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Commodity Purchasing? There’s No Such Thing

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Business Management

Commodity Purchasing? There’s No Such Thing

Do you know all of the elements of the true total cost and total benefit for all of the products you put in your homes?


By Scott Sedam, Contributing Editor September 28, 2021
Building materials warehouse
Let's define "commodity" and look at true total cost, which requires taking every cost into account—and every benefit. | Photo: 06Photo / stock.adobe.com

As part of our five-day LeanWeek total immersion workshops, we have a builder team interview 20 to 25 of its suppliers and trade contractors in a structured process aimed at eliminating waste from product and process. And during the days that follow, I usually find myself thinking about highlights from those five days.

As I write this column on the weekend following our latest implementation with a builder team in the Midwest, one particular comment from a trim carpenter comes to mind: “You get a better price on the trim and door package from BigAm Lumber Co. [the large, regional operation] compared with Supply Central [a small, local yard], but they aren’t at all the same thing. You can tell the quality as soon as you cut the MDF. The sawdust pile from the BigAm material is larger than what you see from Central’s. It actually feels different when you cut it.” 

Which, of course, prompted me to want to know why, exactly, so I asked him about it. His response: “The MDF from BigAm isn’t as dense as Central’s. It blows out on nailing, requiring more sanding and filling. The painter will tell you it doesn’t take paint as well and doesn’t hold up to moisture. It swells and shrinks more, messing up the miters.” He went on to describe other problems with the BigAm package. The doors, to the untrained eye, appear identical to Central’s, but the BigAm doors aren’t cut as accurately, especially the hinge mortises and the cutouts for door locksets and keyways, among other problems.” 


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He explained how his crew spends an average of eight additional man-hours at $50 per hour on the BigAm doors, compared with those from Central. Add that $400 to the extra time, labor, and replacement material for the interior trim, and the BigAm package cost doesn’t look like such a great deal after all. What was believed to be a commodity—two identical packages that could be purchased on bid-price alone—turned out to have some real differences. The lowest bid price turned out to be the highest total cost.

Bid Price and Total Cost, Another Example

Let’s consider another lumber example, one I often use in a workshop or longer presentation. We need 50 sheets of 7/16-inch OSB, the most common sheathing material used for exterior walls. Once again, we compare the bid prices from BigAm, the large, regional operation, to Supply Central, the small, local yard. 

BigAm comes in at $40 persheet, or $2,000 for the load of 50, not bad at today’s prices. Central offers the same at $44 per sheet, totaling $2,200. That’s 10% higher, $200 more for the stack. Add that 10% to all of the sheathing you purchase for each of your homes and it amounts to some  real money. Further investigation reveals the sheathing from both yards is manufactured by the same company in the very same plant. There’s no difference in the product, so this is a genuine commodity, right? The decision is a no-brainer. 

Not so fast … 

BigAm Lumber Co. typically has high turnover and is chronically short-staffed. The under-trained, overworked employees have an annoying tendency of running power banders up too tight and dropping corners. The result is at least two lost sheets, one top, one bottom. That’s $80 of the $200 bid price advantage right there. 

Ask yourself: Do you know all of the elements of the true total cost and total benefit for all of the products you put in your homes?

Their guys are equally sloppy with forklifts, and you can count on them damaging another two sheets. Now our difference is down to $40. And BigAm’s delivery drivers inevitably seem to either drop the load in a mud hole or awkwardly on top of other material on site. There goes your last $40, at a minimum. 

Multiple times this year, BigAm has delivered loads of lumber on a Friday afternoon, even when specifically told not to do so, resulting in an increase in theft over the weekend. (More money.) Central makes a real effort to put loads together so they come off in the order the framers use them, which saves your framers time, labor, and aggravation. You mentioned this to BigAm and they brushed you off, saying they are just too high volume to deal with that. 

Finally, Central is just down the road and always delivers on time. They have strong relationships with the heads of construction, purchasing, and the field superintendents, and they know most of the framers personally. BigAm’s closest yard is much farther away, and if something unplanned does occur on site delaying a framing crew, such as a crane cracking a truss or an overnight theft of joist hangers, it may be a while before BigAm gets there. 

In contrast, Central will jump on it immediately, keeping the crew on site and the house on schedule. That alone is worth the $4 per sheet difference many times over.

Rethinking Drywall as a Commodity

In this scenario, even the exact product from the same production facility in no way meets the definition of “commodity.” Am I cherry-picking here by just picking a couple of isolated examples? Hardly. In another Lean process implementation earlier this year, this one in the South, the drywall labor contractor had a lot to say about the quality of the gypsum board. 

Brand Y leaves nice, smooth “dimples” when screwed or nailed, making them quick and easy to mud. Brand X does not, frequently breaking though the paper, even at light settings on the screw gun. Brand Y has much stronger chamfered edges that don’t break easily, unlike Brand X. The bottom line is another half day for a house per crew. That’s $300 to $500. So yes, Brand X is cheaper to purchase, yet it costs more than Brand Y. 

Do you still think drywall is a commodity?

