A strong purchasing function within a home builder’s operation adds value regardless of housing cycles.

During a strong market, when demand exceeds capacity, purchasing brings new supply and trade partners on board, manages vendor relationships, and resolves flare-ups between construction teams and supplier reps. It also calculates direct construction cost proformas and runs countless what-if scenarios to help make land acquisitions work.

In a housing downturn, purchasing plays a similar role by converting vendor relationships, market intelligence, and construction capacity into staying power.

When times are lean, it is tempting to cut your purchasing team to save money. But that’s like removing the transmission from your car to save weight. You may improve one metric, but you lose the component that transfers power to the vehicle.

Instead, when demand and production slows, think of the value your purchasing function can add beyond their overhead cost. Here’s what that team can do: 

Reduce direct construction costs to protect your margins. In good times, everyone made healthy margins, as it should be. But when the market turns and home builders are the only ones facing margin pressure, the arrangement is no longer fair.

Purchasing monitors commodity price declines to make sure vendors adjust their pricing accordingly, a key argument to convince vendors to play along so everyone helps the industry get through a downturn. If they refuse to adjust their margins while yours collapse, the purchasing team can rebid the work or the spec.

Purchasing also reduces variance purchase orders, minimizes change-order costs, and continuously compares labor, material, and overhead costs with market standards to identify opportunities for improvement. 

These activities create sales flexibility by providing margin room for home price reductions, rate buydowns, closing-cost assistance, free or discounted upgrades, higher specifications, and other incentives—all without sacrificing your entire margin.

Improve cash flow and working capital by negotiating better payment terms, reducing unnecessary inventory, limiting prepayments, and coordinating deliveries so cash is not tied up too early

Use value engineering to help avoid land impairments by reassessing architectural and structural plans, specifications, and construction costs to improve community economics and reduce impairment risk. 

Value engineering may include peer engineering reviews, alternative-product recommendations, and converting base-house items into options so buyers who want the features can purchase them and buyers who couldn’t afford the house with those included features the ability to purchase the lower cost home without those features. 

Purchasing also can (and should) involve vendors, construction, architecture, engineering, warranty, finance, and sales in value-engineering efforts with the goal of reducing costs, not value.

Protect vendor capacity by identifying critical partners (especially those who prioritized you when times were good) and actively communicating market conditions, directing available work strategically, and maintaining relationships so essential capacity is available when demand recovers.

Manage vendor risk by monitoring financial health, insurance, staffing, quality, and lead times. Purchasing also can qualify backup sources and prevent failures that could disrupt construction schedules.

Consolidate spending and specifications by standardizing products, eliminating low-value options that don’t sell, and concentrating volume with top-performing material vendors to increase leverage and simplify execution. 
Purchasing also can simplify product specs by reducing option complexity and standardizing finishes, elevations, and floor plan variations to improve field productivity and lower administrative costs.

Reduce cycle time and costly variances by working with construction, design, and operations to remove bottlenecks, reduce change orders, and prevent rework and schedule delays.

Purchasing also can eliminate waste in the construction process, including over-ordering, material damage, excessive handling and inefficient installation practices by involving vendors throughout the supply chain.

Negotiate better scopes of work. Some vendors may not reduce their price or margins but may be willing to take on an expanded scope for the same amount. That can eliminate gaps, overlaps, disputes, and costly change orders and variance purchase orders that erode margins.

Purchasing can use market intelligence to improve decision making by tracking commodity trends, labor availability, vendor utilization, competitor activity, and regional pricing to improve forecasts and time negotiations more effectively. 
They also can use intel from vendors to help you identify opportunities in the marketplace.

Improve forecasting accuracy by partnering with sales, finance, and operations to create more accurate start, closing, and purchasing forecasts, thus reducing shortages as well as excess commitments.

Strengthen warranty performance by working with vendors to identify recurring defects, improve specifications, and implement quality improvements that lower warranty expenses and improve customer satisfaction.

Prepare the business for recovery by securing scalable agreements, preserving relationships with high-performing vendors, and building sourcing plans that can support growth when sales and housing starts rebound. 
Purchasing also can use their visibility across communities and divisions to identify best practices and deploy them quickly throughout the organization. 

Housing is a cyclical industry; always has been, always will be. Builders that protect and use their purchasing talent now will be better positioned to survive downturns and thrive when the market returns.

Your company’s “transmission” is in your hands.