For years a great resource lay largely untapped within the purchasing departments of large production builders--the ability to buy cheaper and more efficiently nationally.
Everybody knew the potential was there. It was often cited as a primary advantage of being a big national home builder. Yet, for the most part, it remained unmined during the go-go years when speed of getting materials and labor was more important than cheap and efficient.
But now tapping into that resource is critical for survival. Since increased margin isn't going to come from increased sales prices or volume, it must come from decreased costs.
Many purchasing chiefs have successfully risen to the challenge. So much so that during many quarterly conference calls, reduced construction costs have been one of the few positive things CEOs have had to talk about.
Hungry subcontractors and suppliers, willing or cowed into reducing prices, provided the first round of cost savings. But that's not a good long-term strategy, said Ken Pinto, national program manager for Standard Pacific Homes.
"Most of our divisions, in order to reduce costs in recent years did frequent re-bidding," he said. "It's Wednesday, let's re-bid again. Which was driving our suppliers and subcontractors nuts."
Continuing to try to gain margin out of the hides of suppliers is not a long-term solution to the problem. "You either drive your people out of business, or you put them in such an uncomfortable place that they don't want to work for you," he said.
The real work of improving margins through purchasing involves developing honest and transparent partnerships with manufacturers and suppliers. And it's tedious and slow.
Standard Pacific Homes, for instance, started reworking its supply chain about three years ago. At the time, the builder was about as decentralized as a company could get. It had grown fast by bolting on smaller builders across the country, and its divisions were operating almost as though there was no parent company. There were no truly exclusive agreements or partnerships with providers then, Pinto said.
The company is in its third round of paring down its list of product suppliers, according to Pinto. It now has three drywall companies, three providers of lumber, and one main supplier of shingles nationally. It also has one national paint provider, Comex Group; one HVAC supplier, Carrier; and one concrete source.
So far, the efforts have saved Standard Pacific 15% in direct costs, and more is expected over time, said Pinto.
Other improvements beyond pricing are expected. Since things like lumber and drywall are bulk items, transportation savings are expected as well, he said. But pricing and costs aren't the only consideration in choosing providers, added Pinto.
"The partnerships focus on a lot of things--total cost of ownership vs. price, how to reduce resources to get the same amount of work done on both sides of the table," he said.
And not every provider is up for that level of cooperation. For it to work, the provider has to be open about its costs of doing business. "We tell them we need you guys to open up completely so we can understand your costs and we can understand how to help cut them," Pinto said.
And it's important for the builder to be cooperative as well. "We know as builders that there are things we do that cost our suppliers money," Pinto said. In the collaborative relationship, the builder asks the suppliers what it could do to save them money.
It's one thing for Standard Pacific to pick providers, but it's another to get local subcontractors to use them. That wave of implementation is coming next, and some push-back is anticipated.
"Now we have to change our relationships with subcontractors," Pinto said. "Its now going to be different than it was in the past. We are going to try to keep our subcontractors. But we know that there are some subcontractors who won't want to participate. Those are obstacles that we have to get around."
Specifying drywall and lumber sources, for instance, is unusual for Standard Pacific. So the company is working on communicating and building buy-in.
"We just invited all 11 of our primary framers to Denver and announced the strategy," Pinto said. "We wanted them to understand that we weren't doing this so we could push them aside, but to strengthen the supply chain. We brought them together and said, 'You are part of the solution.'"
That's a long way from the message builders used to send up the supply chain.
"For a decade, we in the purchasing department had been advised by subcontractors, if you add complexity, it's going to cost more to do that," said Pinto. "We would interrupt them mid-sentence and say, 'I don't care, get it done.' We didn't care. There were all these specifications and options and upgrades, and that has hurt the whole supply chain."
Beazer Homes, too, has been cutting substantial costs out of home construction through drastically reducing the number of material SKUs, suppliers, and home plans (2,000 a couple of years ago to 400 today).
Having fewer plans allows the company to spend more time and energy working through the details of those plans to make sure they are value-engineered, to use targeted SKUs, and to have detailed materials lists of what's necessary to construct it, said Tony Callahan, Beazer's senior vice president of purchasing and design.
For instance, the company is saving $200 a house on roofing materials in two divisions by buying the shingles directly from the distributor and value-engineering the roof design so fewer are necessary.
As the company builds detailed materials lists for its home plans and determines itemized pricing for the materials, "then you are able to back into what you should be paying," Callahan said. "That has allowed us to have a great dialog with the trades as to how it relates to their bids. You can talk the details to really make sure that you get an efficient bid."
Beazer also is working to be more collaborative with its trades, tapping into their expertise on how to cut costs.
"We had a great meeting with 24 of our trades in Indianapolis," said Callahan. "We talked about where we can reduce costs and involved them in that conversation. From that we got great feedback that we are working to implement. They are the experts. You talk to the trades, and they know more about how to eliminate waste and reduce costs in your house than you do because they are in your houses day in and day out."