Mercedes Homes has tried hard, like most big builders, to strike the best possible deals with its suppliers. The Melbourne, Fla.-based builder has negotiated purchasing agreements that offer rebate incentives with about 30 major suppliers. Its operating divisions, which are active in three states and 13 cities, buy wholeheartedly into eight of these programs. As for the other contracts? As Mercedes, and most big builders continue to discover, it's not as simple as it sounds. Gaps in suppliers' distribution networks prevent Mercedes' divisions from participating in several purchasing deals in various markets.
“More and more, [the divisions] see the value of standardized products and pricing,” said Craig Schmauss, Mercedes Homes' vice president of purchasing. “We're trying to mandate this, but there's still too much divisional and city-level overriding without corporate approval.”
The impulse among big builders to narrow their supplier base is strong. The paybacks from corporate agreements can include healthier rebates, tighter links with suppliers, and greater consistency—from market to market and home to home—in delivery, product quality, and service. “Builders are becoming more sophisticated and are looking beyond price at the total delivered cost,” said Chuck Stein, vice president and general manager of Owens Corning's Home Experts group. Gary Rosenfield, vice president of professional markets for the Timberlake division of American Woodmark, added that when his company works with builders on a national or even regional purchasing program, “it's not just about price so much as our being able to service builders as they grow.”
Price, though, lurks behind most purchasing discussions, which may explain why builders enter into exclusive agreements with very few suppliers and why vendor deals often wind up being worked out regionally or even locally. The logic of a “national” or “corporate” account can also be undermined by other factors. Divisional independence, weaknesses in a vendor's supply chain, projected shifts in commodities prices, divergent building codes, subcontractors who won't budge off of their favorite brands—all these and more, builders concede, make across-the-board compliance impractical and even counterproductive. It doesn't make it easy for purchasing chiefs like Schmauss, who admits that Mercedes' divisions have sometimes “cringed” at certain choices in suppliers.
For many builders, pragmatism remains part of the purchasing power equation. “There is no top-down edict” about divisions buying from one supplier at David Weekley Homes, said Bill Justus, vice president of supply chain services for the Houston-based builder, which has eight purchasing teams serving the 14 cities where it builds. “ ‘National' does not mean ‘one,' and should be an enabler, not an inhibitor. Our national accounts programs have been about putting an umbrella of synergy over a decentralized decision-making process, but the idea is always to have freedom of choice and movement.”
Some builders, though, are trying to corral that freedom by selecting suppliers with broad distribution capabilities and robust field support; by taking a greater corporate role in pitching national programs to divisional purchasing managers; and by enforcing those programs, system wide. “Letting regions and divisions opt out of a deal is a cop out,” asserted David Singer, national purchasing director with Atlanta-based Beazer Homes, which he said has a “good handful” of national programs with vendors such as GE Appliances, Moen, Progress Lighting, and Carrier that are mandated for all 30 of Beazer's operating divisions. “The way things are headed, we're going more toward line reviews and product reviews, so our relationship with suppliers is becoming more critical,” said Singer.
Since mid-2002, Hollywood, Fla.-based Technical Olympic USA has negotiated corporate purchasing agreements with 18 suppliers in categories such as appliances, faucets, roofing, and flooring. Its primary motivation for striking these deals has been to take advantage of its larger size after making three acquisitions during this period. “Leverage may be a dirty word, but it's not a secret,” explained senior vice president of supply chain management, Ed Wohlwender. He noted that Technical Olympic doesn't let its divisions override national agreements, because to do so would give them “a license to hunt.” He also questioned why any vendor would show its best programs to builders that allow overrides.
A former consultant with Ernst & Young, who also spent eight years with Sara Lee, Wohlwender represents a new breed of executive joining the ranks of big builder purchasing staffs from outside the home building industry with supply chain and process management experience (see “New Breed”).
