Go to August 2008 Feature: Sneak Peek
Builders may be reducing square footage, skimming down home features, and reducing floor plan sets to bring the price per square foot of new homes down, but there is a lot of money being left on the table by failing to efficiently source materials and services.
When the housing market first turned, builders were quick to renegotiate prices and contracts, achieving savings of 5 percent to 10 percent, even reaching 15 percent in some cases. However, those have proved to be more or less single-serving savings as the downturn has dragged on. Even builders who ask trades and suppliers to re-bid on materials and services quarterly find that they can extract 1 percent or 2 percent savings at best, if it doesn't cost them more in terms of man hours and overhead to update the back office system with the new pricing.
However, Clark Ellis, a principal with FMI Consulting, believes that if builders' sourcing and purchasing departments could transform their vendor negotiation strategies, they could move the affordability needle even more.
"We shouldn't be talking about price, we should be talking about costs," he says. "What [builders] have to do is look at trades and suppliers as outsource partners--an extension of the enterprise--rather than just suppliers."
By bringing together the various supplier and trade links to understand what costs are involved at each point in the supply chain, more efficiencies and bigger savings can be achieved than through nickel-and-dime negotiations, Ellis says. In fact, he estimates that this collective problem-solving approach could yield as much as 5 percent to 10 percent savings in cost of service.
"The biggest hit is that collaboration with suppliers because you can address those specific cost items and address them quickly," he explains.
The process is undoubtedly easier said than done; this type of collaborative work requires that key players have a different skill than they've needed before. This is less about the give and take and more about shared solutions.
But the good news, according to Ellis, is that unlike the introduction of new value series product, which takes some time to implement, true builder-vendor cooperation yields fast results.
"The new product takes time to get through design, engineering, entitlement, sales, etc., so if a company started a program in the spring of 2008, it would not see much impact on the bottom line in fiscal 2008," Ellis explains. "With the supplier collaboration, some results are almost immediate--within 30 days. You don't get to the full savings potential for six to nine months, but both partners will see benefits from the start."
Moreover, the suppliers and trade partners who are still surviving in the market today are likely to be legitimate long-term players, Ellis adds. That spells out less risk for builders in taking their vendor and trade partnerships to the next level.