Wielding their size and buying clout more effectively is how two of the industry’s largest production builders and a leading buying group for custom builders believe they can counter future anticipated shortages in construction labor and building materials.
How builders should be adjusting their purchasing strategies as the housing industry recovers was the topic of a panel discussion during Builder’s Housing Leadership Summit in New York City this week. The discussion took place as the Census Bureau reported that national housing starts in April rose 2.6% to a seasonally adjusted 717,000 units, and after several of the industry’s largest builders at the Summit said that their sales in the first quarter had risen by anywhere from 25% to 50%.
“If there were sustained 25% growth [this year], it won’t be ‘if’ but ‘what part’ of the supply chain fails first,” warned Tony Callahan, Beazer Homes’ former supply-chain vice president, who now manages his own consulting firm. Callahan moderated the panel that included Brad Conlon, D.R. Horton’s vice president and director of national accounts; Mike Smith, Toll Brothers’ corporate vice president of purchasing and product standards; and Bill Smithers, CEO of Custom Builders USA, a buying group for 220 builders that closed 1,850 homes in 2011.
The panelists focused on how builders can continue to keep purchasing costs under control. Conlon sounded less concerned about rising labor costs—“there’s still a wealth of subcontractors out there,” he said—than the potential for significant jumps in materials prices, especially in product categories where manufacturers could need anywhere from 18 to 36 months to restart mothballed plants. In the event of product shortages, builders “will have to sell who we are,” which in Horton’s case means “connecting the dots” within its decentralized purchasing structure and presenting suppliers with more volume-buy opportunities.
Unlike many other builders, Toll has been adding purchasing personnel to different markets, and realized “substantial savings” by using seasoned personnel, said Smith. Those purchases are now geared more toward hiring subcontractors, which in the past Toll let each of its subdivisions handle.
CBUSA has made several dramatic changes in how it buys, said Smithers. These start with what he called “committed purchasing” for 30-, 60-, and 90-day buys. Builders now order through a cloud-based entry system, through which manufacturers can enter their unit costs. Last August, CBUSA launched an online platform where builders can post their house plans and suppliers can bid for projects. And CBUSA is working on developing national agreements with suppliers. For example, 64 builder-members recently participated in the purchase of 15,000 squares of fiber-cement siding, with the understanding that all of the builders would agree to use the winning bidder as their supplier.
The panelists urged the builders and suppliers in the audience to consider unbundling labor from materials costs to see if there are opportunities for savings. While they conceded that this would be difficult in some markets where turnkey programs prevail, both Smith and Conlon said they’ve had success unbundling the drywall and roofing categories. “The best approach is to sit all of the parties down in the same room and explain what you’re doing,” said Conlon.
Somewhat paradoxically, the panelists also advocated what they called “total cost of ownership,” or TCO, to determine the true cost of labor and materials by including in that calculation such factors as customer service, quality control, installation, and callbacks. CBUSA, in fact, allows its builders to rate suppliers in its group on eight categories, and those ratings are disseminated throughout the organization and to vendors. The buying group also has a group of between 12 and 22 builders that help it assess new products and their potential benefits.
Conlon was quick to note, though, that the goal of measuring vendors’ performance should be to help his company and its suppliers learn from mistakes without retribution.
As market conditions improve, supply-chain efficiency will invariably rest on how well trade partners communicate. And some relationships might need repairing coming out of a recession where builders sometimes throttled and intimidated their suppliers for lower prices. “Most businesses pass the baton between companies and suppliers, but in this industry we beat each other with it,” quipped Callahan.
The panelists spoke favorably about cultivating long-term relationships with vendors through earlier communications facilitated by a more-refined use of technology. But that doesn’t mean builders won’t continue to entertain short-term bidding. “Horton wouldn’t have survived as it did without it,” said Conlon. And Smith said short-term bidding remains “essential” in some instances. Smithers suggested that developing relationships with multiple vendors in different product categories could help builders balance their short- and long-term purchasing needs.
As for taking on new vendors and products, Smith said he looks at quality, TCO, and whether the brand would enhance the sale of the home. He also looks for any potential distribution problems, as he believes the biggest supply-chain challenge for builders will be product transportation, following a recession that caused severe attrition among building material dealers and distributors.
CBUSA relies on groups of 12 to 24 builders, via Yahoo, to analyze and recommend new products. And Conlon said Horton is “looking for unique opportunities” to bring on something new, such as trying it out in one of its models and getting specific feedback about the product from customers.
John Caulfield is senior editor for Builder magazine.