Principles of Lean and Real Estate -- Michael Mullins

Principles of Lean
Manufacturing
& Lean Startups
As They Apply to Real Estate
Monday, Sept 19, 2016
CNU New England
@mullins01

Michael Mullins
Asset Manager, Mullins Management
Executive Director, Lean Startup Challenge
Founder, RE|Work Real Estate Coworking
2000 UMiami BBA Finance
2004 MIT SM Real Estate Development
2010 Startup Leadership Fellow & Program Lead
2011 Lean Startup Challenge Co-Founder
2014 Chicago Booth MBA
Twitter: @Mullins01
@mullins01

@mullins01
The Kentlands, Gaithersburg, Maryland

The Origins of Lean
Lean Manufacturing
Lean Startups
Customer Development, The Lean Startup
Lean Applied to Development
Lean Urbanism
Tactical Urbanism
Lean Development
@mullins01

@mullins01
It’s not about money…
Lean Manufacturing

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It’s not about money…
Lean Manufacturing
It’s a system of practices to minimize
waste

I. Origins of ‘Lean’
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@mullins01
Frederick W. Taylor
Ford Motor Company
Toyota Production System

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Taylor believed that that through
stopwatch studies and other
techniques, management could
determine the one best way to do
any task.
Taylor’s work paved the way to the
field of Scientific Management and
the practice of Management
Consulting.
His book is titled Principles of
Scientific Management.
Frederick Winslow Taylor
1856-1915

@mullins01
Taylor’s theories led to two
important principles:
First, that worker productivity could
be optimized through precision
movement.
Second, that for the worker’s
productivity to be optimized, the
workplace itself must be
optimized. This was a
breakthrough concept in his time.
Frederick Winslow Taylor
1856-1915

“A farmer doing his chores will walk up
and down a rickety ladder a dozen
times. He will carry water for years
instead of putting in a few lengths of
pipe.
...It is waste motion— waste effort—
that makes farm prices high and profits
low.”
- Henry Ford
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Henry Ford
1863-1947

Ford’s insights into efficiency, waste
reduction, and workplace design led to
a revolution in manufacturing. He is
widely credited with inventing the
production line.
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Henry Ford
1863-1947

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Model T Assembly Line

• Taiichi Ohno is credited with
creating a group of practices
that form “lean
manufacturing”
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Taiichi Ohno

• Taiichi Ohno is credited with
creating a group of practices
that form “lean
manufacturing”
• He based his theory on what
he identified as the Seven
Wastes
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Taiichi Ohno

Ohno’s Seven Wastes
1. Delay, waiting or time spent in a queue with
no value being added
2. Producing more than you need
3. Over processing or undertaking non-value
added activity
4. Transportation move stuff too far
5. Unnecessary movement of workers and
goods
6. Inventory, more than needed
7. Defects, unacceptable defect rate
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Major Components of Lean
• Continuous Improvement (Kaizen)
• Push vs Pull (Kanban)
• Steady Flow (Tact Time)
• Flexible Production
• Visual Control Board
• Stop the Line (Jidoka)
• Toyota Readily Shares this Knowledge
with Suppliers and Competitors
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@mullins01
Customer Development
The Lean Startup
II. Lean Startups

Product Wiki
User Portfolio
Automated Shipping
Scanned Item
Works like Netflix – seal and ship
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Customer
Development
@mullins01

“Most startups fail from a
lack of customers, not
product sevelopment
dailure.”
-- Steve Blank
Source: Steve Blank@mullins01

Customer Development in
the High-Tech Enterprise
September 2008
39
Company
Building
Customer
Discovery
Concept/
Bus. Plan
Product Dev. Alpha/Beta
Test
Launch/
1st Ship
Product Development
Customer
Validation
Customer
Creation
Product Development Process…
Process…

@mullins01
“A startup is an
organization dedicated to
creating something new
under conditions of
extreme uncertainty.”
-- Eric Ries

…new product which allows a
team to collect the maximum
amount of validated learning about
customers with the least effort.
-Eric Ries
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Minimum Viable Product (MVP)
?

