Building a Digital Supply Chain in the Building Industry
While the construction industry has historically consisted of a very inefficient supply chain, some multifamily builders are embracing digitalization to take their operations to the next level.
Setting the Stage for Modular Builders
The Great Recession had many strong and lasting effects on the construction industry and overall housing trends in the United States. Home ownership continues to decline, from its peak of 69% in 2004 to 63.4% in 2016, as risk-adverse millennials increasingly choose to rent rather than purchase a home [1].
Source: See End Note [1]
Furthermore, according to a recent study commissioned by the National Multifamily Housing Council (NMHC) and National Apartment Association (NAA), a lack of sufficient post-recession multifamily development and general population growth have created the need for 4.6 million new apartments by 2030 [2]. As such, the need for quick and efficient multifamily construction has led many real estate developers to turn to modular construction to meet their project needs.
Cutting Wasted Time and Materials in a Traditionally Inefficient Industry
In an industry whose productivity gap costs the global economy $1.6 trillion per year (see exhibit below) [3], multifamily developers have turned to modular construction due to the various efficiencies that it offers during the construction process.
Source: See End Note [3]
Modular construction typically involves building entire apartment units off-site, usually in an indoor factory, and shipping completed units by truck to the project site. Units are then fully assembled and attached together to form the overall structure. Major benefits of modular construction include [4]:
- Standardized construction processes, resulting in reduced raw material waste.
- An indoor (climate-controlled) construction environment, allowing for more precise and higher quality construction.
- Reduced labor costs, especially for projects in cities with high wages, as labor rates are often much lower at the factory locations where the units are built. Less subcontractors/laborers are required, also reducing labor costs.
- Reduced construction time.
How Katerra Stays Ahead of the Curve in Modular Construction
Although modular construction’s popularity has only recently gained steam in multifamily development, digitalization within the industry is increasing pressure on builders to look for competitive edges.
Recently co-founded in 2015 by an ex-Flextronics CEO and with roots in Silicon Valley, Katerra is incorporating state-of-the-art technologies into the construction supply chain to exploit the rise in digitalization within the industry and differentiate itself from other modular builders. Katerra uses advanced SAP technology, a proprietary analytics platform, a mobile app, and industrial IOT tools (which incorporate machine learning and big data technology [5]) to optimize its design and construction processes, on-site communication, and tracking of raw materials and labor utilization [6].
The use of these technologies has also allowed Katerra to create a standard “kit” of pre-designed components that can be used by developers as a foundation for their project designs and that can be combined into different configurations to meet specific project needs [7]. Having this level of standardization among a set of general components has allowed Katerra to take advantage of a highly advanced raw materials inventory tracking system to determine the optimal quantity and timing of raw materials that it should order [8]. By doing this, Katerra reduces material costs for its customers by both eliminating materials waste and creating economies of scale through placement of larger orders from its suppliers (as it combines the needs for common materials across multiple projects and different clients).
To maintain its competitive position in the long term, Katerra is building new factories throughout the country and further investing in technologies that will help create a highly integrated and informed network of off-site construction locations in order to deliver products even more quickly to regionally-diversified clients [9].
What Katerra Should Keep in Mind for the Future
As Katerra continues to disrupt the construction industry by embracing digitalization, there are two important concerns it should bear in mind. In the short-term, Katerra must continue to expand its “kit” of premade components with sustainable/environmentally-friendly materials in order to reach a wider range of developers with increasingly complex needs. In the long-term, Katerra can expect its competitors to incorporate many of its current cutting-edge technologies into their own construction processes. Accordingly, it is vital for Katerra to protect its technological innovations, where possible, through the use of patents and similar legal protections, which may not currently be common in the construction industry but that become increasingly important as Katerra blends its operations between the construction and high-tech industries.
Further Considerations
While digitalization within the modular construction industry is proving to be great for real estate developers, it is yet to be determined whether users will also see the same level of benefits. Will the increase in standardization in construction materials and design alienate consumers who seek aesthetic differentiation in their home? Can high degrees of digitalization in the construction process be applied to other property types beyond multifamily, such as industrial/office/medical that are much more complex in design and specifications?
