Some companies manufacture more units in a day than you do in a week. You need to learn from them.
By Colby Swanson
- Short-term thinking continues to stifle modular’s growth
- Why restaurants and HUD-Code manufacturers are more profitable than you
- Forward-thinking manufacturers and developers need to partner
Binging on sugar can be a ton of fun; an instantaneous hit of cheap energy. We can handle it in small doses, but, over time, our bodies start sending us not-so-subtle warning signals.
According to research from Natural Society, the average American consumes 180 lbs of sugar a year. (Compare that to just 4 lbs per year in the 1700s.) High sugar consumption is a big factor behind major health problems like obesity and Type 2 diabetes.
At this point, you’re probably asking “what does sugar have to do with construction?” Well, I am glad you asked.
I wrote an article for the February issue of Offsite Builder entitled, ‘One Secret to Growing the Modular Market.’ In it, I explained how a productized approach to multifamily design is needed if we want to expand the market for volumetric or modular construction. I wrote that article because there are big untapped benefits to creating repeatable products, versus one-off projects.
Here, I support that thesis by looking at two different sectors of the offsite industry: one that uses the product strategy and manufactures roughly 150 million square feet of real estate per year, and one whose project approach limits its output to around 10 million square feet.
Too Much Short-Term Thinking
I often say that much of the construction industry is diabetic, addicted to the sugar rush of operating from project to project. This is especially true of the modular segment, which manufactures homes, apartments, hotels, and schools.
As I noted in my previous article, forward-thinking multifamily developers have been looking to modular as a way to offset the rising cost of construction and to help shorten build schedules. But too many modular factories are missing this opportunity. They’re too focused on manufacturing bespoke project after bespoke project, and on keeping their pipelines full of those projects.
The short-term gain (sugar rush) of these bespoke projects clouds the long-term negative health effects on these companies’ operations. Those effects include restricted throughput, paltry margins, and limited scalability.
One reason these factories are stuck in this mode is that a less forward-thinking segment of developers continue to bring bespoke projects to them. This reinforces the unhealthy diet and continues to restrict innovation and growth.
Lessons From the Restaurant Industry
For those looking to truly maximize the modular advantage, be it factories looking for better throughput or developers wanting faster, more affordable construction, there is a way out. The key is to think in terms of products that are specifically designed for the manufacturing and assembly pipeline, and that feed modular factories a healthy diet of standardized, rather than bespoke, projects.
In the future, the most successful manufacturers and developers will adopt a product, rather than a project, approach. They will understand that producing the same thing over and over is more scalable and results in better ROI.
The restaurant industry is a great example of how a product approach (a highly standard menu) is more efficient than a project approach (a highly variable menu). Standard customer menus benefit the restaurant and the supply chain. They make it possible for food growers, distributors and restaurant managers to predict exactly what they need to grow or stock.
On the other hand, a restaurant that changes its menu more often will have to charge higher prices because managers, servers and cooks must spend more time sourcing, preparing and memorizing, while distributors and producers charge more because of smaller and less consistent orders.
How HUD-Code Manufacturers Make More Money
Let’s look at how this applies to the offsite world by exploring two different types of factories that produce volumetric construction products. One manufactures HUD-code mobile homes—structures that meet standards set by the US Department of Housing and Urban Development. The other makes modules that meet the requirements of the International Building Code, or IBC.
HUD-code factories take a product approach since they manufacture one identical mobile home after another.
- A factory making HUD-code homes can produce 10-20 units per day per day.
- The three largest HUD-code manufacturers have more than 100 factories between them.
- Each of these manufacturers earns more than $1 billion in annual revenue.
By contrast, most IBC modular factories produce permanent structures like houses, apartments, hotels, and schools. Most of these are bespoke projects, each with a different design.
- Most of these factories can only produce 10-20 units per week.
- 90% are single-factory operations. Only a few manufacturers have more than one factory and none more than three.
- Annual revenues range from $10 to $80 million.
If you visit a HUD-code factory you will see staffers who have largely memorized what they are building because they build the same things day-to-day and month-to-month. You will rarely see blueprints or tape measures as they have been replaced by jigs and regimented process controls (steps, goals, timing).
These factories are highly optimized because their stable pipeline affords continuous improvement, efficiencies, and scalability.
Now go to a modular factory that subsists on a diet of bespoke projects. Each project is different from the previous one. Factory floors are littered with blueprints being checked and rechecked by staff who are doing their best, but are also being pushed to go faster.
The bespoke nature of the work means more mistakes and a higher degree of rework (which is often hidden and difficult to measure). This plagues the factory’s productivity, eats into its margins and creates unhealthy rifts between production, engineering/drafting, factory management, and jobsite teams.
If the modular industry wants to accelerate its current constrained ability to meet growing market demand, it needs to adopt a more balanced product approach. This is the only way to create the economies of scale needed to support that growth.
The Power of Shared Visions
It takes many more than two to tango in any part of the construction industry. In the modular segment, partnerships between long-view developers and motivated modular factories can yield substantial economic advantages that have yet to be successfully tapped.
If you are a developer/investor looking to improve your business, and you believe modular (or another off-site method) is a key opportunity, then I suggest you stop designing bespoke projects for each new piece of land. Instead, create standardized building designs that, with only small modifications, can be put anywhere. Products, essentially.
If you are a manufacturer that would like increased throughput, higher margins and the ability to add new factories, then consider what type of work you are accepting. Seek out developer partners who have embraced the product approach and stop feeding Twinkies to your production line.
Our US construction industry needs to perform better, the modular industry has the potential, but we must improve our diet.
Colby Swanson is Co-founder and Exec. Director of the Modular Mobilization Co. and Managing Partner at Momentum Innovation Group.
