Disrupting the industry with a new innovation takes foresight, managed risk, and time. Meritage Homes has been willing to invest in those efforts in order to create a product that prioritizes new benefits to buyers.
But what about cost? While cost is important, Meritage has been able to give it equal relevancy with other factors that are just as critical to the company's vision.
“Our focus on comprehensive evaluation is unique,” said Royal Erickson, national strategic sourcing director at Meritage Homes. “We do a good job of evaluating price, performance, and product. A lot of times purchasing focuses too much on first-time costs. But there are other things that come into play that affect construction and operations. I take pride in the fact that we look at more than just upfront cost, we look at the total costs associated with our vendor alignment.”
Meritage Homes was selected as the partner for the 2018 BUILDER concept home, coined the reNEWable Living home. What is evident from this project is Meritage’s approach to the vision and the balance of focus from its purchasing department. Erickson says that the products selected for the project—such as the indoor air quality system with Aprilaire, HVAC design, and appliances—are all from manufacturers and designers that were vetted and had to meet strict performance criteria.
Pushing the Envelope
Erickson’s partner, Thaddeus Lynch, director of purchasing at Meritage Homes, says this process allows the company to create a competitive advantage over other top 10 builders, because Meritage is continuously pushing the envelope in terms of innovation.
“We aren’t unique to the market, but we are unique from a volume standpoint,” Lynch explains. “We position ourselves to take efficiencies and technologies and get them to scale for a production builder. For instance, we are using spray foam insulation and Aprilaire in-line dehumidification, which no one else is doing. We have partnerships with the suppliers and installers to go beyond what is expected in a house.”
By pushing for this innovation, Meritage has brought something that was used only at a custom level into mainstream use. Lynch explains that seven years ago, spray foam insulation was difficult to use—there was only one spray foam rig in all of Central Florida, which is a six-figure investment. He says, in the case of this building advancement, Meritage was able to do the heavy lifting by specifying it for all new construction. He says as Meritage became the largest purchaser of spray foam, a new labor force was built to support its expansion in Florida. Now it’s standard in all of Meritage’s markets, and it’s also accessible to others who may not have considered it at all.
“We have helped the spray foam industry become more relevant,” Lynch says.
CR Herro, vice president of environmental affairs at Meritage, is tasked with helping shape what’s next in innovation, and he currently is focused on updating the automation platform. As evidence of that, Jeff Vaughn, president at American Residential Products, was doing fiberglass insulation installation for Meritage in 2011 when he was approached to switch to spray foam insulation. Since then, he has purchased 10 spray foam rigs and attributes 90% of that growth to Meritage.
Vaughn says being able to grow the way that Meritage was growing was key. He focused American Residential Products on partnering with the spray foam suppliers to create an intelligent labor force that knows how to use spray foam. He says the spray foam is a huge component of having an energy-efficient product and has seen other builders investing in it as well.
“Manufacturers are usually easier to bring along because they are trying to innovate," Erickson says. "The bigger challenge is to bring the trades along and treat technology fairly in the pricing structure. They need to be reasonable to not push us away from the latest technology. But that may not fit into our trade's buying activities.”
Decision by Divisions
Home automation, Aprilaire and HVAC innovations are just a few of the 50 categories that have to be decided on when constructing a home like the reNEWable Living project. And, it takes a team to select, which is key to Meritage’s success. Just as all homes need a good, solid foundation, so do purchasing decisions. Erickson says that Meritage’s purchasing foundation of strength comes from the divisions.
“We try to communicate out as best we can to make sure that we are on the same page when we are implementing a new program or strategy,” Erickson says. “And nothing gets done without the division because they have to pull pricing through. They have to go through the hard work and the struggle when there is a change. We have to recognize the additional burden on them and be reasonable in setting our expectations and the implementation of a new product.”
Lynch says the strength of getting feedback and vetting decisions with the divisions gets buy-in. Based in the Florida market, Lynch says that the leg work done at a national level sets the division up to think through the options, choices, and what needs to happen for success in every situation.
Because selection is not a unilateral decision at Meritage, there are different processes used to engage the divisions, which depend on the product and the category. Divisions have the opportunity to provide feedback on products that they are familiar with or that they have been exposed to.
“Last year we bid out appliances,” Erickson says. “We took a group of 25 or 30 people from different markets and with varied functional responsibilities such as marketing, construction, purchasing, and warranty and flew them to multiple manufacturers. We spent a day with each manufacturer diving deep into their R&D and their marketing. The Meritage folks on the trip were able to provide feedback and were included in the decision process. Divisional buy in is much easier if the divisions have had a voice.”
Erickson points out that the process also may differ if the product is an exclusive category supporting Meritage's innovation or energy-efficiency platform, including an exclusive for air filtration system. In this case, Meritage would implement a bid event that is focused on getting the best in pricing and performance. Erickson warns that a bid event is not always the best way to get to the ultimate goal of getting to the best product. He says that sometimes purchasing identifies a new innovative product and tests the products themselves, becoming familiar with the product's strengths and weaknesses.
As with purchasing from every industry, Erickson tries to limit exposure to changes in the supply chain and in the labor force. He proactively creates agreements with manufacturers to limit change, but recognizes that there are some things that cannot be avoided.
For instance, Erickson points out that housing saw unexpected movement earlier this year in the lumber market, which he notes as not unprecedented, but significant. When the industry faced duties imposed on Canadian imports that resulted in 20% to 30% increases and that added several thousand dollars to the bottom line, Meritage had to work outside protocol for solutions.
As a mission, Meritage is focused on staying ahead of energy code and adopting products and technologies earlier.
“California’s changing code will have no impact on us today, but our challenge is staying ahead of it,” Erickson says. "The ultimate driver for successful innovation is value—that complicated mix of optimizing cost and benefits for the builder, suppliers, trades, and, most important, the customer."
Sign up now to tour the reNEWable Living Home at its debut during the International Builders’ Show in January 2018.
