics were in spec and which were not.
Kaizen failure cost reduction
At the time, Dura Vermeer had sales of €700 million. Failure costs were €26 million, while profits were only €11 million. One of the turning points in the implementation was when, in discussion with management, we translated the €26 million into the number of Ferraris we could have bought and completely destroyed at the end of the year.
There were only two things the organization could do to increase profits: double the number of projects they sold or reduce failure costs. They decided to tackle the latter first and set themselves a goal of reducing failure costs by 30% each year.
In going through the A3 Lean process, business management focused primarily on three elements:
What they needed to change in their behavior
What elements they needed to focus on in their effort to change (failure costs were first)
The need to create a standard approach to work throughout the organization, which would make it easier to compare subsidiaries and test the company in the right direction
We decided that the Board would review once a month the extent to which the plan described in the Lean A3 was being followed.
I was asked to lead a five-day kaizen event specifically about failure costs. We came with a group of 10 people working in all levels of the organization and in the branches. Most of them had never worked together before, and with them we mapped the process through value stream mapping: from the sale of a project to the completion of a building.
At that time, there was no system in place to track failure costs. To gain more insight into the problem, I asked all the participants to meet with me once a week. At the end of the first meeting, I asked each of the participants to ask three leaders to identify the failure costs in their projects and their idea of what was causing them, just to get a sense of the situation.
At the second meeting, it was very surprising to see the exact figures they came back with. One had identified failure costs worth 92,000 euros, the other 125,000 euros. I realized then that they had a better understanding of what was going on than they initially thought.
Suddenly we had 30 problems to look at. We chose the six or seven we would focus on. For example, one of those problems had to do with the proposal process. Every time the company received a request to build an office, for example, it spent six weeks calculating the cost and preparing a proposal. Then the company sent the proposal and met with the customer, who in 90 percent of cases asked for a lower quote. Dura Vermeer promised to come up with a second quote within two days, even though that was not enough time to consult with as many as 70 suppliers. This led to estimates, and some of those estimates were quite wrong. But the company still had to deliver to the customer.
If nine out of 10 customers asked for a lower price, why not calculate alternatives from the start (thinner walls, cheaper roofs, etc.) instead of working with estimates and ending up losing money?
This was one of the root causes of the failure costs we discovered. On day four of the kaizen exercise, we came up with 23 solutions, which we reduced to seven (calculating alternative bids was one of them).
Another solution was to introduce obeya boards in the preparation phase rather than only in production. Sometimes there was little time to calculate the cost of a project and prepare a proper implementation plan. For example, if a project commissioned by a government agency was delayed due to red tape, all too often those who had to work on that project were not even told.
As a countermeasure, we started visual management of all projects, making it clear who is responsible for what, who is part of a specific project, what the schedule was, and so on. We also introduced the green/red system to make waste (and thus possible causes of failure costs) as visible as possible.
One of the directors was woken up when the obeya board showed that two of his projects were in the red area. As project director, he was shocked because he had not expected to be part of the problem. That changed his mind.
When you use visual signs, you have a standard format and frequency to follow. They force you to focus on the important information. One of the biggest benefits for Dura Vermeer was that they allowed us to discuss results and figures with management. By sharing all the information on the boards, it was easier to talk about problems because everyone had the same view of them, which in turn made it possible for us to take action.
In the end, the organization was able to identify the five root causes of failure costs, which proved to be a very difficult exercise:
There was no good relationship with suppliers
They didn't book the hours correctly (because they didn't know how much they needed)
The process of transferring work from preparation to production left many unanswered questions for those who worked at the sites
Information was missing or came too late
The company was under constant pressure to come up with new price and offer immediately
Being proactive in proposals to customers
Apply visual management (obeya), both in preparation and in production. Dura Vermeer had to find a good way to manage projects without spending hours and hours in obeya. This resulted in the introduction of the green and red magnets (there were also blue ones, which meant a project was on hold).
Standardize work in production: scheduling with subcontractors, daily start-up meetings on sites, visual management on site (board), 5S, etc. At the beginning of each new project, production people attend the kickoff session
Develop a standard kickoff and devise a way to hold structured meetings (one with the team, one with vendors)
Improving the escalation process: what happens if the quality is not good or if the process takes too many hours? How does the organization respond and escalate? This is partially done during the meetings by the directors, but people still found it difficult
Developing partnerships with suppliers: co-planning and increased focus on cost savings, agreements on how products are delivered, performance monitoring, etc.
Our hypothesis was that these seven countermeasures might help. We launched the experiment by giving a 12-hour training course to the employees. We also opened up to the managers of each of the subsidiaries.
Most agreed to participate, and even those who refused eventually joined in.
Each Dura Vermeer subsidiary had its own way of managing its processes. The standard way of working was difficult to introduce, and it was crucial in the initial phase to explain the principles of Lean and its advantages in a very clear way. In the beginning, we had to force our people to live by those principles, but soon they saw the benefit and resistance gradually disappeared.
Ronald then presented the results of this experiment: in less than two years, failure costs went from 26 million euros to just under 6 million euros. But the most important outcome is that people are now in control of the process.
