Since The Great Recession began, the builder supply chain has undergone a lot of challenges.
“The recession reminded us that all good things come to an end. The industry was riding high and, in what seemed like overnight, we were scrambling to better manage our costs,” says Bill Harrill, vice president of national purchasing at Scottsdale, Ariz.–based Meritage Homes, echoing a sentiment likely heard from most, if not all, home builders across the country.
If there was one lesson learned during the recession, it was to look for ways to cut costs. Meritage performed “stick counts” for major products such as lumber, drywall, roofing, and siding and found ways to reduce costs. But eventually the cuts went deeper. As things ground to a crawl, builders began to ask trades for price cuts and let purchasing employees go or spread them across more disciplines. For most builders, the purchasing and logistics function were cut to the bone.
After all of that carnage? They still need to figure out how to build houses with a labor force that was cut dramatically over the past decade. “The people out there who are good at what they do are all working,” says Rick Fletcher, vice president of sales and marketing at Irvine, Calif.–based MBK Homes. “There’s a shortage of skilled labor in this area.”
In hindsight, builders are learning that they should have kept their best employees through the downturn because now, as things improve, they’re needed.
Other lessons—like cost cutting, value engineering homes, and keeping tabs on subcontractors—were driven home early and often during the recession. “You would have a trade that just stopped showing up, and you found out they went out of business,” says Tony L. Callahan, president and CEO of Kennesaw, Ga.–based Callahan Consulting Group. “That is a real disruption to your production schedule.”
Now as volume picks up, the question is how will builders take those lessons learned in the downturn and apply them to a growing market? No builder will apply these lessons the same way, but if they do what’s right for their company, they could find a lot more efficiency coming out of the downturn.
“We’ve eliminated a lot of unnecessary things as result of the downturn,” says David Lemnah, managing member of Denver-based Lokal Homes. “A lot of organizations have a much clearer understanding of what the goal truly is, so that part is good.”
Lesson No. 1: Hang on to as Many of Your Best People as Possible
As builders were trying to cut as much overhead as possible, they ultimately ended up finding headcount in purchasing. At the time, it made sense. Since they weren’t buildings as many houses, they didn’t need as much material or purchase professionals to secure that material.
In some cases, these cutbacks weren’t a horrible thing. For instance, some veteran procurement pros may have been unwilling or unable to read the handwriting on the wall to ask their suppliers or subs for badly needed price reductions.
“Some people were in the mindset that when things were going bad, it was against their nature to go back to the subs and tell them that had to go even lower,” says Mike Schmidt, vice president of operations at MBK Homes. “There were actually purchasing people that had a hard time with time with that. If they’re not going to change, they don’t need to be there.”
But there also were a lot of valuable purchasing people who lost their jobs during the recession, and the industry is still struggling to recover. “In the downturn, a lot of talent left and moved into other industries,” says Kevin Wilson, vice president of purchasing and national accounts for TRI Pointe Homes in Irvine, Calif.
With this tight labor market, Callahan thinks many builders may be regretting some of the cuts they made during the downturn, which provides an important lesson. “Don’t be shortsighted about what the cost of an employee is compared to value they’re providing,” Callahan says. “If you have a purchasing manager or agent who is very talented and you put him on a big project and he can save much more than he costs, you want to do all you can to hang on to that individual.”
And, with the supply chain growing even more complicated and automated, having someone skilled is worth its weight in gold. “If you can get a great guy in and it costs you an extra X amount of dollars, the return is in multiples,” Schmidt says. “Builders need to be aware that top tier talent is tough to get and if you have to replace it, you’re going to have to pay more. I would hope that people are a little more proactive about that.”
Others agree. Bradley Hartmann—a former purchasing agent, author of home builder purchasing book Behind Your Back, and president of Red Angle, which helps construction companies learn to speak Spanish—notes that there have been members of his team who “routinely could save six figures.”
But when things get tough, how do you justify the expense of keeping your best? One way is to spread their skills across various disciplines by combining functions like options, purchasing, and contracting. And now, even as things are improving, those workers are still being tasked with multiple duties. “I think it’s a new economy,” says MBK’s Fletcher. “If a builder is cranking out 400 units a year, he’s doing it with a lot less people than he used to have.”
Ultimately, a builder needs to be smart about where to use employees. Instead of spreading them too thin, it may make sense to focus them on the most important parts of purchasing. “As that market is shifting, it’s a good time to do a good skill assessment and make sure you have your best people working on your biggest opportunities,” Callahan says, adding that it’s ideal to take a holistic approach, making sure your best employees are in a position where they can have an impact on cost.