Wohlwender acknowledges home building has some unique issues. But in his first two years in the industry, he has seen a change, observing that a growing number of large builders are more receptive to one-vendor, one-price buying structures. “This industry is 15 years behind some others, but could be on the brink of major change” in supply chain management, he predicted. A first step in this process finds builders developing purchasing models that at least limit their divisions to buying from two or three vendors per category, without exceptions.
The Art Of Persuasion New research released last fall by Big Builder supports Wolhwender's observations, along with some caveats. Two-thirds of the 409 big builders who responded to the magazine's survey had national purchasing agreements with at least one supplier. Those findings increased to 85 percent among builders within the top 100. The products that have lent themselves most often to these types of pacts include appliances, faucets, lighting, flooring, and kitchen cabinets.
Clearly, it's easier to strike these types of national contracts in categories such as appliances, where the vendor ships direct, bills direct, and handles installation. But it's not that simple for a majority of categories, and the research confirmed it. More than half of the builders polled said their companies allowed local overrides of corporate purchasing programs, and that those overrides occurred, on average, about once out of every five purchases (see charts: National Agreements, Purchased Direct, Local Override
More broadly, one finds builders trying to square their divisions' not-always-compatible product and service needs with their corporate, financial, and operational imperatives. Alpharetta, Ga.-based Morrison Homes, for one, has set up rebate programs with more than 20 suppliers and gets full compliance from its 11 divisions on five of these agreements. Most of the rest, said Morrison's director of construction, Cregg McGaha, have been negotiated locally. “It's just easier to set up some of these accounts regionally because each market is different.”
Some builders are skeptical about their competitors' claims that corporate purchasing agreements can reduce construction costs by $1,000 to $3,500 per home. Besides, builders can negotiate front-end discounts and back-end rebates from suppliers even when they encounter divisional resistance to elements of those deals. “There's a lot of low-hanging fruit that we can pick without compelling our divisions to buy from one vendor and without alienating our contractors,” said Meritage Homes' co-CEO, Steve Hilton.
But even Meritage planned to set up a corporate purchasing department in 2004, said Hilton. And there are signs that other builders are serious about ushering greater conformity into their divisions' purchasing regimens. “We don't have a bunch of mavericks out there,” said Robb Pigg, vice president of operations for Shea Homes, in Walnut, Calif. Shea has negotiated rebate programs with 35 vendors, though none are exclusive or subscribed to by all seven of the builder's divisions. “The team understands that, whenever possible, increasing our exclusivity [with suppliers] gives us a cost advantage,” says Pigg.
Joe Halpin, Midwest purchasing manager for The Drees Co., has recommended to his company's executive committee that he develop a proposal which would narrow the choices of suppliers for the entire company to two or three per category. He added that the Fort Mitchell, Ky.-based Drees—which has rebate programs with more than 60 suppliers but only one national accounts program, with Whirlpool—has considered hiring a national purchasing manager.
In mid 2002, Dallas-based D.R. Horton established a team of four regional purchasing managers whose primary role since has been to get the company's 47 divisions in 20 states on board with its corporate vendor deals, said Ric Rojas, Horton's vice president and director of national accounts. So while most of the builder's purchasing decisions remain in the hands of its divisional presidents, about one-fifth of the 100 suppliers Horton has negotiated purchasing agreements with get 70 percent of the builder's business in their respective categories. Like Bridleman at KB Home, Rojas said that Horton is moving toward a purchasing model that gives divisions two or three choices for each product in each market.
Wohlwender, of TOUSA, and Justus, of David Weekley, say their companies take this advocacy to the next level by sending their corporate purchasing teams into the field to do missionary work on behalf of suppliers, albeit with different purposes: TOUSA to convince its divisions to sign on to corporate purchasing deals; David Weekley to explain evenhandedly the merits of a given vendor's programs, even when two suppliers are competing for its divisions' business.
