By Pat Curry. With the home building community compressing, it only makes sense for the major suppliers to talk directly to their highest-volume builder customers. At least that's how some of those customers see it. With the upswing in volume among the largest players, the buying and selling landscape isn't what it used to be. Some builders are frustrated that the supply chain hasn't kept pace with the changes, but trying to move it forward has brought aggravations, too.

Until recently, the home building supply chain was "perfectly positioned to serve a fragmented industry," says Alan Laing, vice president of customer satisfaction and supply chain management for Pulte Homes. With the help of direct buying, Laing estimates the company saved $60 million overall in purchasing last year. He thinks there's another 8 percent to 12 percent that can be saved through technological advances in scheduling, supplier efficiency, unbundling labor and materials, and supply chain consolidation.

Direct buying can and does work well, and it is widespread in many channel-intensive industries, says Mark Dancer, vice president of Philadelphia-based supply chain experts Pembroke Consulting. In the industrial segment, 12 percent of manufacturer sales are direct to customers. In construction, direct buying is attractive for its consistency, both in pricing and service, especially if a manufacturer doesn't distribute everywhere a builder has projects.

Besides pricing advantages, a direct purchase agreement offers builders "a direct pipeline" to strategic information on product forecasting and availability, says Dale Garwood, director of national accounts for Whirlpool.

Other industries know about the added benefits, says Gary Ragatz, associate professor of supply chain management at Michigan State University's Eli Broad Graduate School of Management. Companies in the computer world gain standardization, help with network set-up, and pre-loaded software packages. In the office furniture business, a direct-buying customer might be provided an on-site designer.

D.R. Horton's direct purchase of cabinets has given the Texas-based company better trained installers because it's the manufacturer who's providing them, says Ric Rojas, vice president and director of national accounts. Plus, the manufacturer receives the installer's feedback for future enhancements.

Going far beyond product education, GE Appliances gives direct buying customers access to training on some of the company's core systems. Increasing numbers of builders are studying GE's Six Sigma approach to quality and process improvement, which they can take home with them, says Terrence Dunn, GE Appliance's head of global communications.

Thorns among roses

The arrangements aren't without frustrations. David Singer, national purchasing director for Beazer Homes USA, admits that the traditional supply chain doesn't lend itself to the model.

"Manufacturers don't want to provide the logistics of getting the materials to the jobsite and neither do we," he says, citing a familiar complaint. "So we have distributors in the middle. For us to ever get real efficient, we have to get everybody in on the conversation saying, 'How can we do this?'"

Beazer's largest direct buying relationship is with appliance maker General Electric, which provides delivery and installation. That makes the actual cost fuzzy, Singer says. Plus, the multi-year commitment required keeps him from taking advantage of competitive pricing.

Laing has the same beef. "Some of these big companies, their costs go down faster than we can keep up with," he says. "We're saving a lot of money when we renegotiate these contracts. We say, 'That's a lot of money. How can we get some of this sooner?'"

Still, Singer says the savings -- and the branding value of aligning with product leaders -- are enough to make him pursue more direct purchase agreements.

Bill McLay would like to do more, too. The director of national contracts for K. Hovnanian Enterprises says he has about 16 national relationships, including four direct-buying agreements. Whirlpool and Masterbrand Cabinets are the two largest. Among the larger obstacles, he says, were distribution rights agreements, a problem they solved with private labels.

McLay says that, as far as he knows, Hovnanian is the only large builder that has all its divisions purchase from its national contractor manufacturers. He thinks that's given him a competitive advantage. About 4.5 percent of his products are bought direct, which he estimates saves him 12 percent to 15 percent of the cost.

"We might do half what the largest builder does, but because we're 100 percent committed, the dollar volume will be higher," he says. "If there's a problem, we're the first to find out and the first to work it out."

Not so sure

Lennar COO and vice chairman Robert Strudler says that while Lennar has national pricing agreements, the Miami-based company still purchases most products through distributors.

"At the end of the day, it's more important how it's installed than what's installed," he says. "That doesn't denigrate the product, but there are several good products that serve the same need. If you install it poorly, you're in big trouble." He also points to the time that can be lost if direct-buy deliveries don't coordinate with the labor.

Another builder who is less than enthusiastic is Michael R. Greenberg, senior vice president of home building for WCI Communities. He likes the idea of volume buying, but not direct buying. He doesn't want the responsibility for warehousing inventory and sees a work flow value in buying turnkey.

He's far more interested, he says, in applying the supply chain efficiencies of the auto industry to home building.

"They're asking their manufacturers to increase their efficiency and pass through that savings," Greenberg says. "That's something our company is working on. We're not waiting on our peers. We feel it's an area worthy of exploration." WCI is benchmarking against purchasing practices in other industries and has sent a team to visit automakers first-hand.

"We're in the early stages, but we're very, very committed to it," Greenberg says. "It's a competitive industry. It requires us to not be lazy and to look outside our industry to people who have pioneered techniques that may have application."

While some builders want to do more direct buying, Pembroke Consulting's research shows little interest from manufacturers, even those making high-margin products. The model is cost-prohibitive, especially when customers are in scattered locations, he says. Dancer cites U.S. Census data showing a 30 percent decline in manufacturer-owned sales offices and distribution centers in the past decade. If the time-consuming activities of delivery, warranty service, and problem resolution, historically handled by 40,000 wholesalers-distributors, are forced back on the manufacturer, the supply chain can become less efficient, he says.

Whirlpool Appliances admits its pretty picky about its direct buying customers, limiting it to top-tier national builders in major markets.

"We have respect for distribution," Garwood says. "When we do go to direct, we try to balance the total industry's need. The traditional distributor model is very important for the vast majority of the industry."

Regardless of the direction direct buying takes, builders must ensure that efficiency isn't compromised if support activities shift away from distributors, he says. "I do like manufacturers and distributors, sometimes in partnership with builders, to be [aggressive] in making decisions," says Dancer. "I would look for some new, creative developments to happen." That might include local inventory and delivery specialists paid not on gross product mark-up, but on a fee-for-service basis.

Integration upswing

One recent supply chain shift is an increase in integrated supply, where large customers outsource their purchasing and ownership of inventory to a supplier. Between 1997 and 1999, integrated supply grew by 27 percent in the industrial sector, Dancer says. They reduce costs by getting better prices and standardizing products and brands. "In the long run, that integrated supplier, once initial cost benefits are wrung out, looks to improve business processes," he says.

That's the concept behind USBuild, which acts as an outsourced procurement arm. In its year-old test in Denver, Laing says USBuild is saving Pulte several hundred dollars per house -- and lots of headaches. Even the trade contractors love it, he says, because they have better cash flow, less inventory to manage, lower warehousing costs, and can work on more houses.

The biggest benefit to builders of either buying direct or using a USBuild-type of model is the separation of material and labor, says Jim Kimzey, USBuild's vice president of business development. "It's real hard to cut costs if you don't know what they are," he says. "Trade contractors don't want to say what they're paying for materials, and where there's mystery, there's money."

McLay and Laing predict that the supply chain will continue to consolidate just as builders have done. Laing cites Masco's expansion into insulation installation, as well as Weyerhaeuser's consolidation of lumber trusses.

"We've seen transformation all over the place. It's going to continue," says Laing. "I don't see any going back."

--Pat Curry is based in Watkinsville, Ga.

Published in BIG BUILDER Magazine, July 2002