Think Like a Factory

To many, prefab has long been associated with one of two things:  either the last twenty years of prefabrication experiments with gorgeously modern, single-family custom homes, or the not-so-beautiful manufactured-housing industry, a historically stigma-plagued solution to housing shortages the world over. 

While the high-volume production sector effectively reduces cost and speed to market of building homes, the failure of prefab, single-family custom homes to achieve similar results illustrates a clear and persistent fact – that factories are rarely an efficient tool for custom anything.

The building industry has begun to awaken to the game-changing benefits of high-volume modular solutions. Early successes show what is possible when one applies the right tool for the right job – namely, factory manufacturing for repetitive products. Below are a couple of thoughts about factory economics that we hope will lend insight into which project types are ideal candidates for manufacturing.  A sort of “sniff test,” if you will, for evaluating whether a project wants to be modular:

Upfront investment and amortization:  Depending on the materiality of a product the fabrication method, setting up a factory is extremely expensive.  Given the high costs of tooling machines such as fabrication molds and training personnel for the production line, a factory’s economic viability depends on the ability to amortize costs by producing identical units in high volume. 

This is why we can’t go to Herman Miller and ask for a chair shaped differently from the one in the catalog, without expecting the price to go through the roof. 

Winter Olympics Media Residences – image courtesy of POSCO A&C

The same rule holds true for most factory-produced goods, to a lesser or greater degree, depending on the cost of setup.

Throughput is everything:  A factory is a huge capital expenditure with a high financial burn rate.  To maintain profitability, factory managers must ensure that the line keeps moving and producing the highest possible quantity of goods per hour or per day. Bottlenecks are the enemy. This has implications for everything from design schedules to financing.  Steve Orchard, former CIO of RAD Urban, a modular manufacturer in the San Francisco Bay Area, articulates the challenges that a traditional lending model poses to a factory: “Money is a key input to all construction. But the real estate industry is transaction oriented and not accustomed to lean manufacturing processes.  The conventional construction supply chain has adapted to slow and choppy funding; it is mostly big domestic companies that can handle a slow and clumsy inflow of money.  It moves like an old diesel tractor.  Manufacturing, by contrast, is a carefully orchestrated, finely tuned, just-in-time machine.  It moves more like a turbo sports car, but only if all the inputs are properly fed.  The supply chain is global and entrepreneurial and less flexible on payment terms.  If money does not flow into the manufacturing system consistently and as demanded, the machine breaks down quickly.  Moreover, the cost of interrupting the manufacturing process is high.  The real estate finance industry needs to start structuring finance tools to optimize and serve manufacturing rather than transactions.” 

On the whole, if modular is your chosen tool and you want to be successful – then think like a factory. This paradigm shift will begin to adjust your perspective on everything from the design schedule to equity requirements and loan guarantees. It will inform your number of unit types, and will give new meaning to logistics, and just-in-time delivery.