Just as a good driver is experienced at predicting what nearby motorists are going to do, a good builder stays on course by building as predictably as possible. A well-thought-out route allows a building company’s supply chain to react in a timely manner, resulting in the right materials showing up in the right place at the right time for the right price.
Based on my 35 years of experience in the industry, I have found that a smooth supply chain usually starts with how well a builder communicates. There is so much information that needs to be shared, but is it being shared in a timely, detailed manner? Here are some of the best steps I know for builders to keep the chain moving and keep costs down:
Provide timely, relevant communication to all groups in your supply chain.
Lower their costs so they can lower your price. The Great Recession took its toll on our industry by pressuring distributors to reduce inventory, and manufacturers to eliminate it. When products roll off the assembly line they go directly into a truck or train car. A manufacturer only keeps inventory when they mistakenly make something that nobody orders.
Both distributors and manufacturers are starving for information that would enable them to hold down costs and still provide products on time (see related infographic). Builders and their trade partners hold key information the supply chain needs. Since trades typically give their distributors 24 to 48 hours’ notice, builders will need to get more involved in the process to communicate in a timely manner. Bring manufacturer representatives into your office quarterly and discuss SKU demand (based on an undisclosed number of house starts) and option selection frequency reports. Let them interpret the data and take action. The more detailed your data is, the better decisions they will make.
Minimize construction schedule disruptions.
The most critical aspect of your schedules is that they be predictable. The ripple effect of disruptions causes mixed signals through the supply chain, resulting in unwanted inventory or backorders. The supply chain can reduce operating costs when all parties have lead times of 30 to 60 days. Reacting to one- to two-day lead times forces suppliers to guess how many widgets to have in inventory. A demand planner at GE once told me his goal was to guess incorrectly less often.
Get involved in your supply chain’s demand planning process.
Don’t let your suppliers just rely on last year’s data and add/subtract based on whether they think the overall market is growing/retracting. You have the data they desperately need.
Manufacturers write Min/Max contracts with their raw material suppliers to get the best pricing. They must honor this commitment regardless of how many orders they get from distributors. If their demand planning process is flawed they will order too much or too little. Either way, it will end up costing the builder money because it is all part of a manufacturer’s pricing.
For example, if they order too much it causes inventory and a decision to stop manufacturing that product. If they make too little, the builder doesn’t get materials on time and that may delay the project. Or, the builder may decide to buy from someone else, causing the manufacturer to lose a customer, or upgrade to another model while keeping the same price. All of these inefficiencies constitute a portion of the overhead costs built into the price.
Make your forecast information relevant by providing it at the SKU level.
It’s one thing to know you’re going to build 5,000 homes. It’s quite another for manufacturers and distributors to know you will need 11,414 of the 7560C. Even if you don’t have an in-house estimator to determine SKU quantities, your trades have the data. If you went out to bid to three plumbers, all three of them did the material takeoff. The data is readily available when you have the right relationships with your trade partners. Sharing relevant information is crucial in realizing a price reduction of building materials.
In every distribution center I visit I ask to see the slow-moving inventory—the products a supplier thought were going to move fast but nobody ordered. Distributors try very hard to guess the correct number of widgets builders will need. Unfortunately, they have very little data to base those guesses on. Keep in mind that backorders are equally costly as they lead to upgrading the customer or losing a customer. The builder has the ability to stop both of these. Forecasting information at the SKU level is vital to helping distributors guess incorrectly less often.
Collaborate with your supply chain to lower each other’s costs.
Traditionally, trade partners don’t want you talking to their distributors and distributors don’t want you talking to their manufacturers. Breaking down these barriers can be challenging but very rewarding. Once they see you are sincere in wanting to lower their costs, they will begin to open up. This is where real cost savings occur. Builders often do things that cost the supply chain money without realizing it. We had changed a two-step distribution chain for door hardware to a direct ship from the factory in neatly packed boxes that contained everything needed for that house and saved about $137 per house. We put floor tile on the same flatbed truck as the drywall and saved about $80 per house. At another company, we put door hardware and light fixtures on the same truck and saved about $60 per house. In many cases, forward-planning SKU data enabled me to get better pricing than other builders.
Provide clear and concise orders.
Are you still sending purchase orders that say, “Frame Pack 1” or “Appliance Package 1,” with no additional specificity? If so, you are actually making it more expensive for your suppliers to work with you as they must root around other systems or wait for notifications for the detail necessary to fulfill your orders such as color, fit, or finish.
Scheduling accuracy also is important as home sites not ready for delivery of materials present significant challenges and costs to trade partners who waste their time and money on dry runs. Smart builders strive to provide quality information on their purchase orders.
Treat trade partners as vital members of your team.
Communication with trade partners has become one of the most important aspects of systems tracking over the past few years, especially since the downturn, which caused many vendors to leave the industry. In fact, based on data from application service provider Hyphen Solutions, one can infer that one out of every four or five trade contractors is no longer serving the construction industry. While consolidation has reduced the number of companies, it does not account for a significant portion of the decrease.
With this significant drop in skilled trades combined with the current uptick in housing sales, how can a home builder guarantee he or she has access to the most highly sought-after companies? How can builders attract the best trade partners and ensure competitive pricing? Some builders have chosen to be a better business partner to their trades, starting with paying them on time. Builders using specialized software packages typically pay their trades in less than two weeks. The ability to pay trades quickly allows them the cash flow to grow their businesses and support your increased building activity. Would you rather work for someone who pays you once a month or twice? Would the price you charge for your service change based on how long it takes someone to pay you or the effort required to get paid the correct amount?
Strive for continual improvement.
Once communication is opened up and no single entity is striving to prevent collaboration, kaizen activities can be conducted. Toyota has popularized this Japanese-based continual improvement strategy, which consists of focused projects that result in small improvements to operations. This creates a culture of progress as it involves people at the lowest level of the organization to drive the change. The synergistic result to a home building company and its suppliers can create savings of 15 percent to 20 percent on building materials.
Construction managers and their trade partners typically start the kaizen process by targeting a result that improves job readiness, safety, and/or costs. I have seen examples where the process can save a good deal of money. For example, at one company the electrician’s cost control measures improved by having the distributor kit all the parts on two pallets, delivered separately. Another builder focused on reducing the amount of lumber delivered to its sites. The construction manager, framing foreman, and lumber distributor met at the site to discuss deliveries and theft. They ended up packing the lumber differently and redistributed the lumber in each delivery, which reduced instances of theft.
Ken Pinto is a former operations manager with nearly 20 years of experience working for some of the biggest home builders in the country. He now owns Kenzai USA, a Dallas-based supply chain company.