As an organization takes stock of its skill level, it also needs to become a destination for other top employees. While a builder may not be able to reclaim the purchasing talent it lost during the recession, it can make strides to be a destination employer for others.
“We need to be focused on attracting that top talent and keeping that talent and making our places better places to work,” Schmidt says. “We’re focusing on internal talent. How can we make their work better, more efficient, and more fun?”
Lesson No. 2: Know and Monitor Your Trades
Builders suffered during the recession, and some of their trades may have suffered even more. “A lot of longtime trade partners went out of business, and it happened immediately,” Hartmann says. “That was a huge problem.”
In some places, that issue hasn’t gone away. “We’ve had subs fail on the job in a spectacular fashion,” Schmidt says. “That’s still happening. There are still a lot of smaller companies out there that, due to mismanagement, improper invoicing, and myriad reasons, are not making it and they’re shutting down.”
The phenomenon drove home the fact that builders need to monitor their trades and be on top of their financial health. “You have to really know that trade and track to the best of your ability, their financial security—how stable they are,” Callahan explains.
But monitoring trades is much easier said than done. One way is to have good relationships with the distributors that work with your trades. “If they have a relationship with certain distributors, you need to be aware of it,” Wilson says about trades. “If there’s a challenge with a specific sub, you can be more reactive to it.”
Callahan thinks builders also can help their subs by getting to know them and helping them monitor their own costs. “It’s understanding the cost drivers, having a good rapport with the trade, and helping them become more efficient so they can lower your costs,” he says. “It’s having that shared information and data set to where you’re not surprised and you’re always getting a good deal.”
But a good deal doesn’t mean overpaying to keep a sub in business. While Bill Justus, vice president of supply chain services for Houston-based David Weekley Homes, is adamant that the company won’t “pay a huge premium to maintain a relationship,” he will look for ways to gain market share with them. For instance, a builder could try to arrange jobs where a sub doesn’t have to travel as far, among a number of other tactics.
“Anything we can do to mitigate costs for them and reward them in terms their loyalty and the quality of their work for us, we’re going to do,” Justus says. “Also, we look at our payment cycles and pay a little faster. That can help with cash flow. With guys on limited credit, you can directly purchase the materials and they pick them up and install them. They don’t have to put the cash outlay out there for the materials required to do the work.”
Like Justus, Meritage’s Harrill looks at the trade relationship as a partnership. “We can’t beat a trade or manufacturer up to save a dollar a square foot and then give dollars a square foot away in inefficiency,” he says. “That simply does not allow us to establish a rhythm. The key is to understand each other’s business. It’s difficult to measure how important that is.
In fact, a veteran sub can save money. “An experienced electrician who’s worked with this house before knows exactly how many feet of wire go in there, how many parts he needs to use,” Harrill explains. “It’s very cost-effective with that knowledge. A new guy may be uncertain, so he will pad his bids somewhat, and since you need someone to do the job, you don’t get the best deal.”
As subs went out of business in the downturn, builders also learned that it was essential to have backups—other subs they could trust to finish out the job. “We don’t get locked in with one trade just handling all of our jobs,” Schmidt says of his company. “If something goes wrong, you want diversification with your trades.”
While most everyone agrees that diversification is necessary, opinions differ about the proper mix. TRI Pointe tries to have two teams. Callahan says two trades per category is a good rule of thumb, with 75 percent of the work going to one trade and 25 percent going to the other trade, though both have the capacity to do 100 percent of the work. “If there’s a situation that something happens, I have another one ready to be on that job site almost immediately,” he says.
Justus says its important to prioritize the proven performers. “You’re looking to hold on to your stronger subs—the ones who have been with you longer and have demonstrated track record of performance,” he explains. “If you’re looking at your total amount of work, you’re giving them more than the ones on the fringe.”
But on the flip side, a valuable lesson for builders from the recession that’s relevant any time is that you can’t get too attached to legacy relationships. If there’s a problem, you need to cut the cord. “Just because you’ve done business with somebody a long time doesn’t mean that they’re the best trade you can find,” Callahan says.
Lesson No. 3: Stretch Your Dollars
During the downturn, every builder’s mantra was cost. Specifically, they looked to cut costs and find savings wherever possible. For instance, Meritage discovered it was ordering 600 2x4s and using only 480 of them. By finding this error, the company cut $20,000 from its framing bill.
