For the past several years, national purchasing contracts have had the focus of keeping escalating material costs down and guaranteeing supply for the large builders as they grew, organically and by acquisition. There have been challenges on both sides of the supply chain with these agreements, as material shortages and escalating costs required re-evaluating ongoing contracts. How did builders and suppliers handle these challenges and what will they do in the future?
During the bygone “high-velocity” years, rising costs and strong demand put pressure on many suppliers. Companies that had guaranteed pricing to builders were losing money on every sale. Many vendors asked builders for relief. In a few cases, suppliers even rescinded the contracts that they had with the builders, declaring force majeure. As discussions followed among builders and vendors, most of these failings led to satisfactory compromises in both camps. However, in exceptional instances, vendors unilaterally cancelled contracts, leaving the builder stranded without supply.
A healthy supply relationship should withstand the anomalies, and even pressures, of a fast-moving marketplace. Great builders and vendors understand that two priorities will help both partners win: long-term relationships, and reducing the “total cost of ownership” in the long run.
What happens next? As signs of a slowdown in sales crop up, increased pressure falls on builders' purchasing groups to try to maintain margins. How will builders change their purchasing habits in a market that is now easing, compared with the hot markets of the past few years? How will vendors respond? I asked a couple of top purchasing people at builder organizations and got mixed responses. The first said that his company will respond to pressures for decreased material and labor costs, and will be push vendors very hard to lower their prices. When asked if they would break a contract to get lower prices, this executive said yes. Another large builder asserted that he would not break a contract, but indicated that their vendors will work with them to lower costs commensurate with whatever savings they can achieve.
While responses will differ, pressure will intensify over the coming months to lower total costs in the supply chain for every input into the building process. As always, industry leaders on both sides of the equation already have solid processes to optimize the supply chain. They're challenged to integrate the supply chain, from concept through construction, and after sale service.
How will your company respond to increased pressures for lower prices/ costs? E-mail your thoughts to email@example.com. If you want to keep your note confidential, just indicate that on your e-mail. In a future column, I will describe the responses that I receive.