Red Bank, N.J.-based Hovnanian Enterprises goes to bat for preferred vendors, too, but only after it puts their product lines through a rigorous review process. Hovnanian has an internal Accounts Awards Committee that includes a representative from each division whose vote is weighted by that division's sales and unit count. The company's Texas and California regions control 54 percent of the committee's voting power. When the committee chooses a supplier, any division that wants to opt out of the national program must receive a waiver from CEO Ara Hovnanian. “That hasn't happened much,” said Mark Hodges, Hovnanian's senior vice president of corporate operations.
Hovnanian has negotiated national account programs with 23 suppliers and has several more in the works. Hodges said that his company recently compared the purchasing agreements of one of its acquisitions with its own, and found that by switching to the vendors Hovnanian favored, the acquired builder could bring down its costs by $1,500 per home. “That's $1.5 million to their bottom line,” said Hodges.
‘Sub‘liminal Influence Builders, of course, have not been alone in growing in size and stature; many suppliers today have tremendous brand leverage and marketing clout. Yet the breadth of—and influence over—a supplier's distribution network often determines whether it is capable of accommodating a builder on a multistate level (see “Local Option,” page 25). “A national program is only as good as a vendor's local presence,” observed Schmauss, of Mercedes Homes. Purchasing director Singer lamented that Beazer has been frustrated in its attempts to expand its national accounts program with vendors that may distribute products in only two-thirds of the markets where Beazer builds.
More suppliers are accepting builders' challenges to plug holes in their distribution. Executives from Duron Paint & Wallcovering and window maker MI Home Products—whose respective business with builders has been mostly regional—were among those whose companies have been expanding their distribution alliances in order to supply builders wherever they construct homes.
Creativity also counts. Last summer, Beazer and Norandex entered into a purchasing agreement for siding that was to be limited to certain divisions because Norandex didn't have full distribution in some states. But Singer began asking why this deal couldn't be broadened. “We did a lot of questioning with our divisions, and looked at several different manufacturers,” he recalls. Norandex offered Beazer a “strong financial incentive,” recalled Singer, but the supplier's market penetration and installation services are what won out, as well as Norandex's willingness to establish what Singer called “distribution links” in markets where its presence wasn't adequate.
Another roadblock builders must circumnavigate in striking meaningful purchasing pacts is the influence subcontractors can wield over which products are used for new-home construction. Jeff Andress, Delta Faucet's trade channel manager, claimed that the strong preference among local plumbers for Delta's products was “critical” to the faucet maker capturing the lion's share of TOUSA's purchases recently. Conversely, Pasquinelli Construction has national accounts with four vendors—Moen, Maytag, Carrier, and OC (for roofing)—that can be overridden on practical grounds by any of its 10 divisions. That happens often in North Carolina, a strong market for Goodman's HVAC products and where “contractors will charge us more to install Carrier,” explained George Smith, director of purchasing for Pasquinelli's Chicago division.
“It's a labor-intensive market right now, and we can't afford to be shoving a vendor's line down our subs' throats,” said Kelly DeLoach, purchasing manager for American West Homes in Las Vegas. “Delta's been knocking on our door, but our plumbers give me a better price on Moen.” Paul Whitscell, purchasing agent for another Vegas-based builder, Woodside Homes of Nevada, added that while his company always tries to negotiate the best deal possible with vendors, “we work with 65 subs, and if they don't want to use a product there's no point trying to force them to.” Mercedes Homes has agreements with painting subcontractors in each state it operates in because, said Schmauss, “paint is very much an installer's preference.”
But as builders reel in their divisions' purchasing options, many have reframed their relationships with subcontractors by laying out stricter guidelines on which products subs can install. Several builders said they've told their subs to toe the line or go work for someone else. “Subs aren't objective because their [selections] are based on incentives they get from vendors,” said Singer, at Beazer Homes. “We don't want to choose products on the basis of whether a sub gets to go to the Super Bowl with a supplier.”
