Could some of the most in-demand housing markets be cooling off?
USBuild: Creating an Internet-Driven Supply Chain
While business-to-consumer e-commerce initiatives targeted toward home builders are still popping up so fast it’s hard to sort them out, the pace is distinctly slower on the business-to-business side.
While business-to-consumer e-commerce initiatives targeted toward home builders are still popping up so fast it’s hard to sort them out, the pace is distinctly slower on the business-to-business side. In fact, the guess is that we’ll see more firms leave the field this year than enter it. That said, there is a hot item in builder B2B. It’s USBuild, the San Francisco-based dot-com with the ambitious goal of inventing a completely new, Internet-driven supply chain for large-scale production home builders.
The company is partnering with Penske Logistics to pioneer a new business model, an e-chain, to streamline procurement, distribution, delivery and other logistical processes associated with production building. It is an Internet-enabled pipeline of information, financial and product flows designed to benefit builders, manufacturers and trade contractors.
USBuild landed in Denver last year, with national Giant Pulte and local heavyweight Village Homes of Colorado testing the waters as the first clients in a pilot program. Village’s program never got off the ground because the designated housing development was stopped in its tracks by the Front Range’s obstinate entitlements processes. But Pulte enjoyed enough success in its pilot that other big builders in the Denver market are signing up for the next round of tests.
"We saw that they saved some money," says Brian Hutt, Lennar’s program coordinator for the USBuild initiative. "But we still don’t know how far we can take this thing. So far, it’s limited to products that are not big-ticket items in the construction of a house."
Pulte’s program had USBuild buying plumbing and electrical products directly from national manufacturers on orders received from the builder and Penske trucks delivering them to the building site exactly when needed by the relevant trade contractors. This year, USBuild will finally get Village going, add a second Pulte project and also add developments by Lennar/U.S. Home, Centex, David Weekley and local builder Genesee Homes. Moreover, it hopes to expand the product and trade contractor categories to take out more costs from current supply chain inefficiencies.
Electrical and plumbing products are low-hanging fruit. Without USBuild, builders have no way to deal directly with the manufacturers. Virtually all products are purchased through the trade contractors and pass through two or three intermediaries between the manufacturer and the site. It’s difficult for builders to get critical information back to manufacturers, even though they know, months in advance, exactly what they are going to need.
"That’s what we do," USBuild CEO George MacConnell says, "leverage that information to create a more efficient supply chain." In the USBuild model, the builders can order products online and specify exactly when they want them delivered to the site. USBuild aggregates the orders, buys in bulk (at reduced prices) and trucks the products to a local fulfillment center in Denver, where the bulk shipments are broken down into trade packs that are trucked to the site exactly when needed.
"Right now, we expect to start shipping to Pulte, Genesee, Village, Lennar and Centex in the first half of this year," MacConnell says. "Later in the year, David Weekley Homes will come on as well.
"We’ll launch with these customers in the product categories we pioneered last year, including rough plumbing, finish plumbing, finish electrical, garbage disposals, hot-water heaters and HVAC equipment, then expand into other product categories later in the year. We don’t know which ones yet."
There’s the rub. It will have to be more than low-hanging fruit, and yet even MacConnell admits USBuild will probably never be able to deliver the major structural products involved in building a house. "In our current system, we would exclude from consideration products such as framing lumber, structural panels, roofing, wallboard and insulation," MacConnell says. "We think those products will continue to flow through existing distributors in the market."
Appliances will never be part of the mix either. Big builders already buy directly from manufacturers such as G.E. and Whirlpool. "We get the information to them about what we need and when six to eight months ahead of delivery," David Weekley says.
And yet the builders have high hopes to move much more than a few lighting fixtures through the USBuild supply chain. "I think eventually our industry is going to learn how to connect with manufacturers better," Weekley says, "and some of the inefficiencies that now creep into our ordering of products and their manufacturing will be rationalized. I’m not sure what this is going to look like in 10 years. But as a purchaser of $500 million worth of products a year, I’m going to start now to work at learning how to build a more efficient process."
Now, Weekley is happy to attack the inefficiencies associated with plumbing and electrical products because they jeopardize the ability of highly skilled trades to function at peak productivity. MacConnell says he has anecdotal evidence suggesting that 10% to 30% of the times these trades arrive on site, either the job is not ready or materials required have not arrived. There’s a stiff cost associated with a wasted trip by a plumber or electrician. "That’s a really inefficient use of a scarce resource," MacConnell says.
Still, you know the builders expect more. "We’re trying to walk before we run," Weekley says. "But home builders are way behind most other industries in developing flows of information to enhance product-purchasing efficiency. The people running USBuild are very experienced at this. We’re hoping we can learn something worthwhile."
What does Weekley expect in the way of additional product categories from USBuild? "It’s hard to project. Certainly a lot will depend on how it goes this year in Denver. There are pilots of other B2B initiatives going on elsewhere. To me, this is the one with the best chance of success. But we’ll see."
Paul Dodge, Centex’s vice president of purchasing and distribution, predicts hardware will be the next target. "Penske’s logistics work well in plumbing and lighting products," he says. "I see no reason why hardware shouldn’t work as well. That’s another supply chain with inefficiencies in it.
"The current system in many of these trades is more of a push than a pull. The manufacturers push product into the pipeline, selling to distributors who eventually sell to trade contractors, and there’s a necessity to inventory unsold products at each stop along the way. USBuild’s solution is a pull system, driven by our demand, with the ability to eliminate all that unsold inventory from the manufacturer to our building site."
One element limiting USBuild will be the degree to which it can convince trade contractors to uncouple products from labor. "We have to approach this on the basis that we still expect everyone who adds value in the supply chain to make money," Dodge says. "It’s the inefficiency of carrying unsold inventory that we want to eliminate. We expect some resistance, but we also expect to show the trade contractors, as well as manufacturers, that they can make more money in this new system than in the old one."
The trades will come out ahead, MacConnell says, because they’ll have less working capital tied up in their businesses and more ability to concentrate on their highest-margin activities, the labor of their skilled workers.
That might be true in some trades and in some markets, such as Denver, where there are lots of contractors and most of them are small. MacConnell says that’s one reason Denver was picked as a test market. But even if USBuild expands the product categories in which it works, will the firm be able to move into enough other markets to reach anything approaching national operations?
MacConnell says it will target markets where the big production builders control a large share of the market. That looks like Phoenix, Dallas, Houston, Southern California and maybe Chicago to us. But what about markets such as Atlanta, where a large number of smaller production builders dominate the scene? And will the large trade contractors who dominate markets in the Northeast, Midwest and even Phoenix be willing to uncouple materials and labor?
Time will tell, but only if USBuild continues to do well with the Denver experiments. Today, a lot of the biggest builders in the United States are watching what happens in Denver very closely.