Do large builders, either public or private, gain a cost advantage over smaller builders? Is the value they receive greater as a result of their size? Is it large builders that vendors seek to do business with? CEOs of large builders typically boast of their purchasing edge over smaller builders.
Still, people such as The New Home Co.'s Larry Webb argue that no significant difference exists. Sivage Homes vice president of construction David Murtagh insists that we buy at or close to our competitors.
If these statements are true, then the paradigm of vendor relationships must not rely on size alone. Something else separates one builder from another in terms of a vendor's willingness to extend the best terms. Could it be that vendors provide their best prices not to the largest customer, but to the one that allows them to achieve the greatest level of overall benefit? This could be the customer that doesn't demand as much of their staff (or overhead); one that pays on a timely basis, minimizing the cost of financing accounts receivable; one that doesn't unilaterally process petty back charges; or one that is easy to work with and appreciative. A customer the vendor truly appreciates and wants to keep.
While price is critical, other factors add value. If you, as the builder, have a problem, do you get your vendors' undivided attention, from their top people, or do they lack your same sense of urgency? When you need a vendor to adjust its schedule and respond immediately, does it? When small work items surface, does your vendor do them for free or does it charge you every time? Can it be a surprise that relationships still count?
Drew Holzwarth spent more than a decade with NVR. He was there as NVR successfully drove vendor prices down. Holzwarth knows it can be done, and NVR is one of the best at doing so. Today, Holzwarth is one of the principals of Piedmont Realty and Construction, a home building company based in Charlottesville, Va.
“One of the legends at NVR was our director of construction, Robert Burdette,” recalls Holzwarth. “Robert pounded into everyone he came in contact with that, ‘You cannot beat a man at his trade,' and that, ‘Our trade partners should play a key role in our cost-savings process, [because] they work with these products every day, and price cannot drive cost-saving decisions alone.' Somewhere along the way as these legends retired, they were replaced with procurement professionals, and trade partnerships were lost.
“As a private builder, I do pay a little bit more, but my standard equipment is a bit superior because I've had my partners help in the process. I've established true trade partnerships, and when I pick up the phone, my partners react. My partners are bringing in national suppliers who've been priced out of the national home building market—for instance, Kohler and Trane. In the end, I pay a bit more but I include brands that set us apart.”
Holzwarth argues that he can't “out-Ryan Ryan Homes.” Instead, he focuses on differentiating his offering, stepping out of the commodity pricing arena. “The heads of procurement for the national home builders hold a lot of power,” Holzwarth says. “Procurement teams have dialed down the quality of the nationals' product and are now in conflict with profit center managers.” Everything is a trade-off. Doing one thing may conflict with other operational objectives. Beware of unintended consequences.
All things being equal, larger is better in terms of purchasing power. But things are never equal. Large or small, public or private, the key to minimizing the total cost of a vendor relationship for you is minimizing the total cost of the relationship for your vendors. It's not about one thing, it's about everything.
Jamie Pirrello is the CFO of Sivage Homes and its San Antonio division president. He may be reached at [email protected].
