By Pat Curry. Volume builders are frustrated with multiple layers of mark-ups in the supply chain; they've had it with rebates that mask the true cost of products, and the time is past due for a system in which labor is priced and purchased separately.
That's what builders say they want. Will they get it? Manufacturers, builders, and supply chain analysts say production home building is on a direct course for buying materials, delivery, installation, and warranty services in separate pieces.
"Unbundling is exactly what purchasing is all about, in my opinion," says Bill McLay, director of national accounts at K. Hovnanian, in Edison, N.J. "Even in turnkey, you need to understand the costs of each component."
Greg Lorenzetti, corporate vice president of construction and purchasing for Atlanta-based Morrison Homes, is even more pointed on the topic.
"We need some middle men taken out," he says. "Plumbing is an example. I pick out my plumbing fixtures. It goes from the manufacturer to the distributor to the plumber to me. Every step of the way, someone puts a mark-up on that. What am I getting from that?"
Not enough, says Mark Dancer, vice president of Pembroke Consulting, a Philadelphia firm specializing in supply chain issues. The answer is unbundling, which he says takes the "smoke and mirrors out of what a supply chain does for a customer."
On a three-step journey that starts with large-volume customers leveraging their size for the best possible pricing, Dancer says the current discussion in the industry shows that builders have taken the second step, in which the focus shifts from price to cost. That can lead to outsourcing and a restructuring of the supply channel to shrink the distributor's role to one of local delivery and support. From there, the final step is fee for service, in which the supply chain is unbundled and services are purchased a la carte. "The customer chooses what he wants," Dancer says. "It's about better price, better service, and better accountability."
That also has some decidedly attractive benefits for distributors, Dancer says. Net income is often 2 percent or less on products, but services typically have a gross margin between 30 percent and 50 percent.
Gina Blackstone, national sales manager for Price-Pfister, acknowledges that unbundling is a growing trend, but feels caught between builders and distributors.
"We have a commitment to the distributor, then the plumber, then the builder," she says. "It's got to be a happy marriage between all three because the distributor can make you a hero or a zero. I love my distributors."
Still, she faces the question of direct sales in nearly every builder contact.
"I don't know if they've thought it through with the personnel. My question is, if you take the plumber out, and add the cost of the person to manage the inventory, is it a wash? I don't know."
The builders don't know either, and that's the problem, says Hovnanian's McLay.
"Everyone is trying to understand how much these products are costing in the food chain," he says.
The best way to do that is to break down the costs of the materials themselves, says Bill Michels, CEO of ADR North America, a supply chain consultant in Ann Arbor, Mich. He estimates that builders can save as much as 20 percent by doing purchase price cost analyses of the products they use on a regular basis.
"We're training buyers to look at raw material prices on something like chip board," Michels says. "We know what it costs to harvest a tree — the overhead, and labor — and come up with an estimate of that cost. That's a whole lot better than trying to price in a volatile market."
One builder has literally taken distribution into its own hands. Chicago-area builder Neumann Homes opened a lumber supply company last April.
"We'll end up delivering 700 homes worth of lumber this year," vice president of internal operations Dave Shellhamer says. "Over half our homes will be with our own lumber we've purchased ourselves direct from the mill."
While it's too early to have concise numbers on savings, Shellhamer says the system has given them greater control over costs and delivery times. But it also has cost them.
"You see some relationships end," he says. "One manufacturer who used to come running in with a rebate check every quarter now says we would compete with distributors. Others say, 'When you get this big, call us back.' It upsets us. We've done a pretty good job of it... . In our opinion, they don't believe in us."
The manufacturers have their share of gripes as well, mostly related to unrealistic delivery demands. Blackstone got a panicked phone call from a distributor who needed a product sent overnight when a plumber didn't give him sufficient notice to stock it. "Luckily for me, a faucet can be put in FedEx," she says. "When it's a toilet or a cast iron sink, it's not happening."
The entire industry continues to struggle with lead times, says Tom Halford, Whirlpool's general manager for contract sales. Decisions on brands and products are made "way upstream" in the buying process. As soon as those decisions are made, the manufacturer should be told "so we can understand the demand in aggregate to fulfill from inventory or hold it in production.
"When you get lead times of one day, two days, less than a week, it's hard for any manufacturer to supply that," he says. "It forces manufactures or distributors to carry higher levels of inventory, which isn't necessary. The more we can collaborate on demand, the better."
Hamlet Homes, in Salt Lake City, uses a Newstar purchase order system to supply its vendors with their individual orders electronically on each house a week before excavation. Then, once the work is performed, the field supervisor "can push a button that tells the computer to issue a check," says president John Aldous.
As a result, invoicing has been significantly decreased, control has been substantially increased, and supervisors in the field are "inspecting instead of in the office checking off paper saying, 'Yes, this work is done,'" Aldous says.
Anand Sharma is president of TBM Consulting Group, a supply chain consulting firm in North Carolina. He has worked with literally hundreds of companies, including window and appliance manufacturers, to help them retool operations to dramatically reduce production and delivery times. For home building, he sees three issues causing the bulk of added problems: the cost of inventory builders have to carry; customer changes; and re-work. The solution to all three, he says, is to align with suppliers with enough flexibility in their manufacturing practices to respond quickly.
"In my opinion, the best way to manage supply chain is to work with people who can actually produce what you need with the shortest possible lead time," he says. "When people are becoming responsive, they're reducing lead time from weeks to days. We say, 'Don't go on the old paradigm to tell customers to have excess inventory. You can make it in two hours and ship within 24. Don't worry if we have it on hand. We need to have raw materials on hand, which is a lot cheaper than having finished product on hand.'"