“When sales began to slow, our operations team focused almost solely on lowering costs,” Harrill says. “We performed ‘stick counts’ for major products such as lumber, drywall, roofing, and siding. What we found was that we were paying exorbitant prices for commodities and in numerous cases paying for product that never went into our homes.”
As the economy improves, builders are holding onto that cost-saving discipline. It can be anything from having a better handle on materials costs and quantities to working out national-level deals with manufacturers.
Coming out of a recession, Callahan says that sort of exclusivity is something builders should explore, especially manufacturers who have the distribution prowess to get parts in all markets. “The goal is that if you can get a better deal by giving one manufacturer, distributor, trade supplier more volume, then you should do that,” he adds.
Wilson says TRI Pointe has been focusing on manufacturer relationships and understanding their drivers, but he isn’t as focused on buying direct as other builders may be. Local dealers also have purchasing power that builders can utilize. “Traditionally, we partner with local experts and rely on their knowledge and the national accounts,” he says.
There’s also an opportunity to work out deals with some distributors. If you work to help suppliers eliminate trips to the jobsite, for example, you can save money. “From a distribution level, there are some professional dealers that are strong at a regional level,” Callahan says. “It makes sense to align yourself with those professional dealers where you can add value.”
At TRI Pointe, Wilson looked for savings in the supply chain—wanting to understand the path of the product and who is involved in its transportation, from when it leaves production or a warehouse to when it gets to the jobsite. “You want to make sure every dollar put into the home provides value to the homeowner,” he says. “You can’t do that unless you understand the supply channel.”
While that could mean eliminating certain parts of the supply chain, Wilson is concerned about pushing too hard on pricing. “If you’re screwing down pricing so tight that people can’t be profitable, that’s really going to limit you supplier and sub base,” he says.
Some builders also found savings by renegotiating, sometimes very regularly (though the constant bidding can raise costs on the supplier’s end). “During the downturn, everything went down,” Schmidt says. “We were rebidding all of the time. A lot of peers had locked in, but we were rebidding every time we got the chance. Every time we rebid somebody needed the work. If you lock a guy in for eight months and the market is going down, you’re in trouble.”
In a rising market, taking the opposite approach may generate savings. As materials costs increased, MBK saved money by locking in rates. A builder can do this and sometimes they can go through their lumber dealer, for instance, to a rate guarantee. Their bulk buying power can help builders secure pricing they not have negotiated on their own.
It’s not easy playing the market—knowing when to extend price commitments and when to shorten them. But Callahan thinks having specialists focused on various verticals can help a company better see where prices are moving.
“You can have a cross-functional team that’s working on HVAC and another working on framing,” he says. “You can put the house verticals into teams. Within that scope, they can go deep and know those cost verticals.”
But sometimes, in this era of big data, Hartmann argues that too much transparency can overwhelm a builder. Does it really make sense to have procurement people drill down into costs to save $20 on something like toilet tissue holders? Instead, he thinks builders should only dig into the data on big-ticket items.
“You can get far more bang for your buck by having that person leave it alone,” Hartmann says about the smaller items. “If you’re paying more, it’s only a small fraction of your house cost.”
Lesson No. 4: Automate to Improve Efficiency
When Meritage’s Harrill worked in the field, he remembers carrying a clipboard, putting a big Gantt chart on the wall for each of his homes, and using a pay phone in a garage. The world has changed quite a bit. “Today, we can schedule trade partners, approve payments, and update schedules from a smartphone or an iPad while literally in the home,” he says.
And, at Meritage, technology has helped provide consistency across the company. “We’ve centralized the purchasing administrative functions,” Harrill says. “The decision-making process is still where it belongs, at the division, but the daily administrative portion is centralized for the whole company in one team. In that way, we can push to start communities and homes better and ensure consistency across the company.”
But despite those advancements, it is doubtful builders were thinking about spending any money to automate their purchasing processes in the depths of the recession. Automation “was looked at as an expense in the recession and it was cut,” Callahan explains. “Builders mandated price reductions, laid off hundreds of people, and cut the software budget.”
But Callahan argues that builders who didn’t automate coming out of the downturn should think about it now. “Builders should be looking at different things to improve efficiencies,” he says. “They are busy, but rather than just throw bodies [at problems], they should think about automating. Everyone is looking for people right now.”
By automating some processes, Callahan contends that builders may be able to save headcount or at least reallocate employees to others areas as the market expends. “You take the bodies out where you can,” Callahan says. “You should have your good people working on the things that matter rather than transactional labor, which can be automated.”
