Craig Schmauss, director of purchasing for Mercedes Homes, had heard the rumor–a large national builder was abandoning national purchasing agreements with rebates and giving its division heads free rein to negotiate for materials locally.
Schmauss, who had been working tirelessly to consolidate as many of the Melbourne, Fla.-based builder's contracts as possible, was nonplussed. However, faced with the same extreme pressure all purchasing executives are under to cut costs, not to mention the constant assurances by division executives that they can buy better locally, Schmauss thought it was at least worth discussing. Eventually it was decided to try out the idea on a boutique project the company was working on, developing special pricing for a couple of floor plans.
"We told the divisions, 'Forget all corporate agreements. Go talk with your trades, and get the best prices you can find; if you save money, great,'" Schmauss recalls. "Again, the intent was to get the lowest price possible."
The result: "For the most part there were savings, but when you factored in the equipment, the warranty, and the rebates, there really wasn't any better deal," Schmauss says. "For example, one of the contractors said, 'I can get you Brand X equipment, and I can save you $400 a house.' And when we actually analyzed their house, maybe it was $40."
Schmauss acknowledges that his experiment was small and might not represent what could happen on a larger scale. "I'm sure in certain markets there are certain conditions where [a savings] truly does exist," he says. "Lower price is nice, but that's not why we pick partners."
National purchasing contracts, packed with rebates and discounts for buying in bulk, have been heralded as one of the advantages of being a large national builder–something that gives you a leg up on the little guys.
Yet, in practice, it's been complicated for many to implement. Home building is still a local business, and different parts of the country have different materials needs. Plus, division presidents can be balk-prone, reticent to cut off their long-time local sources, and often complaining that they can do better locally. Suppliers, on the other hand, want exclusivity before they will offer the best discounts and/or rebates, something that is difficult to achieve.
Still, gaining national purchasing power has been something most big builder purchasing chiefs have worked diligently to implement over the past few years, and, despite the challenges, many say they are expanding rather than contracting those efforts and have no plan to abandon national contracts.
"Personally, I think that's a mistake," says Tony Callahan, senior vice president of national purchasing, planning, and design for Beazer USA. "We've added additional exclusives."
Pulte, which has extensively plumbed the depths of national purchasing agreements, is also sticking to its national buying plans. "We haven't moved back yet [from national purchasing agreements]," says James Coffee, Pulte's vice president of strategic sourcing. "We are retesting some of our agreements to make sure that they are in good order ? If you are good at what you do, and I assure you that we are, they [local divisions] are not going to find anything they are going to get a better deal on."
And by a better deal, Coffee doesn't just mean one that's less expensive. Product quality, delivery systems, warranties, ease of installation, support, and probably a half dozen other factors weigh in the equation with price to determine what a good deal really is.
For nearly three years, Standard Pacific Homes has been developing a national purchasing system, narrowing down its supplier list, and working to convince its division presidents to buy into "One Standard," as the initiative was named. The process continues and is even more important in a down market than an up one, says Scott Hearty, the company's vice president of regional purchasing.
"In days past, you could pick whomever you wanted, and there were margins there [to buffer potentially higher materials costs]," Hearty says. With a slowed market, division heads are quicker to jump on the preferred supplier bandwagon if you can show them there is money to be saved, he adds.
Standard Pacific recently hired Ken Pinto, a Pulte alumnus, to work toward gaining volume commitments from product providers. "I think we are getting more converts [among division presidents]," Hearty says.
For Bill Justus, vice president of supply chain services at David Weekley Homes, relationships with trade partners are something to be maintained–strong market or weak. "In an up market and in a down market, you have to look for win-wins," Justus says. "If you can do that, you can build the longer term relationships that everybody talks about. But [for some builders], they tend to go out the window in a down market."
Not at Weekley, which has an elaborate grading system for its suppliers and rewards its high performers. "We are committed to building our relationships through good times and bad," Justus says.
Learn more about markets featured in this article: San Francisco, CA.