What Real Estate Investors Can Learn From Toyota’s Competition Against Time
Apple CEO Tim Cook has taken it upon himself to give out a copy of George Stalk’s and Thomas Hout’s 1990 book Competing Against Time: How Time-Based Competition is Reshaping Global Markets to all of his new employees. That’s how important he sees this book and its concept, described as follows:
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“Today, time is on the cutting edge. In fact, as a strategic weapon, contend George Stalk, Jr., and Thomas M. Hout, time is the equivalent of money, productivity, quality, even innovation. The ways leading companies manage time – in production, in new product development, and in sales and distribution — represent the most powerful new sources of competitive advantage. Time consumption, like cost, is quantifiable and therefore manageable. Today’s new generation companies recognize time as the fourth dimension of competitiveness and, as a result, operate with flexible manufacturing and rapid-resource systems, expanding variety and increasing innovation.”
Indeed, we real estate investors think a lot in terms of budgets, ROI, NOI, cap rates, debt service ratios, LTVs, ARVs, CMAs and the like, but rarely do we see time as something to be measured and used as a performance metric in and of itself, even though time is one of the easiest things to measure.
The book itself came out when American companies were becoming particularly fearful of Japanese competitors. The authors note that the Japanese had successfully implemented time-based models into their companies before American companies had. They were beginning to out-compete American firms.
How Toyota Revolutionized Its Systems
One example they give is Toyota:
“By the late 1970s, the engineers at Toyota Motor Manufacturing company were frustrated because the sales and distribution network was frittering away their reductions in manufacturing time. Twenty to 30 percent of the cost of a car to a consumer which was more than it cost to Toyota to manufacture the car, and more than 90 percent of the time a customer had to wait was consumed by the distribution and sales function. And if ever a company disliked waiting and paying to move product around, that company is Toyota.
“In 1981, the frustration led to the merger of Toyota Motor Manufacturing and Toyota Motor Sales… The new Toyota developed and implemented a plan to reduce delays and costs in its sales and distribution system. Toyota found that the existing distribution system handled information in layers, sequentially and in large batches. Information would accumulate at one step of the sales and distribution process before being sent to another level. This accumulation consumed time, generated costs, and distanced the factory from the customer needs.
“…To speed the flow of information, the new sales director wanted to reduce the accumulation batch size. They developed a computer network system to tie the salespeople directly to the factory scheduling function, bypassing several levels of the sales and distribution system and enabling the modified system to operate with very small information batch sizes.
“This new approach to handling information was expected to reduce cycle times in the sales and distribution system from four to six weeks to two to three weeks across Japan. The goal in the Tokyo and Osaka regions, which account for about two-thirds of Japan’s population, was to reduce cycle time to two days. By the spring of 1987, the responsiveness of the sales and distribution system had improved in the best situations to six days, thus exceeding their first goal and achieving more than a 50 percent reduction in sales and distribution time” (Stalk 68).
Toyota implemented processes like this throughout the company, and as anyone who is familiar with what happened knows, Toyota became a power house in automobile sales, both in Japan and around the world.
And it’s certainly not just Toyota. Stalk and Hout give countless other examples of firms that made reducing the amount of time various tasks took a priority and how they inevitably rose above the competition.
What Real Estate Investors Can Learn From Toyota
As I noted at the beginning, real estate investors look at a whole host of various metrics, but rarely time. The key thing to remember, though, is that time is related to many of these metrics indirectly.
Related: What Real Estate Investors Can Learn from the Golden State Warriors’ Historic Collapse
For example, if you have employees working on a construction project, every day they are there costs you all of their wages regardless of how many materials are required. If it takes them an extra day to finish a project, that’s an extra day of wages down the tube.
Even if you are using contractors who bid out the project, you still have to pay taxes, insurance, utilities, mowing/snow removal, and, of course, your mortgage as the days, weeks and months accrue.
If a unit requires three weeks to turnover and re-rent instead of two, you have lost a week of rent, which reduces your net operating income and virtually every other metric real estate investors normally use. While that might not matter much on one unit, multiply that one week over an entire portfolio year in and year out, and we’re actually talking about a lot of money here.
This is especially true given that if you have positive cash flow, every penny you save or earn in this respect is 100 percent profit!
Using Time Metrics
It’s hard to get employees to care too much about a rehab budget because it seems rather abstract. Trust me, they’re not keeping a running tab of expenses in their head as the project progresses. But when you have two goals in mind — 1) to meet a certain quality standard, which you will check on and 2) to meet a certain time requirement — it becomes very easy for them to focus on hitting that goal.
And yes, studies show that people are more productive when they have an objective goal or deadline, especially if that deadline is in the near future.
I put my deadlines together by budgeting out a rehab scope as a contractor would and then adding a contingency for unforeseen items (usually 20 percent). Then I multiply that by 0.6 for the labor. (From what I've seen, labor is usually about 60 percent and materials 40 percent.) Then I divide the remainder by the wages of the crew on the job. That gives me a time goal.
I then share it with the crew lead, and we stay in touch daily. This keeps that goal at the top of mind and also makes for a great way to evaluate construction crews I don’t see personally very often. Yes, it’s not perfect and it’s not the end of the world if you miss your goal, but having something to shoot for does wonders in and of itself.
Time is Money
When a job is done, we then evaluate the work. I ask the lead to write down every extra item not on the scope they had to do so I can get an idea of how close the extras were to our 20 percent contingency. Then we sit down once a month to discuss the projects, what went right, what went wrong, and how we can do them better.
This has notably reduced the amount of time our rehab projects have taken and has also given us a solid (albeit imperfect) model for evaluating construction crews.
With regard to turnover, it’s sometimes easy to think that we’ll just get to it when we can, especially if there is a lot on your plate. But having a deadline to have the average turnover finished in, say, two weeks puts finishing turnovers quickly at the top of your mind. If you’re cash flow negative, speeding up turnover is one of the quickest ways to get into the black. And if you’re positive, as mentioned above, every penny is pure profit.
There are a thousand parts of any real estate investment company that can be improved by making time a priority, setting goals with that in mind and using time metrics to evaluate your performance. Time-based competition, as Stalk and Hout call it, is essential. Remember folks, they weren’t lying when they said that time was money.
Do you focus on the metric of time in your real estate business?
Leave a comment below!