In theory, national buying power is one of the biggest weapons large national builders have that their smaller local competitors don't. In practice, it's been a difficult one to wield.
The goals are simple: Leverage scaled spending by buying more with fewer vendors, and then reduce the list of SKUs (stock keeping units) you buy with each vendor to cut costs by simplifying the supply chain.
But the execution is complex and time consuming. Until the recent downturn, many builders didn't have the time or the urgent need to push the process through.
Beazer Homes USA has been working toward the goal of leveraging its spending for at least three years, "but not to the degree that I am now," says Tony Callahan, senior vice president of national purchasing, planning, and design, who joined the company three years ago. "Two years ago, our challenge was, 'How do we get all these houses built?'"
But, as sales slowed, reducing the costs of building homes has pulled into sharper focus. And, with orders down, suppliers are more willing to deal. "It's a good time because there's capacity in the industry, and there's a desire for [vendors] to gain market share because the overall volume is low," Callahan says.
One step was reducing the number of house plans Beazer offers and the number of vendors it uses. For instance, GE is its sole provider of appliances. Last year, the company looked at all the products it was buying from GE and reduced the SKUs by 50 percent, eliminating similar offerings and creating what Callahan calls "a logical upgrade path" of offerings.
Next up, is paring down the company's list of offerings in carpet, lighting, and door handles. "That's a three-month project. We are using a tremendous amount of colors and styles, and some are virtually the same," he says.
The costs savings of simplifying product offerings extends to installation and distribution. "If you reduce your faucets 50 percent, you are reducing distribution costs. You've reduced your plumbers' costs because the chances of them having the parts for that faucet with them are greater. ? It makes more sense for everybody in the channel."
But challenges of leveraging spend by simplifying the list of suppliers and materials come from within. Convincing division presidents to jump on the national buying bandwagon can be an issue for some builders.
While Beazer gives local divisions a lot of autonomy for choosing local trade partners, Callahan works hard to get buy-in on the national ones. "You are looking at maybe 80 percent early adopters, 15 percent on the fence, and then you've got 5 percent you just have to bring in," he says. But most come around eventually. "Our negotiations tend to take longer, but the buy-in is greater."
Beazer, like many builders, has been working to get lower prices from its suppliers, but there is a point where the supplier has nothing left to give. "You can only get so much from somebody's margin," he says.
That's when you start talking to the trade partner to figure out how processes can be improved to cut costs. And it's not always the suppliers' processes that are the problem. "Maybe we are sending them out on a lot of dry runs" and they arrive and the house isn't ready for them to start their portion of the work, so they have to come again another day. "That can show up in their prices," Callahan says. "We try to work with them."
Learn more about markets featured in this article: Orlando, FL.