I am often asked should sourcing operations be centralized to one or a few locations or decentralized to each operating location. Before I get to my response, let's look at the strengths and weaknesses of each model within the home building industry. A Centralized Sourcing Model (CSM) is often associated with lower costs, managed risk, and leveraged resources. Some drawbacks of CSM are reduced flexibility, less local autonomy, and elongated response time. On the other hand, a Decentralized Sourcing Model (DSM) is often associated with flexibility, responsiveness, and greater local autonomy. Some drawbacks of DSM are higher costs, more risk, and additional resources.
There are pros and cons to both approaches. So how do I respond when asked whether or not a company should centralize or decentralize? I say use a hybrid approach. Centralize those categories where leveraging the company's spend makes sense. Specifically, centralize areas in which you can lower your costs, improve quality, or increase responsiveness from the trade, distributor, or manufacturer. If you cannot do that, then leave the operations decentralized. However, help the decentralized locations by implementing strategies where they share information with each other to help control costs. Also, make sure you have good sourcing policies and procedures to minimize your risk.
Now let's look at what categories you should consider for centralization. There is a strong business case to be made with leveraging the material specification with a limited number of manufacturers through national accounts. Incentives, brand alignment, product consistency, training, and manufacturing resources are just some of the benefits of leveraging this area. Recommended categories include appliances, siding, HVAC, roofing, flooring, engineered lumber, faucets, lighting, paint, cabinets, and doors. There may be other categories that make sense for your company, but consider them carefully.
Implementing any national account is disruptive to the trade base. Fragmenting the trade's spend makes sense if you can lower your total costs. There are some instances where a trade has more volume within a given category than you do. Talk with them about combining your volume with theirs in your next RFP. You may be able to lower both your costs and implement the new agreement much faster.
There is also something to be said for leveraging your spend with large regional trades and distributors if providing them more business will lower your costs, reduce your cycle time, and improve the level of service that you receive. Recommended categories are pro dealers, electricians, plumbers, framers, flooring installers, insulation contractors, drywall applicators, foundations, and flatwork trades. Many builders have even asked existing trades in one market to open operations in a new market. This can make sense if there is a lower cost for the builder and enough volume to support the trade's additional overhead expenses. Involve the trades and the manufacturers in the product development process. They can provide you with insight on everything from cost effectiveness, ease of installation, and design for warrantability. Part of their value proposition should be to help you build a better home. Most trades welcome the opportunity to give input on a new design.
Remember, one size rarely fits all. It does not have to be all or nothing. Leverage your spend and your resources where it makes sense for your company. Help the other areas by sharing comparative information that they need to keep improving. Always keep an open mind and try new things. If it does not work, then try something else but keep moving forward.
Tony L. Callahan is managing partner of the Callahan Consulting Group, which specializes in helping clients lower costs and cycle times while managing risk throughout the supply chain. He can be reached at email@example.com.