For big builders, the party is winding down. The days of giving their regional divisions free reign in purchasing building materials and products may be numbered. As mortgage rates creep up and new-home sales slip, builders have to bring even more corporate discipline to their operations. And as the market consolidates into fewer hands, the biggest builders are scrutinizing their supply chain for ways to achieve more efficiency and cost savings. They're using their size to squeeze suppliers for lower costs, and, in an increasing number of instances, that means migrating from local sourcing to national contracts for building products.
At Lennar, national contracts number about 40 today, up from just a handful six years ago, and include items such as concrete roof products, faucets, appliances, and paint. “All of our products and materials are up for grabs,” says Mark Shevory, regional president of national purchasing. “As our company grows, we continue to leverage our buying power, and as building distributors become more sophisticated, we should be able to source more products nationally.” The company, which closed 42,000 homes last year, projects 10 percent to 15 percent growth this year. And although Lennar doesn't quantify the dollar-for-dollar savings gained through switching to national contracts, “we're confident we've generated substantial savings through price protection, back-end incentives, and preferential supply,” Shevory says.
Beazer Homes is also plotting supply strategy carefully. It is taking a systematic look at national contracts, re-evaluating existing agreements, and exploring opportunities in all categories. “We prioritize our efforts based on a company-wide spend analysis and are literally going from the largest opportunity to the smallest to hit all bases,” says Tony Callahan, vice president of strategic sourcing and national purchasing. Appliances, faucets, and lighting, among other products, are sourced nationally, and a roofing contract is under way. Callahan estimates that by centralizing its buying decisions in recent years, Beazer has saved more than $1,000 per home. And it's not just pricing power the company is after. Callahan points out that suppliers are more motivated to solve field problems, invest in training to promote upgrade sales, and work on reducing costs when there are 18,000 homes worth of volume at stake.
LOCAL WISDOM Indeed, the success of national sourcing has as much to do with the quality of the distribution channel as price, since the work is done on the local level. Craig Schmauss, corporate director of purchasing at Mercedes Homes of Melbourne, Fla., says buying on a national scale saves the company roughly $2,000 a house. By partnering with a single source, Mercedes taps into broader market research and support. However, getting local buy-in can be a struggle. “Unless a supply chain is already in place and well-versed, there's always someone out there who says they can't get it. Or, that it's more expensive than the local products and it's going to hurt their divisions,” he says. “As a general rule, we're trying to nationally source as much as we can without crippling the local divisions.”
Unilateral agreements do require more up-front negotiations to make sure the needs of channel partners and operating divisions align. Beazer looks for national suppliers with a shared focus on the customer, the product range that its customers expect, and an attitude that if something is wrong, they'll make it right. And Callahan checks in often with the local guys. “It could be a subcontractor issue, a distributor issue, or a manufacturer issue,” he says, “but if you haven't asked the division's opinion on the partners you're looking to select from, that's where you'll get resistance. It takes us longer up front to determine who we're going to align ourselves with, but once we do it, we can implement with velocity.” Lennar's Shevory agrees. “There is a transition period,” he says. “We tell our manufacturers that they need to visit the division and solve the problems at a local level before we execute a national program.”