By Roberta Maynard. Industry observers are fond of saying that the biggest builders wield unprecedented clout when it comes to buying products. That seems to make sense when you look at the enormous volume concentrated at the top. This year, the four largest builders will produce 100,000 homes. (A year ago, five builders produced that number of units; a decade ago, it took 50 to do it.) And with so many big builders bent on dramatically increasing market share, a change in that trend is unlikely. As evidence, we have only to look at the steady stream of acquisitions adding turbo power to builders' strong organic growth.
This expansion should mean increased purchasing power for those companies. There's a lot of rhetoric, but I wonder. Are they realizing it? Nothing is remarked on with greater regularity than the business' inherent "local" nature. Buying decisions are shaping up to be a matter of local control versus national buying leverage. Can builders have it both ways?
It may be true of land buys, but when it comes to products, I don't think so. Size alone isn't the answer. If building 30,000 homes doesn't, in fact, get a builder great volume pricing, then where's the value in being big? Why else would some smaller private builders insist that they continue to get competitive prices — sometimes even lower prices — than the nationals get? It could be in part a distribution issue or a matter of unclaimed rebates. Or maybe it's because, despite their expanding size and increased use of national contracts, many big builders are still leaving the product choices to their divisions.
Technical Olympic(Engle and Newmark)
|Weighing in: National contracts with suppliers are on the rise, but so are regional agreements. Here's a sampling of builders and their progress toward purchasing consolidation.|
It's an issue that's going to be problematic for many companies, particularly those pondering the possibility of hitting an annual volume of 50,000 — and there are a few of them. It's going to come down to the ability to manage the balance between local preferences and division autonomy on the one hand and corporate buying power on the other. That's what will separate the efficient, sustainable giants from those merely bloated from feeding off a strong housing market. Greg Lorenzetti, Morrison Homes' vice president of purchasing, construction and architecture, hit the nail on the head when he remarked that size doesn't guarantee better pricing; that only comes when the purchasing function is consolidated by, for instance, using fewer, better suppliers.
In this month's cover story, you can read about the state of the supply chain, one of the most challenging operational issues in this industry. In an accompanying piece, you'll learn how Morrison, for one, is changing its operation to make purchasing more efficient and powerful.
Big builders say they're getting better deals than ever. Certainly the likes of Pulte and Beazer are putting a lot of effort into negotiating terms. Several others are also trying to get at the true prices of products by unbundling products from labor. Price isn't everything, but it is a competitive factor. Whoever figures out how to make purchasing work to their advantage will take a giant leap ahead.
Published in BIG BUILDER Magazine, November 2002