This is, as always, a work in progress - the organization still occasionally lacks standard work. It is difficult to change a culture, and to try to make more progress in this area, the board has decided to change its approach: instead of reading a progress report in the office twice a month, each board member now visits a subsidiary in the morning (to attend the local obeya meeting) and then meets with the rest of the board in the afternoon to share findings. This system makes it a lot clearer to the local teams whether they have their processes under control or not.
"Going to the gemba is the most important part of a Lean transformation. Seeing, experiencing and feeling what is happening in the company is key. I now attend a management meeting every Monday morning, which allows me to offer advice, support and suggestions for improvement. For example, in two months I have attended the obeya meeting of every subsidiary, which really helps me to understand what is happening throughout the company. Management is really better informed these days and people notice how different things are now that the management team is directly involved in the process."
Kaizen Increase Market Share
The second Kaizen was conducted to increase market share. We did that by conducting a similar exercise. We wanted to understand how Dura Vermeer could create healthier growth without under-selling just to get work (which seemed to be the trend lately).
One of the trends I saw was that less and less work was being outsourced directly. Most of it began to be done through tenders.
This is a difficult process that has dramatically changed the construction market: in some areas, the procurement rate went from 10 to 90 percent.
Dura Vermeer needed to focus on improving the process and increasing the number of projects it was winning. After careful observation of the market and the company's behavior within it, we came up with six countermeasures to Dura's problem with market share:
Creating more opportunities
Set up a better filtering system, to isolate the projects that the company had no chance of winning (e.g., if there is a tender for the construction of a Protestant school in a village where there is normally only one Protestant builder, how likely is it that that contract will not be won by a Protestant company)
Increasing the scoring rate (i.e., the number of contracts the organization actually wins - one in six, two in seven, and so on)
Sharing more knowledge between subsidiaries (for example, when a subsidiary received a request to build a laboratory despite having no laboratories in its portfolio, another subsidiary with experience that area stepped in to help)
Implementing the red power/green power system
Turning customers into ambassadors
Again, we went to all the subsidiaries with this set of potential solutions (this was about six months after the failure cost kaizen had taken place). After some initial struggles to make sure the improvement did not become the prerogative of the sales guys, we managed to get very good results.
"One of the characteristics of the construction market in the Netherlands is that even the biggest companies have a small share. When we started Lean , Dura Vermeer had 1.8% of the market share - now we are at 2.3% and we are very proud of that. Our goal is to reach 3% soon, and we will get there".
Kaizen bids preparation process
The third problem I worked on with Dura Vermeer was the bid preparation process.
The problems we identified were:
The price was too high compared to the competition
Many opportunities were lost because of the price we offered, even though Dura Vermeer scored well in quality
There was too little capacity in the preparation process to effectively pursue the right opportunities
There was no understanding of capacity versus requests
We did another value stream exercise and set some goals (one was to win 30% of the tenders the company participated in).
Introduction of work instructions for the procurement process, to introduce the right standards with the help of the people doing the work
Ensuring that directors were available to sign off on a proposal (tenders cannot wait a week or two just because directors are not available) - this was achieved by consistently explaining why it was important to win a specific project, etc.
Improve communication with subsidiaries to better understand capacity and realize which tenders to bid on
Setting the price based on what customers would be willing to pay (as opposed to looking at cost and margin). Here's an example: offering houses for the same amount that banks are willing to spend on mortgages (about €190,000).It's essentially looking at the market (classic Toyota style) to understand how to offer something that the customer will buy at the right price (this has really caught the company's attention). It is "Price-minus" versus the traditional "Cost-plus" approach
Be able to calculate within 1.5% accuracy and in just a few hours how much a building will cost. Given certain criteria (square footage, materials, etc.) the company should be able to foresee the cost without having to go through all the suppliers
Start looking at how people are going to use a building. What is important to a client? This was a way to inject creativity into the company's projects while going a step further by looking at the social aspects of a neighborhood, and it required the input of different types of professionals
Making a clear choice to involve outside consultants in some of the activities the client might ask the firm to perform
We operate in a highly competitive market, and we understand how crucial good customer listening is. Our "Price minus" approach has helped change the way we prepare quotes. When we talk to our clients, we understand what they see as value and can deliver a project accordingly and at the right price. We now think in a different way, allowing us to make a profit even with the low prices we offer: given a certain budget and our client's requirements, what can we deliver?
These countermeasures seem to be working: one of its subsidiaries was aiming for 160 million euros in contracts. Before the end of May, it was already at 97 million euros, winning 50% of tenders.
The Lean implementation at Dura Vermeer is still a work in progress (isn't that the case in every organization?), but the number of contracts won is increasing. At the same time, failure costs have dropped dramatically. The biggest change, however, is in the mindset: a culture of continuous improvement is beginning to take shape in the organization. People own and control their work. Sticking to countermeasures that make sense seems to be bringing great benefits to the company, and as a result, people are engaged in our effort to take the company to the next level.
"Our goal is to fully implement a standard way of working that everyone believes in. We want all our affiliates to implement our best ideas, and to do that we need to build on our collaboration with each other. We want to become a smarter, learning organization. When it comes to Lean , a CEO must be a believer himself. Only then can you give direction to other senior executives and convince them of how game changing the methodology can be. You also have to be very clear that using Lean is not optional. Persistence is the secret."