The decrease in demand for new housing is hitting the supply chain hard. Builders have recast their earnings, and commodity wood prices and other building material prices have fallen to almost “cost-to-produce” levels. Builders are demanding help from their vendors to reduce costs further and keep demand as high as possible. We need to examine the extent of the help needed and how as an industry we can move toward that goal.
Our industry, like most others, does have a real price/demand curve. The curve is simple for most products. The higher the price, the less you sell, all else being equal. For example, freight companies and airlines are battling high-energy costs that must be passed on to the customer, therefore raising prices and softening demand. As we know, in residential building, the affect interest rates have on the price of a home is astounding. Consider that according to the Freddie Mac Mortgage Calculator, the change in interest rates from June 2005 to June 2006 has added the equivalent of $16,000 to the cost of a home priced at $180,000. This is based on a 20 percent down payment.
The bad news is that the additional $16,000 cost per house, or $102 per month increase in mortgage payment, is not in the new-home business supply chain to argue over. The money doesn't go to builders, installers, distributors, or manufacturers. Rather, the incremental monthly increase flows to investors who purchase mortgage-backed securities. With this money pulled out of the supply chain, how can we make up the difference?
The process of adjustment has started, with builders looking at every way they can to reduce costs. These cost reduction efforts use tactics that range from the old fashioned brute force of threatening business loss, to sophisticated supply chain enhancements through a shared vision.
Brute force moves money from one participant in the supply chain to another. The other tactic–working with a shared vision–can take real long-term costs out of the supply chain and improve quality so everyone can win bigger and better. And the savings will be there for years to come.
For example, consider the framing package of a home. This package is one of the more complicated parts of the supply chain. It starts with a design that is affected by local codes, snow loads, hurricane and storm demands, seismic requirements, and many other factors—most of which are regional or local in nature. Add to that matrix of requirements the builders' and buyers' preferences, framing company practices, distributor alliances, manufacturer regional strengths and weaknesses, and the result is a highly complicated optimization puzzle.
Currently, integrated teams across the supply chain are working together to take real costs out of the framing system. The components of design, materials, manufacturing, distribution, and installation are being examined and optimized to reduce costs. True savings estimates in hard costs for these efforts range from $2,000 to $6,000 per home. That does not make up for the $16,000 that we have lost out of the supply chain, but it represents a start. These cost savings estimates don't include the invaluable savings from increased customer satisfaction and reduced expense of callbacks by improving the systems. This process can be repeated with many other systems in the house.
For long-term benefits, consider establishing supply-chain teams that will work to optimize your systems. These teams will develop strategies that will benefit every part of the supply chain and have the potential of increasing total demand for our industry by significantly lowering costs.