When Masco Contractor Services (MCS) agreed in June to install insulation in more than 75 percent of the houses that Pulte Homes builds over the next two years, and struck a similar arrangement with Beazer Homes in September, the high-profile announcements served as prominent signposts for a broadening trend. Increasingly, suppliers are offering turnkey programs to production builders searching for new ways to reduce their cycle time, their paperwork, and, in some cases, their liability, while upgrading the job-to-job quality of their product.
While many in the industry still question whether the benefits are real, the attraction is hard to ignore. As big builders focus on land development and improved capital and market positions, many are handing off the actual construction of those homes to trade partners that can maintain the builder's quality standards, lower certain production and quality control costs, and effectively minimize insurance risks.
Turnkey programs are popular with some builders because they offer what MCS' president Donnie DeMarie called "a single point of contact" that streamlines the supply chain, construction, and back-office processes. These programs have become increasingly important to builders in southern and western markets where contractors are scarce; and in markets where the quality of contractors' work consistently falls below what most builders' standards can tolerate.
Kitchen cabinet and appliance suppliers have offered installation for many years. But a growing number of companies are providing turnkey solutions for home builders including suppliers of lighting, framing packages, and flooring. Pro-oriented dealers -- whose acquisition strategies have been designed, in part, to keep up with builder consolidation -- now install windows, countertops, cabinets, trusses, and framing packages. And lurking in the wings is The Home Depot, which acquired three flooring installation companies in 2002 and has its eye on expanding its installed sales business with builders in more product categories.
Clearly, many of these initiatives are seen as opportunistic; this trend hasn't gained industry- wide acceptance yet. Some building material suppliers claim that a turnkey program would be impractical when their products travel through one or two distribution points before reaching the jobsite. And the benefits of these programs have yet to be quantified to the satisfaction of some builders looking for hard evidence of cost and cycle-time reductions.
Still, big builders show a preference for trade partners that can help them build more homes in multiple markets on schedule and without errors that trigger post-sale complaints. "What's driving this [move toward turnkey installation] for us is a change in how we measure efficiency," said Luis Solis, national vice president of purchasing and logistics for Denver-based MDC Holdings/Richmond American Homes, which has 190 active subdivisions and is on track to close 10,800 homes this year. "We are less interested in the unit price or back-end rebate and more interested in what will produce smiling customers."
Womb to Tomb
Suppliers view installation as the latest cost of doing business in an industry where the demands of large production builders get more complex each day. "We think we have great products, but that's not enough to win with builders anymore," said Michael Jones, general manager of contract sales for Louisville-based GE Appliances, a leading appliance supplier for new-home construction.
In the window category, where builders face persistent installation and warranty challenges, Milgard, of Tacoma, Wash., and Atrium Windows, of Dallas, will install what they produce for builders, whereas Andersen Corp., of Bayport, Minn., calls upon a network of 2,700 dealers and distributors -- ranging from lumberyards and specialty window retailers to large distributors like Taylor Trim & Supply on the West coast -- that participate in this supplier's "Circle of Excellence" program, according to Patrick Janes, Andersen's manager for residential construction. Between 50 percent and 60 percent of the vinyl windows that Toll Brothers buys are installed by its preferred distributor, Bradco, or by one of its primary manufacturers, said Mike Smith, Toll's director/assistant vice president of purchasing.
Kitchen cabinet makers have been at the forefront of the turnkey movement. About 35 percent of American Woodmark's production goes into new-home construction, and its Timberlake division installs cabinets for 16 of the 20 largest builders, according to Gary Rosenfield, its vice president of professional markets. Using its own employees and subs, Winchester, Va.-based Timberlake manages the installation process from start to finish through its "Diamond Service" program that, on average, can deliver cabinets 10 days after they are ordered and get them installed a day later.
Acquisitions have positioned several companies to provide turnkey programs for builders, running the gamut from the contractor consortium American Plumbing and Mechanical, to the pro dealer Building Materials Holding Corp., and the world's largest home improvement retailer The Home Depot. But none has stepped so boldly onto that stage in recent years as Masco Corp., which entered the fray in 1995 when it acquired Gale Industries, and two years later bought another installer, Kerry Corp. "We really didn't make a big push until we bought BSI in 1999; that's when it all coalesced," recalled DeMarie from his headquarters in Daytona Beach, Fla.
In 2002, Masco spent $735 million to acquire Service Partners LLC, a Virginia-based distributor and installer of insulation, roofing, gutters, and other building products. MCS' installation network now extends to 375 branch offices, 54 distribution centers, 8,000 service vehicles, and 16,000 insured installers. The division installs insulation in three-fifths of all new homes built, said DeMarie. In 2002, MCS' $1.85 billion in sales represented 14 percent of Masco's total revenue, and in each of the past three fiscal years the division has enjoyed a double-digit profit margin. MCS is now working with the Orlando-based marketing firm First Marketing to, in DeMarie's words, "unify our message."
