As a home builder, it’s important to maintain proper staffing levels within your purchasing department. An understaffed purchasing department won’t have time to properly vet price increases, competitively bid and accurately contract trades, minimize change-order costs, or ensure your next project starts on the right foot. Show me an understaffed purchasing department and I will show you a company that is leaving money on the table.
Such deficiencies will most likely have a ripple effect on construction, suppliers, installing trades, and certainly on your profits. General and administrative (G&A) expenses are something every company needs to manage, but cutting the department that’s responsible for keeping your costs low is a little like killing the goose that lays the golden eggs. Still, how do you know what proper staffing levels should be to balance costs and value to your profitability?
Step 1 in Figuring Out Purchasing Department Staffing: Know Your Business
Start by assessing your organization’s business model. Are you a production builder or a custom home builder? It stands to reason you will consume more resources as a custom builder than as a builder that designs a home once and builds it many times in one or more communities.
Do you offer a lot of standard upgrade options, or are all features included in the base price of your homes? Options consume a great deal of resources for both your purchasing department and your entire supply chain, not to mention the other parts of your business. If you do offer options, do you allow custom choices, too? On the resource-consuming Richter scale, custom options are about a 9.0 because they require a great deal of effort for your purchasing team, your suppliers, installing trades, and your construction team.
Other questions you’ll want to consider involve the stability of your house plan library, including the number of plans and how often you change, create, or add new plans for an existing or new community. The more plans you add or the more plans you change, the more time you will consume on the purchasing side.
I prefer to use several ratios when determining staffing levels because most business models are complex.
How about change orders? Do you allow customers to make changes after the scheduled deadline? If so, then yup, you guessed it, that’s going to consume more time and resources, as your team will have to repeat portions of their job at least twice. That allowance is inefficient, but maybe that’s your niche. If so, that’s OK; you just need to staff appropriately so change orders don’t eat away at your profits.
Next, look at the tasks you have your purchasing department doing, specifically whether you have them perform non-purchasing tasks, such as pulling permits, tracking insurance, and scheduling trades.
All of these things need to be considered before you compare staffing ratios at your company with another of comparable volume in the same market niche. The challenge with broad industry metrics is that some builders inevitably compare their staffing levels to other home builders that have a different business model.
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For example, if you are a production home builder that creates new house plans for every new community, makes regular changes to them, maintains an excessive number of options (including custom options), and expects your purchasing team to pull permits, track insurance, and schedule trades, is it fair to compare your staffing levels with a builder that has a small national plan library, rarely changes its plans, and doesn’t offer options? Probably not.
The Right Staffing Ratio for Your Purchasing Department
Once you have a good handle on the requirements and expectations for your purchasing department, it’s time to consider some staffing ratios.
These ratios are important because they tell you when you need to add resources to the department. A staffing ratio is often tied to a level of business, such as home closings per purchasing employee. With this ratio you look at your annual closings and divide it by the number of purchasing employees.
Another one is housing starts or the number of homes you start in a year divided by the number of purchasing employees, or by the number of communities per employee. I even know a builder that measures the number of change orders per employee. I started my career in manufacturing for a company that used a ratio of purchase orders per employee. Another way to look at it is spend under management, as some companies expect a purchasing employee to manage a certain dollar amount. You may want to measure it as the number of house plans per employee or sales per employee, or perhaps the number of options per employee.
There are pros and cons to any of these ratios. Frankly, I prefer to use several ratios when determining staffing levels because most business models are complex. I prefer starts over closings because home starts is a leading indicator and home closings is a lagging indicator. If you use a closing ratio, your purchasing department could really struggle if you have an influx in starts until those starts become closings, signaling that you need more staff. By then you may have lost valuable team members to burn out … and probably money on the table.
I also like to look at the communities under management ratio. If your average community size is 500 lots and you don’t make a lot of plan changes, then you will require fewer resources to manage compared with a builder that has an average community size of 75 lots.
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It is helpful to look at the change order and option ratios, as well, but only in combination with starts and communities under management. I think it’s a lot more effective to look at these four ratios together than just relying on one in isolation. I look at spend under management but not as a ratio; instead, I use that metric to make sure I’m tasking my most experienced and effective purchasing team members with the larger or more complex spend categories.
What About Economic Factors?
It’s important to remember that housing is a cyclical business. During the boom times, costs rise … especially when there is more work than materials or installing trades can handle. However, during a slowdown, the opposite is true. I have always believed that a good purchasing professional can save a company 10 times their cost (salary and benefits), and wouldn’t you want all hands on deck in your purchasing department working to get your costs in line in a declining market? (Just a thought.)
In summary, it’s OK to compare your staffing levels with those of other home builders, provided you’re comparing apples to apples. If you’ve tasked your purchasing department with a lot more than your benchmark builder, you may see higher costs and higher employee turnover. Next, rather than look at a single ratio, identify three or four that best gauge your business.
Lastly, be slow to downsize your purchasing department. Better to set cost reduction and cost avoidance goals to get your costs in line during a downturn. If your costs remain high while your net sales price falls due to incentives to homebuyers, the only place that can come from is your margins. While you certainly will see margin shrinkage in a downturn, you need to make sure your supply chain is working with you—just as you did with them when times were better.