Payment is a good place to start. As builders compete to get the best subs in each market, being able to pay quickly offers them a competitive advantage. To meet that need, MBK uses software called SupplyPro. “We went from 90 days to paying within 72 hours,” Fletcher says. “That’s a big difference for some of these subcontractors and smaller companies that depend on cash flow.”
Callahan also sees a tremendous value in automating the ordering process. “The amount of errors through that process is high,” he says of doing things the old-fashioned way. Automating things doesn’t necessarily mean going out and buying the latest and greatest software, either. “Some builders are customizing and developing their own software and other doing more than Excel 101,” Hartmann says. “They are setting these up where a few changes in input can affect everything versus having 200 Excel documents that aren’t tied together.”
Whether a builder is developing software or buying something off the shelf, it’s a waste if they don’t have the proper talent to utilize the technology. People who are skilled in Excel and Visual Basic for Applications macros are vital when it comes to efficiencies and saving money as part of the purchasing part of the business, according to Fletcher. But he also warns that builders shouldn’t just go with the analytics guys in purchasing, either. In a way, it’s like baseball. While the new Moneyball breed of numbers guy is en vogue, there’s still a need for the veteran scouts.
“It’s still about having a guy with relationships in the industry over 20 years,” Fletcher says. “He’s a solid guy, people want to do business with him, and he understands the strategy. It’s also about having the guy who came out of Chapman [University in California] with analytical and computer skills to put it all together and show where these efficiencies can be had.”
Lesson No. 5: Aggressively Value Engineer
When the recession hit, Schmidt and Fletcher and the team at MBK took a number of steps. They looked to cut costs and renegotiated contracts. But one of the biggest moves may have been the decision to go in and re-engineer MBK’s model homes in active selling communities. Some of the projects sold well at one time, but had stalled.
“We value engineered,” Schmidt says. “That was in response to the recession. It was something that philosophically we carried through to our buying today. It changed our whole dynamic about how we do things from a value add and a value saved.”
The changes showed up in kitchens. Schmidt said MBK’s kitchens were getting huge as buyers ordered islands as large as 15 feet. The builder decided to pull the sizes back in and give buyers a standard 6-foot island. If they wanted more, they could pay for that option. “You give them a standard of one size and the options of another,” Schmidt explains. “You do that with cabinetry as well.”
Windows were another place MBK found standardization. Instead of offering a wide variety of sizes and types, it narrowed its options. “When we have more of the same type of window, we have better buying power,” Schmidt says.
TRI Pointe Homes has similar goals, taking the idea of scaling back beyond just products. “One of the things we focused on was simplification,” Wilson explains. “That’s everything. That’s products and paring down your designs and options. For a manufacturers’ standpoint, it’s all about SKU management, and that’s how you drive efficiency and profit.”
While Callahan thinks builders were good at eliminating costly SKUs, he also believes they need to remember how to replace those items with things whose value exceeds their cost.
“A lot of builders stripped houses down to nothing,” he says. “You walk in and there’s no amenity, plain-looking houses. I think that negatively impacts their sales absorption.”
Wilson agrees, cautioning that builders can’t just cut SKU and plans to the detriment of consumer preference. “We need to be able to pare down our designs if we have a plan library of 500 plans across the country,” Wilson says. “But if we’re doing a new urban infill in Southern California, that’s new product [that could be in demand]. You can’t be so focused on the SKU reduction that you can’t meet higher demand.”
But a builder can’t just go through and choose to keep products that offer the biggest price discounts. It needs to ensure the offerings also meet the needs of buyers. “The key is you should always be looking at the specification levels in your home and make sure you have good feedback from the customer,” Callahan says.
Ultimately, it gets back to a simple business mantra that works in good times and bad: Know the customer. TRI Pointe is taking time to develop an increased awareness of who its customers are. “We want to find out what their needs are and be focused on how we can add value to our customers every day,” Wilson says. “From a purchasing aspect, if the supply channel is not adding value to homeowners, why are we doing it? In the past, it might have been acceptable to say, ‘We’re doing it because we always have.’ That’s not acceptable today.”
Over time, that relationship of value to cost will change. Sales will increase and buyers will want more products, forcing builders to decide whether to continue limiting SKUs or start expanding to meet demand.
“As the economy comes back, you’ll see these [product offerings] expand,” Hartmann says. “That will be a challenge. If you start adding options to close deals, before you know it, you’ll have this culture where you’re adding all of this stuff and it complicates everything on your list.”
Laura McNulty contributed to this report.