In Pulte, MCS found a nearly perfect partner: one that's large (it closed about 29,000 homes in 44 markets and 25 states last year), was committed to reducing its production costs by $55 million in 2003, and was already among the industry's most active builders in getting suppliers more involved in the installation process. Pulte has turnkey pacts with Louisiana-Pacific, Seagull Lighting, GE Appliances, Moen, and Masco's Merillat division, which installing cabinets in 70 percent of Pulte's homes. Pulte recently signed a turnkey agreement with Pratt Development, a Phoenix-based concrete, framing, and trim company.
"Our deal was a function of Masco's achieving critical mass on the installation side to accommodate our capacity needs," explained Alan Laing, Pulte's vice president of customer satisfaction and supply chain. "For us, it's a simple business model: one consolidated invoice and less finger pointing." By using fewer installation sources, Laing said Pulte manages its liability better, too. "It's a lot easier tracking down one installer than six if something goes wrong," said Laing.
Savings Not Universal
The MCS-Pulte deal is clearly making waves, causing some builders and suppliers to redraw the parameters of their partnerships. Two-thirds of Therma-Tru's doors go into the new-home channel, and recently, the Maumee, Ohio-based supplier engaged in what Jerry Oleshansky, its vice president of marketing and business development, called "discussions at a very high level" with several builders about initiating an installation program. Rod Clark, Jeld-Wen's marketing manager in Klamath Falls, Ore., said that the only reason his company might consider installing its doors down the road is "because of the Masco-Pulte situation."
But builders and suppliers agree that turnkey programs aren't right for every situation. They are less in demand in markets such as Chicago, where big contractors are in control and where unionized trim carpenters are powerful; or in Southern California where "the trade base is much more sophisticated," said Frank Glankler, president of Hovnanian Enterprises' Forecast Homes division. "You can work with contracting companies out here that have 40 crews which handle 5,000 homes a year." Certain product categories, like masonry, roofing, and doors, are simply better handled by local distributors and installers. Jerry Orlando, national accounts manager for GAF's builder program, noted that the Wayne, N.J., company's largest customer, D.R. Horton, manages all of the roofing installation for its homes.
John Landon, co-CEO of Dallas-based Meritage Homes, doesn't dispute the value of turnkey programs for cabinets and appliances, but he's not completely sold on MCS' model. "If [MCS] actually reduces costs, I'm all for it. But that would mean there's a significant difference between a large contractor and Masco. My experience has been that these big contractors are savvy." More to the point, perhaps, Landon worries about Meritage's competitiveness if MCS' hegemony expands. "If everyone buys from the same [installer] for the same price, who benefits? The largest builder, of course, and where would that leave me?" asked Landon, whose company will build around 6,000 homes this year.
Landon's concerns may be justified, as MCS prepares to expand its installation services to windows, garage doors, and siding, said DeMarie. While it will continue to purchase products from a wide range of manufacturers, MCS' installation services may eventually incorporate more of Masco's products such as tub surrounds, mirrors, and hardware. MCS is also developing a training, certification, and monitoring program for fireplace installers that could resemble the program it set up for insulation installers in 1999 with the NAHB's Research Center. "We definitely see ourselves as changing the industry, and we're positioning MCS as experts in building science," proclaimed DeMarie.
Other suppliers are getting more involved in subcontractor scheduling and new-home design. MasterBrand, in Jasper, Ind., has been working with Ryland Homes on a turnkey design, for kitchens in the builder's entry-level homes, which is flexible enough so that "the kitchen fits even if the house isn't framed perfectly," said Martin Van Doren, MasterBrand's senior vice president of builder direct sales and operations.
Turnkey programs may never be suitable for every building product, but O'Leary at Beazer Homes is convinced that they will become more common as suppliers, in their efforts to keep pace with large builders, seek new revenue streams for capital to purchase information technology, building materials, and insurance.
For this to happen, most suppliers would also need to fundamentally alter their business model, according to Solis, of Richmond American Homes. "We see a growing interest [in turnkey], but not an overwhelming capacity. Many of the largest product manufacturers which should be able to respond to our request for installation have trouble with that because, ultimately, the manufacturer continues to measure its own performance on revenue and margin instead of customer satisfaction."
Suppliers, said Solis, need to calibrate the metric they use "to assess how they are creating value."
Learn more about markets featured in this article: Dallas, TX.
