The Price of Oats
There’s an old joke about a man who wanted to buy some oats from a farmer. He asked the farmer how much he charged. “That depends,” replied the farmer, “on whether you buy them before or after they’ve been through the horse.”
The residential building products landscape is littered with unfortunate (and expensive) tales of products gone bad, and it’s no secret that the price of an inferior product is far different from the ultimate cost of that product.
If you’ve been around long enough, you remember the story of fire-retardant-treated (FRT) plywood. Treated with chemicals to reduce the movement of flames from one multifamily roof to another (a fine idea), the process ultimately delaminated the OSB sheathing, causing unsightly bulges in roofs and eventually degrading to the point of being hazardous. Thousands of roofs had to be replaced, at enormous cost to builders and great inconvenience to homeowners.
More recently, you may have had the misfortune of using a certain type of Chinese drywall. Laced with formaldehyde from gypsum quarries, the product caused massive corrosive damage to wiring, appliances, HVAC coils, and even foil-backed mirrors.
Remediation required moving families from their homes (and housing them), taking the homes down to the studs, and refinishing entire interiors. I had the “fun” of working with more than 40 very unhappy homeowners to solve this major problem, at a cost of literally millions of dollars—not to mention enduring sensational evening news coverage of the issue.
- The Center of Home Building: Purchasing —Is Purchasing at the core of your operations? If not, you’re leaving money on the table, and lots of it
- On-Site vs. Off-Site: a Total Cost Analysis —Most builders and component suppliers do a marginal job of calculating true, fully loaded, total cost when comparing various methods. It’s time to remedy that
One more example is a now-defunct window manufacturer whose irresistibly low-priced windows quickly began to suffer broken seals and shifting in their openings, wreaking havoc in thousands of homes. We all know that you get what you pay for, as these harsh lessons illustrate.
The good news is that there is much more readily available information today about product quality, thanks to the internet and the ability to search reviews on thousands of products.
The trouble is that home building purchasing managers are often motivated to buy products at the lowest price, intending to save the company money in material costs. This sensible objective results in countless poor and expensive decisions.
Factors Affecting the Ultimate Cost of Products
Not only is product quality and durability an issue, other factors significantly affect the ultimate cost of selected products, such as:
—On-time delivery: No matter how good the product, if it holds up construction because the manufacturer fails to manage its production and distribution processes, you’re spending money on “empty-house days” while waiting for delivery. How many times have you heard your construction manager complain that he can’t move a house ahead because he’s waiting for materials?
—Correct delivery: If the cabinets that arrive are oak instead of the maple you ordered, or don’t fit properly in the kitchen openings, you’ve wasted even more time and you risk missing your closing dates—one of the most important influencers of customer satisfaction.
The lesson: A key factor in a manufacturer’s performance and reliability is its distribution network. Smart builders carefully assess a supplier’s distributor program before signing a contract.
—Changing product specifications: If a manufacturer is constantly changing specifications or features (and model numbers) of their products without informing you, or without changing out your model displays, you’ll end up installing products your customers didn’t buy. And believe me, they’ll notice.
My company switched our appliance manufacturer (and we were buying thousands of appliances each year) for the sole reason that they were constantly making modifications to their products that we simply couldn’t keep up with ... and wasting time and money trying.
—Poor warranty service:- Service performance is critical no matter how good the product normally is. Things break, but if your manufacturers don’t stand behind their products and instead hide behind their flimsy warranties, your buyers don’t blame them, they’ll blame you.
The same goes for hiring trade partners. Too many builders choose their trades on the basis of bid price alone, and don’t even investigate the other key factors that affect the ultimate cost of the services provided.
Evaluate These 3 Factors to Make Cost-Effective Purchasing Decisions
Consider the following three key factors—besides price—that all purchasing managers must evaluate in order to make truly cost-effective decisions:
1] Capacity: Does the trade partner have sufficient capacity to manage your work? How many crews do they have? How many projects are they working on? Will you get their crews when you need them? Will they send two guys instead of the three needed to meet your schedule?
Most trades admit they’ll take any project they’re offered, regardless of their capacity to manage it, and many use “subs of subs” when their internal capacity can’t meet the demand for service. Smart builders prohibit the subcontracting of a trade’s work, or at least require notification that the trade intends to do so.
The trouble is that home building purchasing managers are often motivated to buy products at the lowest price.
2] Craftsmen’s skill: Sure you can have 19-year-old plumbers working on your homes, but wouldn’t you rather have plumbers with 19 years of experience? Find out the experience level of the trades’ crews before giving them the job.
3] Quality assurance: Do your trades inspect for quality to ensure their crews are delivering quality work? If not, that task is left to you, and I can assure you that if they don’t monitor the quality of their work, it’s far more likely to be subpar.
The bottom line is that choosing a product or service based on first price alone fails to take into account the many factors that increase the ultimate cost of that product or service. It’s a relatively easy lesson to learn, but a very difficult one to follow when price is leading the decision-making process.
When giving marching orders to your purchasing folks, make sure they consider not just the price but the ultimate cost of the materials and services they buy. It will often change their decisions, and for the better.
In other words, the next time you’re buying oats, be sure to take delivery before they’ve gone through the horse!
Access a PDF of this article in Pro Builder's April 2020 digital edition