The better, more important question is, do you know all of the elements of the true total cost and total benefit for all of the products you put in your homes? I’m betting the answer is, “No.” I can cite countless examples, from concrete to roofing, from windows to flooring, from cabinets to countertops, but I think you get the picture. 


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To establish “True Total Cost,” you must take every cost into account—and every benefit. Remember this equation:

V=B/C (where V is Value, B is Benefit, and C is Cost)

That’s the ultimate goal, to understand the true value of everything you buy, whether labor, material, or services, and buy accordingly. Without deep knowledge of both parts of the equation, cost and benefit, the goal is impossible. 

If you’re convinced there is no such thing in the real world as a commodity, it’s time to start measuring more thoroughly and making better, informed decisions. What factors do we consider? Take this list, edit to your local methods and practices, and get started.  

Elements of the True, Total Cost Model

Bid price

We start with bid price because it’s the anchor against which all other factors are added or subtracted. There’s a trick, however: Comparing the bid prices of multiple suppliers or trades is never apples to apples—until you expand the measurement criteria. A thorough application of the other criteria below, however, will yield an accurate comparison.  

Capability and capacity

Every builder has been burned by overloading a supplier or trade with additional work, then discovering that supplier or trade can’t handle it. There goes the schedule, not to mention the quality. Giving more business to a preferred vendor is a good practice, provided they have both the required capacity and capability. 

It will take awhile to figure out how to measure many of the elements in this list, but tracking warranty incidence and cost in detail and using that information in purchasing decisions is imperative.

Schedule and delivery

I learned it more than 30 years ago and each year brings more proof. The best builders are the best schedulers, and the best schedulers are the best builders. A tight, predictable, accurate schedule brings order to our naturally chaotic business of home building and yes, with today’s material and labor shortages, the challenge is even more difficult, today. It goes without saying that the suppliers and trades that can keep you on schedule are indispensable to your success. 

Safety

If you pay attention, you’ll find your safest trades are your best trades. They hire better people and they train better. To know which trades value safety, track the state workers’ compensation modification factor for every trade working on your projects. If not, you’re not just losing profit, you’re putting your company at risk.

Communication

Whether you use email, text, phone calls, or the latest web portal, the quality of your communication with suppliers and trades is critical for a well-run operation. Suppliers and trades that engage in frequent and timely two-way communication help you avoid mistakes, rework, extra purchase orders, wasted materials, and warranty costs

Participation in product development

The best builders involve their key suppliers and trades upstream in new-product and plan development, as well as ongoing continual evaluation and improvement of existing plans. Whenever you fail to do this, you pay a huge price—as do your suppliers and trades. Find the suppliers and trades that are truly adept at this, hire them, and keep them. You’ll see, everything gets better.


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Process integration

Creating a thorough flowchart of a builder’s operations  typically reveals 100 to 150 specific processes from land/lot to the end of warranty. Whether it is plans, purchase orders, scheduling, scopes of work, quality checklists, warranty report forms, or myriad other elements, how well a supplier or trade integrates with your systems is a critical factor in managing cost.

Quality

While this may seem obvious, it’s a rare builder that factors in quality beyond some global, fuzzy notion of how good a supplier or trade is. There are many methods for tracking quality, such as number of items at various stages of production, warranty claims, and customer satisfaction scores, but some type of quantitative measure is required for hiring, retaining, and helping trades improve.

Pre-close rework

Almost no one measures the extensive rework that goes on during the construction process itself, and it’s an expensive oversight. Most of this cost is never billed, thus it stays out of sight, out of mind, and is rarely addressed. Some trades are adept at in-process rework, but it’s expensive for them and it inflates your schedule. Find the ones that get it right the first time, and make sure your management and processes enable that goal, not hinder it. 

Post-close warranty

It will take awhile to figure out how to measure many of the elements above, but tracking warranty incidence and cost in detail and using that information in purchasing decisions is imperative. “Things gone wrong,” such as nail pops, bowed studs, bad carpet seams, wavy siding, concrete scaling , and so on, must be tracked by trade, and even better, by crew leader.

And it’s every bit as important to also measure dollar value. Trade A with just half the number of quality problems but three times the average dollar value as Trade B, affects both your bottom line and customer perception far more. One water leak in a second-floor primary bath, for example, counts for more than 100 paint touch-ups. Track both, for every supplier and trade, and use the data to inform your supplier-trade selections and ongoing management.


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Suppliers and Trades: a Better Understanding

All this may seem a lot to consider, but you tell me, which criteria do you leave out? When you finish running your material and labor purchases through these elements, you’ll have a far better understanding of your suppliers and trades and which ones you should keep hiring. 

You’ll also understand why I insist there is no such thing as a commodity. But let me know if you find one—though I don’t expect to be hearing from you soon on that challenge.

 

Written By
President

Scott Sedam is president of TrueNorth Development, a consulting and training firm that works with builders to improve products, process, and profits. A senior contributing editor to Pro Builder, Scott writes about all aspects of the home building business and won the 2015 Jesse H. Neal Award, business journalism's most prestigious prize, for his commentary in Pro Builder. Scott invites you to join TrueNorth's Lean Building Group on LinkedIn and welcomes your feedback at [email protected] or 248.446.1275.

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