Familiar scene? A supplier–squeezed between soaring materials costs and builders on extreme budgets–shows up, hat in hand with a sob story.
A garage door manufacturer called on Standard Pacific Homes national program manager Ken Pinto, with a long face as he delivered the news that steel prices had climbed so high, he could no longer keep his doors at the promised unit price.
Pinto didn't buy it. No question, steel prices had shot up since January. But six months earlier, the same manufacturer's rep bragged to Pinto that his company had bought rolled steel futures to hedge its position and keep prices flat into 2009.
The contract remained in place. But that was only one temporary victory that may stall–but not stop–the wave of price increases caused by high fuel prices and worldwide demand trends.
"It's real; it's coming like a tidal wave, and I think it's going to impact our industry tremendously," says Bill Justus, vice president of supply chain services at David Weekley Homes.
Justus and other building executives worry that climbing materials prices may well become the next big blow to new-home builders. "The reality is we are seeing severe price pressures in the market, and if we can't get these under control I'm afraid it's going to seriously impact what demand we have out there," says Justus.
In addition to steel-intensive products like garage doors and plumbing fixtures, the price of asphalt shingles has also risen. Recent storms in the Midwest, together with the closure of inefficient plants, created a shortage. Also, asphalt comes from oil. Plus there are the increased costs of the fuel needed to deliver the product.
"You throw all of that together, and it's resulted in significant price movements–in this case, 30 percent price increases in the next two months," notes Justus. "And carpet has gone up double digits as well. You are hearing the drywall guys cry."
Now is the time to cash in on good relationships built with suppliers over time, according to Pinto. In cases where price increases are inevitable, builders with the best relationships will be able to negotiate smaller increases than the competition, he says.
"What some of us are hoping is that they will make more money on someone else," Pinto explains. "Lower my costs but raise someone else's. ? For some materials, like asphalt shingles, the best I can hope for is that they will defer my price increases for a couple of months. ? Instead of 12 percent, I get 7 percent."
Having a bargaining chip or two helps. For instance, Standard Pacific is in the middle of its second round of supplier consolidation. Pinto is making it clear that those suppliers who are willing to hold prices down–or are at least willing to make Standard Pacific's cost increases less than its competitors–have a leg up on the competition for a greater share of the company's business.
At Florida-based Mercedes Homes, director of purchasing Craig Schmauss has negotiated with some success for price concessions from the trades to make up for some of the cost increases of materials.
He's also got rebates on the radar. "I'm working with manufacturers to increase rebates to overcome price increases, especially where we have an agreed upon price," Schmauss says.
That has worked for faucet purchases, where manufacturers increased prices to the distributors but increased Mercedes' rebates on the faucets to, in effect, keep Mercedes' prices flat. "It's not ideal," says Schmauss.
The company is also re-engineering its houses to rethink the materials it uses. For instance, the company is no longer including poured concrete walls as standard in many of its homes. "Right now cost is king, and that's $1,000 to $2,500 more in cost," says Schmauss.
Additionally, a predicted 35 percent increase in the cost of asphalt shingles between now and 2009 has the company considering alternatives, including poured concrete roofs. Schmauss has had his share of materials suppliers in his office pleading for relief from contractural price locks and claiming they will go out of business without price increases.
Sometimes telling them "no" now will hurt more in the future, according to Schmauss. When the contract is up, they will increase prices even more to make up for losses sustained during the contract period.
In some cases, Schmauss offers to give materials suppliers who say they are in dire straights small price increases now in return for locking in prices for the next year. If they threaten to increase prices by $60 at the end of the contract, he may offer a $10 increase now and another $20 increase at the beginning of the next year instead.
"It's pay me now, or pay me later," he says.
Schmauss has developed another technique for dealing with hard luck stories. "I pull out our income statement and challenge them to find money on there for me to give them."
A manufacturer made the mistake of crying about making only $50 per garage door. Schmauss's reply? "I would love to make $50 a house. You are making $50 a door. You have got a long way to go."