Manufacturers have long responded to builders' demands for relief from mark-ups with rebates. But some builders say they've become as much a commodity as the products themselves and are virtually meaningless.
McLay says he supports national programs and rebates as "an extra spiff based on what I negotiate," but in general sees rebates as simply a way to hide the true price.
Lorenzetti dismisses them as a source of extra cost. "It's an incredibly inefficient, wasteful system," he says. "If a manufacturer would sell at a set price to builder, based on their size, they could save a lot of money in paperwork."
At Neumann Homes, Shellhamer says rebate programs are so commonplace, they won't even get a manufacturer in the door of his office.
"The supplier for electrical trim plates, which costs all of $25 a house, has a rebate program," he says. "Everybody does it. I don't want to hear about standard programs or rebates."
That attitude appeals to Dave Whelchel, director of sales and marketing at Hurd Windows in Medford, Wis. He would much rather sit down with a customer and develop a custom set of performance incentives than hand out a rebate check. He likes to create packages that can include marketing assistance, model home programs, event sponsorships, installation and sales training, and warranty service.
"You have to be a lot more creative than just coming in with a product and a price," he says. "What we feel builders and distributors want are partners to grow their business in all facets, not just products. We're no longer a supplier in a classic sense. It's a much more integrated relationship now."
Pembroke's Mark Dancer points to a cause-and-effect element that's often missing in rebate programs. Rebates are most effective, he says, when they reward performance that is tied to supply chain activities, such as forecasting. In construction, a customer with a large production schedule could receive rebates for meeting the targeted completion date.
"That's good for supply chain because it shares information — a production schedule — and allows the manufacturer to schedule delivery," Dancer says. "As a result, the builder gets a price break."
This isn't to say that the supply chain is irreparably broken and nothing is working well. Lorenzetti notes that manufacturers have improved business models to maintain adequate inventory loads and distribution facilities, and product innovation is excellent.
Many manufacturers have made significant investments to meet the needs of large-volume builders.
American Woodmark Cabinets spent $100 million to overhaul its manufacturing operation. The company just closed its warehouses and created a nationwide network of 13 plants designed for just-in-time production. To that they added the Diamond Service Platform, nine-member teams that work for a single builder. That has given them a delivery time, they say, of 11 days from order to installation.
"At the end of the day, all cabinet manufacturers get their raw materials from the same place, a tree," says Ian Sole, senior vice president of marketing for American Woodmark, in Winchester, Va. "We can all build boxes. The differences between companies are people and how they operate."
The challenge for manufacturers, he believes, is to meet the increasing demands of builders while containing costs.
"That will require, I think, more and more closeness between partner and builder, greater sharing of information, and greater sharing of plans," Sole says. "As these companies grow and volumes get greater, the need for clear lines of communication gets greater."
One example of a seamless supply chain process often touted by builders is Whirlpool's. Tom Halford says the company is about "half way through" a three-year, multi-million dollar initiative that targets 23 critical capabilities. The first four focus on date integrity to deliver and install a complete order by the promised date "under any condition and circumstances in the U.S., Canada, and Mexico."
Whirlpool also is working on driving out cost for its corporate and trade partners, upgrading its in-house supply chain training, and creating teams to collaborate with customers on forecasting and lead times.
Then, there is the Quality Express logistics operation used to deliver and install each order. Owned and operated by Whirlpool, it's designed to provide consistency across markets.
"Given the consolidation of big builders, there's a need for efficiency and focus," Halford says. "We're trying to make sure as builders advance their production capabilities, we can deal with that efficiency. The spark that ignites this is collaboration, whether it's centralized or decentralized decision-making processes." TEC Specialty Products, a flooring adhesives manufacturer in Palatine, Ill., has addressed lead times with a $1 million investment in warehouse automation, says logistics and planning manager Luis Diego Delgado. The switch from a paper-based warehouse system should reduce order errors and cut volumes of paperwork. When it comes on line at the end of the year, he anticipates delivery times will drop from five to six days to no more than 48 hours.
And his customer service representatives can finally do their real jobs.
"Instead of spending time being clerks," he says, "our customer service representatives can spend 100 percent of their time building relationships, which is what I want them to do."
Adieu to Bidding
It's no surprise that supply chain analysts expect to see the big builders, manufacturers, and distributors get bigger. Bill Michels, of ADR, predicts more performance partnerships and strategic alliances, such as joint ventures or co-locations, including as shared showrooms. He also forecasts further streamlining, with integrated systems between suppliers and builders.
"Buyers are bogged down in the bidding process instead of buying," he says. "Aligning with key suppliers is addressing that. The greater degree of consolidation, the higher the need for a strategic relationship."
At least in flooring adhesives, Delgado says vendor-managed inventory (VMI) is revolutionizing the industry. With VMI, the manufacturer takes responsibility for replenishing inventory instead of waiting for orders to come in. He envisions dramatic savings in inventory holding costs and streamlined processing.
"Right now, we are manufacturing based on forecasts we receive from sales, he says. "With VMI, we could be manufacturing to replenish the shelves of our distributors."
Sharma says it's doable. He's worked with a number of manufacturers whose distributors are "almost on a milk run... . They will load everything they need to deliver in the sequence they need it. Rather than having your own warehouse, you have a truck as your supplier. You have almost infinite flexibility. Those are the kind of things that infinitely improve cost of materials."
For those kinds of changes to happen, and have the cost savings passed on to builders, Lorenzetti says the biggest builders will need to force the issue. That will happen when they run out of other ways to save money.
"It's going to be tough for manufacturers to change the system because they'll make a lot of people angry," he says. "When we get done squeezing everything we can out of the low-hanging fruit, I think this is the next initiative."
Published in BIG BUILDER Magazine, November 2002