Looking outside the shousing industry for supply chain expertise
Large builders seeking ways to improve purchasing practices are turning to a new breed of senior-level managers whose backgrounds extend beyond purchasing and even home building.
In 2002, as it was absorbing two acquisitions and revving its expansion engine, Technical Olympic USA (TOUSA) tapped Ed Wohlwender to take command of a new post, as senior vice president of supply management. The position was created as part of a broader strategic vision of TOUSA's chief executive, Antonio Mon, to support construction across the country with a more integrated approach to materials purchasing. The goal has been to manage the elements that drive costs across the entire supply chain, focusing on the “total cost of ownership” including warranties, delivery, scheduling, and skilled labor.
“It's critical for everyone [suppliers, distributors, and contractors] to have a line of sight toward the home buyer, and the builder must manage the entire process,” said Wohlwender.
Wohlwender brings a unique perspective to that process and to collective efforts of TOUSA's purchasing team. A West Point alumnus with an MBA from Xavier University, the 44-year-old Wohlwender spent eight years managing production scheduling and logistics for Sara Lee's $1.4 billion Hillshire Farm division, two years with Ernst & Young's Mid-Market supply chain consulting group, and two years with Standard Register, a documents management firm.
Since he's come on board, TOUSA's purchasing managers across its 14 divisions have divided up into product category teams with a new focus on selecting vendor partners and aggressively pursuing corporate purchasing deals with suppliers. This selection process is also influenced by the technical expertise offered by the company's building sciences and product development staffs headed, respectively, by vice presidents Mike Beckett and Jeff Lothian, whom Wohlwender works with closely. Wohlwender notes that because the divisions have a better understanding of the total supply chain process, it's easier to win across-the-board internal acceptance of these agreements.
TOUSA is also now resolving disputes with suppliers over costs, distribution, or labor with the help of a program called “Job Ready/Job Complete” that monitors its contractors' performance. Through each step of the construction process, contractors fill out a check list that gets posted on a Web site. Having facts at its disposal helps TOUSA “take the ‘personality' out of our discussions with vendors,” said Wohlwender.
The focus on supply chain management has been important in TOUSA's ability to handle a 21 percent increase in closings in 2003, to 6,135 units.
Reliable fabricators and distribution still wield influence in what builders buy.
National agreements may work for appliances or faucets. But for products involving fabricators, multiple distribution hand-offs, and third-party installers, there's still plenty of purchasing power in the hands of local project managers.
“Products that have a large labor component to them are much harder to establish national distribution,” concedes Bill Justus, vice president of supply chain services for David Weekley Homes. Kitchen cabinets are perhaps typical. Builders have been reluctant to strike national purchasing agreements because the finished product is often tethered to networks of fabricators, especially in markets such as southern California. It's one reason why leading cabinet manufacturers don't have much of a presence in such a huge market with home builders.
“Ease of implementation” is why American West Homes prefers to deal with local cabinet suppliers, too, according to that builder's purchasing manager Kelly DeLoach. “In Las Vegas, we have a wonderful group of custom cabinet makers that can work on a production basis for us and will make changes for us,” said DeLoach. “The larger guys will customize for you, but they'll charge for it.”
Installation continues to be a pivotal issue. Recent installation and supply deals that Pulte Homes has struck with Masco Contractor Services could be viewed as Pulte's attempt to peel away some of the supply chain layers of handling labor-intensive products such as insulation and, more recently, fireplaces.
But these agreements are often easier said than done. A year ago, Beazer Homes tried to broker a deal through which faucets made by either Moen or Kohler would have been installed into its new homes by American Plumbing & Mechanical, better known as AMPAM, the industry's largest plumbing contractor. AMPAM's bankruptcy woes put a damper on the negotiations, conceded David Singer, Beazer's national purchasing director. However, Singer noted that Beazer has engaged in installation deals with AMPAM-affiliated companies in Las Vegas and Dallas, and could extend those agreements to other AMPAM companies if those relationships work out to the builder's satisfaction.