The year 2016 was an eventful one for home building.
Supply Chain Management: The Missing Link
Reading Professional Builder’s July 2002 cover story, 'Purchasing Power Plays,' I had a disturbing reaction.
|Contact Scott Sedam
via e-mail at scott@TRUEN.com
Reading Professional Builder’s July 2002 cover story, “Purchasing Power Plays,” I had a disturbing reaction. This article is the best demonstration of what’s wrong with the current thinking about builder/supplier/trade relations and supply chain management that I have read. My own magazine provided me with the perfect pre-workshop handout for telling clients what not to do and how not to think.
The author, Bill Lurz, an excellent writer, did an honest job of reporting what he had found and heard. No “shoot the messenger” here. Bill reported it as the builders called it, and that simply reflects the small percentage of builders who are thinking right about this issue. Several experts quoted in the article did everything possible to send the wrong message.
What am I talking about ? I am talking — more like screaming — about the critical difference between “initial price” and “total cost,” or even better, “total value.” And to compound the irony, Heather McCune, our editor in chief, was hitting the nail on its proverbial head in her column “The Business Relationship Equation” in the same issue. The mere act of going to the dry cleaner on Saturday morning revealed the truth to Heather. She even quoted my quote of the famous Dr. Deming about what he said when asked how much his shoes cost. He looked down at them and said, “I don’t know ... I haven’t finished wearing them yet.”
Before you continue with this diatribe, I suggest you go back and read (or reread) the July cover story. Most people quoted presumed that the initial price of a commodity or type of labor is the only thing that matters. And that, dear readers, is a guarantee that you will never get everything you pay for in a transaction.
I fully expect calls and e-mails from people who say the “total cost” approach was implied. But if you were thinking that, you would have brought it up. Somebody would have brought it up.
You cannot know the true cost of anything without analyzing all the connected and related costs and benefits. Period. If you haven’t finished wearing those shoes, how can you know? How long will the shoes last? Will your feet hurt? Will the shoes go out of style? Will they send your back out of whack? Will your spouse think they are ugly? What would happen if something goes wrong with the shoes? Will that great, clout-induced deal you got still look great the morning after? Let’s talk about just a few examples:
Cost of material seems straightforward. If I get $30 off on a range, $5 off on a square of shingles or 25 cents a sheet off on drywall, I’m ahead of the game, right? Most of you know better. You can cite a hundred examples of when a better initial price ended up costing you, not saving you.
What about delivery? I know a builder who on paper saved hundreds of thousands on a national drywall contract only to lose that and more in schedule loss when he couldn’t get the houses stocked dependably. He thought he was cutting out middlemen by buying “direct.” He believed he was eliminating “non-value-added.” But the value of dependable, timely stocking wasn’t figured in. The problem is, builders are notoriously poor at identifying and measuring what is really value-added and what is not. They make a lot of assumptions, and the assumptions can lead to disaster.
I know of another builder who tried to go direct with plumbing fixtures. Again, on paper, he was saving big bucks. But his field guys told story after story of how buying direct caused them so much brain damage, schedule delay and rework that there was no way the company was saving money “net-net.”
The best plumbing contractor I have ever met described in detail how the “direct buy, ship and deliver” program was killing his business — and not for the reason you are thinking. It wasn’t the lost margin on fixtures. It was the destruction of the schedule. Previously, all his work crews had 100% of what they needed for the next day’s jobs on their trucks before going home. They virtually never had a wasted trip to a building site. Now, wasted trips had become common because the fixtures were not arriving at the houses the same day as his plumbers. He had raised his labor-only prices substantially and was seriously considering dropping the builder.
The local remedy, unbeknownst to the corporate purchasing guys, was to lease a big truck trailer, park it at the back of the site and ship all the fixtures in early. Meanwhile, the fixtures sat until the superintendent crawled through the trailer, found the right ones and got them to the right house on the right day. This worked — about half the time. And you guessed it: The purchasing guys a few states away showed a big savings on paper, while the field guys buried their additional costs at the local level.
I know a hundred of these stories. Like the great “insulation direct” scheme that resulted in no insulation in several states. Or the switching of fireplace companies that saved $100 a house on 350 houses but cost more than $500 a house the next year on tear-outs and rebuilds.
In all cases, the purchasing guys looked great on paper. We could go on, but I hope you get the point. There are huge costs in delivery, quality, impact on other trades, ease of installation, etc., that can turn a “direct buy” equation upside down. Just thinking about problems with stucco, mold, fire-retardant roof sheeting, composite siding, expansive soils, etc., can make you sick. The costs are seldom what they seem up front.
And we haven’t touched the value side of the equation. What about warranty work? Not just this year, but four or five years down the road? Who will guarantee that? What about help with new design, plans, specifications, options and new models? What about training of your people? What about guaranteeing availability of product? What about a supplier’s training of the installation trades to make sure they know how to build it right? What about workers’ comp expenses? What about insurance? What about the ability to work with other trades? Did you read any of that in the article? No.
The message in the article was clear: The only thing that matters is the price on the barrelhead. Nothing in the July cover story sounded anything like true partnering. What the heck have we been talking about the past decade? Does anyone really believe in it? What I find is that many builders understand the concepts of partnering, total cost and total value intellectually — but behaviorally nothing changes. Ultimately, all the suppliers and trades have to go by is behavior.
And here is the real opportunity for smaller guys to beat the big guys because the smaller guys can start behaving like partners and go by the criteria of total cost and total value without having to worry about making someone 1,000 miles away look good on paper. Certainly, a single division of a national can do this, too (and I have seen it), but it is tougher and riskier. If you want short-term savings on paper, stick with initial price and hammer the daylights out of your suppliers and trades. For a while, you’ll look good. If you want to save real money in a permanent way, go with total value and really mean it. It works.
Can I prove it? Sure. I have tons of examples and statistics. But my favorite indicators are from suppliers and trades. At my company, we have been running the TradePOINT Supplier-Trade Feedback System for years. This survey collects data from suppliers and trades on builders and rates them. Guess who has the top scores? The top three to date out of more than 30 measured have been local builders building 100 to 500 homes annually. Ask these guys if they can compete with the big honchos. They’ll just smile and send you on your way. They don’t want you to know what they know. Several will be mad at me for telling you.
But I’ll tell them to just forget it. The initial-price-get-it-while-you-can-this-year mentality is so ingrained that they don’t have to worry. Don’t believe me? Just go back and reread the July PB cover story.