Big builders have made double-digit growth look almost routine. But internally, the task of keeping up with the ever-mounting demand for products and materials continues to grow more challenging each year for buying staffs.
Without question, big builders are gaining clout and control when it comes to buying decisions while the stakes for suppliers continue to escalate. That's increasingly becoming the case as builders look to consolidate orders among fewer suppliers within product categories and strike more cost-advantaged national contracts.
At the same time, however, the process of specifying, ordering, and making sure products arrive on time across as many as 200 to 300 community jobsites high-production builders now manage each year has become daunting. As a consequence, the process of evaluating what materials builders will ultimately buy for their various homes and communities under construction increasingly involves deciding which manufacturers can deliver on a wide array of criteria, not just the best product at the best price.
Where The Buck Stops
As purchasing decisions have grown in size and value, it's not surprising that builders are becoming more centralized in their approach. One of the driving factors, however, is the ability centralized purchasing teams have in striking long-term pricing and support programs directly with manufacturers even if products flow to jobsites by way of subcontractors and distributors.
The number of builders reporting national agreements for most other product categories, however, begins to tail off rapidly. Among the next ranking categories: lighting (24 percent); roofing and siding (23 percent and 22 percent, respectively); flooring (22 percent); HVAC and windows (21 percent); fireplaces (15 percent); lumber and framing (11 percent); doors (10 percent); countertops (10 percent); and wiring and security (6 percent).
A critical impediment to striking national agreements lies in the simple fact that distinctly regional and local product preferences among buyers tend to undermine the one-brand-fits-all strategy. As a result, while national contracts may not appear prevalent in many categories, builders nevertheless report they are striking a significant number of powerful regional agreements with suppliers and distributors.
As the decision-making processes of the biggest builders become more centralized, data can be collected nationwide about the performance of many products and can take a more dominant role in purchasing decisions, contends Ron Theilacker, quality improvement manager at the San Diego office of Pardee Homes. Theilacker, a specialist in Six Sigma process management, is a big believer in analyzing the data. The purchasing process has moved substantially beyond weighing product features and benefits for the price. He maintains it now typically should include measures that identify and address known problems, maximize return on investment by reducing call-backs, repairs, and replacements, and perhaps improve teamwork and morale as well. He also says he believes “many resources and many people” should be involved in purchasing decisions. By “many,” he means everyone who touches the home and the buyer: architects, marketers, options representatives, construction, contractors. Admittedly, says Theilacker, this is easier said than done.
Decision Drivers While suppliers may still win or lose on price, builders surveyed said the two biggest drivers of purchasing decisions were “Track record for reliable delivery” and “perceived value to the buyer.” Both were cited by more builders (86 percent) than any other criteria among the dozen that typically go into builders' final purchasing decisions. A solid, dependable warranty ranked third, with 82 percent of builders. Clearly, all three factors are critical to meeting buyer expectations in an increasingly customer-driven business.
The next most important issues to builders, cited by three out of four respondents, were the ability for suppliers to “shorten cycle time” for builders, product “design and style,” and the “ease of installation” of their products.
Naturally, the criteria that drive purchasing decisions vary greatly by category.
Price proved to be the most important of a dozen factors for builders in deciding on structural products such as lumber and framing (cited by 51 percent of builders), roofing and siding (39 percent), wiring and security (30 percent), and windows and doors (30 percent).
But price did prove to be the driving consideration for more visible categories such as flooring. That's in part due to flooring's importance as a big-ticket upgrade category for most builders. Flooring typically provides better-than-average perceived value among consumers, as well as gross margin dollars to builders. It's not surprising that more builders (77 percent) reported they are concentrating on flooring sales at design centers than any other product category (see charts, at right).
By contrast, design and style ranked highest in importance for categories such as lighting and cabinets (35 percent). For appliances and faucets, meanwhile, consumer brand preference weighs most heavily. Builders ranked “brand home buyers request” most often in importance when choosing appliances, for instance, (cited by 37 percent of builders), followed by “perceived value to home buyers” (27 percent), warranty (25 percent), and price (23 percent).
Having a dependable warranty was also an important purchasing criterion, often ranking among the top five considerations builders cited across the majority of product categories builders buy from. The one category where it mattered most was HVAC, where “a solid, dependable warranty” was the top-ranking concern, cited by 40 percent of builders.
Many builders say they still often accede to customers' wishes if the perceived value is clear and the manufacturer issues a hassle-free warranty. “If buyers will pay for it, we'll sell them anything they want,” says Donna Sanders, vice president of options at Pardee Homes in Los Angeles.
But increasingly builders are confining upgrades to product lines where they know suppliers will be able to deliver the goods reliably and be available in the long run to service and support what they sell. “If we have a national agreement with manufacturers, part of that agreement is usually that they will make sure that their products are available within a certain period of time,” notes Sanders.
Price Vs. Rebate Debate Indeed, builders are looking as much at the long term return on investment as they are at cost in weighing purchasing decisions. That includes not only the broader support costs in getting products installed, but also the opportunities to increase what buyers will spend. Says a vice president of purchasing at an East Coast builder who requested anonymity: “We determine the most economical way to build a home and then figure out what more the buyer will pay for,” he says.
And that trend will continue, according to the survey: Nearly one-third of big builders surveyed stated that they believed the proportion of the sales price derived from options and upgrades—which last year averaged 11.2 percent—will increase during the coming year. Part of the ROI equation continues to hinge on the net price builders ultimately get from suppliers. Among big builders, getting the lowest initial price continues to be preferred by 63 percent of home building executives compared to just 8 percent who still favor rebates; one out of four builders remain indifferent, as long as they know they are getting the best price they can.
Many big builders complain, however, that rebates often get credited corporately and often don't show up correctly on the cost-of-goods line at the division level, throwing off margin figures that often determine bonuses.
Ultimately, the survey reveals what informal interviews confirm: Outstanding service from manufacturers and suppliers can often trump other purchasing criteria including, and in some product categories, price.
“Good service captures people's hearts,” says Joyce Mason, vice president of marketing at Pardee. But “good service” is a subjective criterion, and the closeness of some of the responses in the Big Builder study hints that there is room for further investigation.
“There's a lot of opportunity for improvement based on data from market research,” says Pardee's Theilacker. Acknowledging that decisions are driven by availability, price, and appearance, he nonetheless insists that objective data should drive the purchasing process. “We have to come up with the best products to eliminate pain later on,” he says.