Major Components of ‘Lean Startup’:
CustDev
Customer
Validated
Learning
Pivot
MVP
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“A methodology for breaking down
a large, diffuse problem into a
series of actionable steps that can
be individually validated…”
My Definition of Lean:
@mullins01

As defined herein, Lean can apply:
My Definition of Lean:
@mullins01
… And to the
permitting /
Land Use side
of the
equation
To the
development
side of the
equation…

@mullins01
Lean Urbanism
Tactical Urbanism
Successional Development
Lean Development Methods
III. Lean As It Applies
to Development

Lean Urbanism
• A proposed regulatory
regime that implements
intensive, front-loaded
neighborhood design
followed by simplified &
accelerated permitting.
• A Lean Urbanism district
ready for simplified
development is called a Pink
Zone.
@mullins01
Andres Duany,
Planner & Urbanist

Lean Urbanism
• The name Pink Zone means lighter red tape.
• Aims to restore common sense, fairness, and
democracy into the development process.
• Intended to foster Incremental and Infill
Development
• Tools of Lean Urbanism include:
– Thresholds for the implementation of onerous
regulation
– Workarounds for code problems
• Passing accountability upward
• Buildings must meet codes applicable in their time/era
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Why Conventional Development
Doesn’t Work
I. Dinosaurs vs. Mammals
II. Fixed Costs
III. Switching Costs
IV. Excess Intermediation
V. Populist Permitting
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• Mammals
• Mammals
• Dinosaurs vs Mammals
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Dinosaurs Mammals

• Dinosaurs vs Mammals
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(Professional
Consultants)

Doesn’t Work (for mammals)
I. Dinosaurs vs. Mammals
– There are a lot more mammals than dinosaurs
– Mammals are necessary for incremental &
successional development to happen
– Left alone, will create ‘Organic Development.’
– Organic Development has a Jacobsian
character master planned projects
consistently fail to capture
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• II. Fixed Costs – 24 Unit Project
@mullins01
Legal $50,000 $2,100
Engineering $35,000 $1,500
Environmental $25,000 $1,050
Permitting $25,000 $1,050
Public Relations $25,000 $1,050
Linkage $100,000 $4,150
Inclusionary Zoning $100,000 $4,150
Total $360,000 $15,000

• III. Switching Costs
– False Positives are an unfortunate reality
– Rational Expectations reduce Expected
Returns for Site Selection (s)
xi * E(ri)
@mullins01
i=1
E(rs) =
n

• III. Switching Costs
Site #1 $25,000 25% -100%
Site #2 $25,000 25% -100%
Site #3 $25,000 25% -100%
Site #4 $25,000 25% 0%
Sum $100,000 100%
Outcome ($75,000)
E(r) = -75%
@mullins01
Cost Weight Return

• III. Switching Costs*
– E(r) in this example is -75% or ($75,000)
– Therefore realized site selection cost is
$100,000, not $25,000
– Developers are already ‘underwater’ before
they begin.
@mullins01
*Can include both Implicit and Explicit
Costs

• Adverse Consequences of Both Fixed
Costs and Switching Costs
• Incentivizes rational Developers to stick to one type
of product.
• Strong disincentive to consider projects in other
municipalities than those where developer has local
knowledge or an ‘in’
• These Costs must be spread across realized
development units, increasing marginal costs. This
always reduces supply
• Higher ‘Working Capital’ Requirements sharply
reduce # of developers who can play.
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Tactical Urbanism
• a collection of low-cost,
temporary changes to the
built environment,
intended to improve local
neighborhoods and city
gathering places
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Mike Lydon, co-author of
“Tactical Urbanism”

Tactical Urbanism
• Tactical Urbanism is the Minimum Viable
product of Planning and Development
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Successional Development
• Tactical Urbanism is not an end to itslf.
It can lead to successional development
strategies through Iteration
• Successional Development is the
concept of temporary development that
is intended to be replaced
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@mullins01
Container Park, Downtown Las Vegas

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Mashpee Commons, Mashpee, Massachusetts

• IV. Excess Intermediation
Necessary:
Architect
Civil Engineers
Contractor
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Extraneous:
Permitting Consultant Attorney (for Permits)
Public Relations Lobbyists (of any type
Environmental ScientistLSP
Fire Protection Engineer Code Consultant
Geotechnical Engineer

• V. Populist Permitting
– Most Municipalities design around internal capacity of the
permitting agency, not the number of projects (market supply)
– In highly regulated areas, this system is not designed to produce
anything.
• In the 1960’s urban renewal was used to grant the federal govt power
over city development.
• On the contrary, in NE it is intended to afford opponents every oppt’y to
object (not so in Boston, where it is designed to give the Mayor ultimate
control)
• Elsewhere, Counties have greater powers. Reality is that landowner
has few development rights
• Landowners only constitutionally entitled to a minimum use (Truro)
• Cities have rights to take property per Kelo vs City of New London
– Courtroom vs Planning Board Hearing
@mullins01

What’s Next for Me?
Initiatives on the Development Ecosystem;
Development from the Perspective of Human Rights;
Work on Economics of Land Use Policy & Advocacy
@mullins01

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