(Word Count: 783)
—
[1] Richard Fry and Anna Brown, “In a Recovering Market, Homeownership Rates Are Down Sharply for Blacks, Young Adults,” Pew Research Center, December, 2016, http://www.pewsocialtrends.org/2016/12/15/in-a-recovering-market-homeownership-rates-are-down-sharply-for-blacks-young-adults/#most-renters-would-like-to-buy-a-home-in-the-future-but-many-cite-finances-among-major-reasons-for-currently-renting, accessed November 2017.
[2] Patrick Sisson, “Study: U.S. must add 4.6M new apartments by 2030 to meet rising demand,” Curbed, June, 2017, https://www.curbed.com/2017/6/12/15785610/rent-real-estate-apartment-construction-affordable-housing, accessed November 2017.
[3] Filipe Barbosa et al., “Reinventing Construction: A Route to Higher Productivity,” (February 2017), McKinsey Global Institute, https://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/reinventing-construction-through-a-productivity-revolution, accessed November 2017.
[4] Ryan E. Smith “OFF-SITE AND MODULAR CONSTRUCTION EXPLAINED.” Whole Building Design Guide, August 9, 2016. https://www.wbdg.org/resources/site-and-modular-construction-explained, accessed November 2017.
[5] Margaret Rouse, “Definition Industrial Internet of Things (IIoT),” TechTarget, March, 2015, http://internetofthingsagenda.techtarget.com/definition/Industrial-Internet-of-Things-IIoT, accessed November 2017.
[6] Katerra, “Our Process,” https://katerra.com/en/how-we-do-it/process.html, accessed November 2017.
[7] Ibid.
[8] Ibid.
[9] “Katerra Announces New Mass Timber Facility,” press release, September, 2017, on Katerra website, https://katerra.com/en/who-is-talking/press/2017/press-releases/CLT-Factory.html, accessed November 2017
I thought this was a really interesting essay, providing a powerful example of the fact that no industry is immune from the impacts of digitalisation. I had a couple of thoughts as I read it.
First, beyond modular home construction, innovation in home building technology may permit other forms of construction on-site, such as with robotic brick-layers:
https://www.youtube.com/watch?v=2-VR4IcDhX0
And using 3d printing:
https://www.youtube.com/watch?v=GUdnrtnjT5Q
While this wouldn’t permit the same economies of scale and output as factory based production, it might allow more bespoke designs in harder to reach locations.
Second, the impact of labour-eliminating technology in the construction industry has the potential to have a profound and negative social impact at the bottom of the labour market. Whereas when many agricultural jobs were destroyed through the mechanisation of farming people were able to find employment in cities/factories as part of the industrial revolution, it’s not clear that equivalent opportunities will exist for manual workers in today’s economy. Governments and businesses will need to think hard about how they manage this transition.
As the article and comment above points out, the digitalization of the construction industry, while good for developers, may have an adverse effect on the working class labor market. While one could argue that construction firms should be motivated by their own bottom line, I wonder if they may run into issues with local governments. Often-times governments are involved in real estate construction, as they the ones managing zoning rights, permits, etc. City officials may want to ensure that the developer on a given plot of land is going to employ a certain number of people, and therefore may be reluctant to give permits to those who plan to use digitalized modular home design.
I also think maintaining flexibilty in the construction process is important for construction companies to keep in mind as they think through how to implement modular design. Many home-buyers do not want cookie-cutter homes, and may therefore be less inclined to purchase a home built by modular design. Katerra and others should think through how they can best maintain flexibility in the modular construction process, to maximize variability in end-design.
This was a very interesting and well…constructed…article! The construction industry, as indicated in the article, seems to be one that might stand to gain tremendously from digitization. To Sara’s point above, I do wonder how local governments might begin to play a role in the design, permitting, and inspection processes for new construction. New and innovative construction techniques may take a while to gain acceptance at the regulatory/policy level, a trend that seems likely to be exacerbated at the local level. For me, this issue brings up questions surrounding how a company like Katerra might have to bring the industry and, more specifically, their collaborators along in understanding how technology can help the business and how quality and construction standards can be maintained.