Rattling the Supply Chain: Damage Control

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So what was wrong with the guaranteed low-price strategy?

September 01, 2002

 

Contact Scott Sedam

via e-mail at scott@truen.com

 

In my August column, I went on quite a tirade about supply chain issues and builders' myopic tendency to dwell on initial price instead of total cost. I was just getting on a roll when I ran out of space.

This is a huge issue. In fact, I have found that supply chain issues have been rattling around my brain about every other day since.

Two days after I dispatched that column, I was in a major American city conducting partnering workshops. The suppliers and trades confronted me with evidence of builders' engaging in some of the worst supply chain and purchasing practices I have encountered. I thought I had entered a time warp and slipped back into the dark ages of home building.

You know, the really bad times when we engaged in Neanderthal practices that were guaranteed to make a mess of things. Way back -- like the 1980s.

Let's take one builder strategy that seems to be spreading, break it down and gauge the impact. A big builder -- a dominant player in his city and a well-known name -- established a new policy: Every supplier and trade must sign a contact stating that the builder will be given "guaranteed lowest prices" -- as in lower than any other builder's. Further, the contract says the builder has the right to audit the suppliers' books at any time, without warning. As a coup de grâce, the supplier has to pay for the audit.

If you are reading this and thinking, "Yeah, what's wrong with that?" you might as well quit right here. I can't help you. You will go on deluding yourself that such short-term, coercive, one-sided relationships are getting you ahead in the world. Give me just one day in your organization to show you how to count total cost, and I will show you how mistaken you are -- but you will never do that. The short-term, macho gratification of beating up your suppliers and trades just feels too good.

I thought this was only a "big-builder" ruse, but quickly another supplier at this workshop informed me of a smaller (but also well-known) builder playing the same game in the same market. And the irony of it all was that both builders had conducted "partnering" workshops in the same seminar room where we were working that day. Such builders give partnering a bad name. One supplier described his experience with these builders as "partnering purgatory." That's catchy.

 

So what was wrong with the guaranteed low-price strategy? First and most obvious, it locks in low price as your only real criterion. It says nothing about quality of labor or material, delivery, schedule adherence, capacity, service, warranty, safety, job-site cleanliness, in-surance coverage, etc. Any one of these factors can make a low-price deal the most costly one you've ever made.

And don't kid yourself. I have never seen a builder with such fanatical devotion to initial price pay sincere attention to any of the other critical factors. The low-price message is loud and clear. Suppliers and trades learn quickly what counts.

The second issue is in some ways even more serious. Making a supplier or trade guarantee that you get the lowest price really guarantees only one thing -- that you will make liars of your suppliers and trades.

I had several suppliers who worked for both builders issuing the guaranteed low-price edict. Obviously, two builders can't both be getting the lowest price from the same supplier. Somebody is lying to somebody.

The builders have put the supplier in an irresolvable position, unless he gives up some of the business. But then his volume goes down, his profits go down, and his low price goes up.

Everybody loses.

But that's just on the surface. The real damage comes from the effects of the frustration and anger suppliers and trades feel over having been put in such a position.

As for the third element of the builder edict -- the right to audit a supplier's books at any time, unannounced, with the supplier getting billed for the audit -- I will never understand why any supplier would sign something like this. I would rather lay off half my staff and sell my assets. I'd find another line of work.

The one-sided nature of such a relationship can result only in resentment and mistrust. It is, in fact, a de facto statement of mistrust as the cornerstone of the relationship. And you know and I know that these builders would never open their books to the suppliers and trades.

The only parallel I can think of is starting a marriage under a coercive marriage contract full of punitive remedies for nonperformance. Best wishes, enjoy the honeymoon, and watch your back.

So what does our "low-price guarantee/random audit" strategy gain us? Anger, resentment, a total lack of trust and ultimately higher prices. Now that's a strategy.

Some of you might be protesting, "Hey, they're going along with it. We aren't hearing anything from them." Just you wait. It's the gift that keeps on giving.

Suppliers and trades know how to get even -- and they will get even. It might be not responding to your month-, quarter- or year-end rushes. It might be substitution of materials. It might be slacking off on warranty and service. Or it might just be that your competitor now gets the best crews and your schedule inflates by five days.

And if they get the chance, they will leave you, just when you wanted to increase production by 20% in a hot market.

One way or another, your low-price mentality will cost you.

It is the ultimate in hubris to see these actions in a seller's market for trade labor, which is still most of the country.

Some people might call such an outcome "the law of unintended consequences." I would call it "the law of blatantly obvious consequences." Is it really so hard to see the results of our actions?

I really wish I didn't have so many of these stories. Many in the industry have worked diligently over the past decade to change things. And a significant number of builders are doing the right things.

But actions such as those described above make it harder for everyone.

There remains a question in regard to the suppliers who told me their "partnering purgatory" stories. Having been through the so-called partnering experience with those two builders, why would these suppliers be willing to go through another workshop with another builder?

The answer was encouraging. They knew that the builder I was working for was serious. This builder had consistently done the right things, played fair and took the long-term view in every dealing. Partnering wasn't just a manipulative buzzword for this builder. It really was two-way, and it really was a way of doing business. He knew that his success depended on their success.

The suppliers believed in him, so they believed in the message I brought. That makes my job easier. But the message for you is: Suppliers and trades do recognize the difference. They quickly understand who is in it for a total cost win-win instead of the initial price slash and burn.

I just hope more builders begin to recognize the difference as well.

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