All Business Myth Stories
From customer care and human resources to land strategiesand purchasing, misconceptions abound about how to operatea building business...
Customer care myth: Home buyer satisfaction increases in an up market.
Finance myth: Every dollar of revenue should generate the same return.
Service myth: The customer is always right.
Purchasing myth: Price and cost are the same thing.
Hiring myth: It's all about money.
Operations myth: Bigger is always better.
Land strategy myth: Builders need to pay more for land than developers.
Operations myth: Land is the answer to all problems.
Labor myth: Talent lost during the recession is easily replaced.
How to maximize purchasing strategies as the housing industry recovers is on the minds of many building executives today. BUILDER talks with industry consultant Tony Callahan about keeping costs under control.
What’s the No. 1 misconception builders have about purchasing and supply chain issues?
The biggest misconception is that “price” and “cost” are the same thing. Price is only part of the cost of doing business with a supplier or trade. Poor quality, missed deadlines, rework, warranty expense, and negative impact to employee morale and customer satisfaction are all additional costs.
In addition, many builders buy into the myth that they can always get a better deal purchasing locally than by aggregating spending at a higher level. The truth is that fragmenting your spending almost always results in higher costs. Unless your installer has more volume than you on a national basis, you are leaving money on the table by allowing him to control your material specification. Manufacturers are interested in builders that are willing to make an exclusive commitment. Long-term pricing, rebates, and volume incentives aside, manufacturers are a great resource in concurrent engineering new floor plans or value engineering existing ones.
What can builders do to improve efficiencies?
First of all, leverage spending at the highest sourceable level. Can a material or service be supplied by one company nationally for less? If not, can it be supplied regionally for less? If not, then purchase it locally. Use that thought process for both the cost of goods sold and indirect categories like computers, mobile devices, office supplies, construction trailers, or leased vehicles.
It’s also important to consolidate your trade base. Have a primary (70%) and secondary (30%) trade for each cost code. Leveraging your spending with capable trades will lower your costs and improve your level of service. A trade is a lot more likely to work through the weekend for a builder that gives him volume. That said, I always recommend having two trades per category in the system and ready to go. One is not enough given the volatility of most trades.
Building companies also should set up their systems to be able to compare costs from one house/subdivision to another, something they may already be doing if they build the same floor plan in multiple communities. Lastly, builders should work to reduce material SKUs. Rather than offering every item in the manufacturer’s catalog, limit the choices to the items that target what customers want. Purchasing slow-moving SKUs increases costs in the supply chain and can negatively impact days under construction. However, be sure to update your SKU library when manufacturers introduce new products that would be of interest to your target customer.
Tony Callahan is president and CEO of Callahan Consulting Group in Kennesaw, Ga.