Do builders make purchasing decisions by price or by cost? Do manufacturers understand how big builders come to their decisions? New BIG BUILDER research tells the story more clearly than ever before.
Big builders and their larger vendors view the purchasing evaluation process very differently, the research reveals. Of course, since builders make the final decision on purchases, it would be advantageous for manufacturers to understand what they want and provide it. The accompanying chart shows the difference in views on the importance of some criteria in the purchasing decision that are part of total cost. Note that the builders rank these criteria much higher in importance than do the manufacturers. The survey showed that builders also gave a lower importance to initial price, 42 percent, versus lowest cost over time, 67 percent.
Price is normally defined as the initial cost of the goods being sold. This is what you pay for the unit of material or service that you are buying. This would be the price that you pay per foot for a piece of engineered lumber. According to the survey results, we can see that while price is a factor, most big builders use a much more sophisticated view in making purchasing decisions. The fair way to evaluate purchases for all concerned is to evaluate total cost of ownership over time, according to Tony Callahan, vice president of Strategic Sourcing & National Purchasing at Beazer Homes in Atlanta.
“The true cost of any product or service is the total cost of ownership over time. This is the initial price [less rebates], plus all other costs that can be attributed to the product,” says Callahan. “These include logistics costs, conversion costs, warranty and repair costs, customer satisfaction costs, etc. Product benefits should also be considered. For example, can the product help sell houses or increase option revenue?”
If we use Callahan's view of price to examine engineered lumber, for example, the true cost would be defined not as the price per foot, but the total installed cost of the engineered lumber package integrated into the frame of the house that meets the builder's design criteria for that customer segment. How would this work in a perfect world? The structural design of the house would be done to meet the buyer's demands as interpreted by the builder. The design system would allow the builder to pick a “hutch factor” or deflection number that is the performance rating for the structure. Once that is done, the design would be made to meet that factor and building codes at the “least possible total cost.” With the design now in hand, the builder can price the pieces of the frame—including the logistics, warranty, installation, and all other costs—to end up with the best possible long-term cost of ownership that meets the customer's demand.
No, we are not there yet with most of the products that go into new homes today, but we are getting closer all the time.
Product Disconnect Overall, how important are each of the following criteria to you (big builders) when purchasing, specifying, or recommending building products for use in your firm's houses?
SOURCE: BIG BUILDER RESEARCH 2005