A Supply Chain Prescription

In the August and September "Lessons Learned" columns, I got pretty worked up about misdirected supply chain management practices I had encountered of late. I had just completed a couple of "partnering" workshops where the suppliers and trades had confronted me with a host of (to put it kindly) unproductive builder practices. They had questioned builders' sincerity and willingness to walk the talk.

A couple of weeks after the partnering workshops, I attended a large manufacturer and supplier conference. I presented on how to become the "supplier of choice" in builders' eyes. I challenged these manufacturers to do more, to get outside the box, to understand builders' issues and not just provide a decent product at a low price but also solve builders' problems. Do that, I suggested, and they will overcome builders' low-bid mentality. Then during the coffee breaks and meals, I listened to another broadside aimed at builders. These were not happy campers.

I heard amazing stories at this conference from manufacturers who felt they had made the effort and that builders had paid little or no attention. They were emphatic, and here is where big builders better pay attention: More than a few significant manufacturers of critical building components stated flatly that they had made a strategic decision to no longer work with the top 20 builders or to get out of that business as soon as possible. Some even hinted at top 50. They were dead serious, not making idle threats. They had done the math, and it wasn't pretty.

Why? Several reasons were cited. They felt that many of the builders were playing win-lose games. Pitting one supplier against another in unethical ways was commonplace. Putting suppliers through rigorous, expensive bid processes only to use those bids to pound down their original supplier was a frequent tactic. Talk of "partnering" was too often just that talk. Builders talked total cost, but all they understood was a cheaper price.

But the bottom line was this: The more stuff these manufacturers sold to the top 20 builders, the more money they lost. It no longer made sense to do business with them. You might be thinking that these were old-line companies stuck in the past, unable to compete. You would be wrong. These were premier firms, known for innovation in product and process. Let's think about this. Taken to its natural conclusion, what you have are builders' purchasing departments counting their savings while they systematically deplete their supply chain. This is like an artillery unit on the front line periodically lobbing salvos behind itself. Who will supply what they need to fight the war?

In the short run, this might look like a great strategy. On paper, there will be profits, perhaps even for a year so a few executives can reap big bonuses. But the obvious consequence is that as these builders reduce their supply options, supply prices will go up. All their efforts ultimately will result in higher prices and fewer options the opposite of what they intended. Meanwhile, trust will be destroyed. Based on the feedback I hear from both sides, the trust level between manufacturers and builders hardly registers. As this extends through distribution channels and on to the trades, it gets even uglier.

I heard other interesting things. For instance, none of the manufacturers really wants to be in the direct-to-builder business because most builders can't handle it. The builders' schedules aren't reliable enough to make direct-ship work and suppliers are expected to eat the extra cost. Some manufacturers are going along with direct-ship because they have to, but they don't believe it will last.

Why is this happening? I think the basic problem is that most builders don't know how to measure what is value-added and what is not. I have heard many accounts of supposed gains from cutting out so-called middlemen. Only later do builders realize what they lost in the deal.

Now, I am all for eliminating non-value-added work, and I have helped builders do that. Why should anyone pay for nothing? I also have worked with manufacturers, suppliers and trades to help them understand what is value-added, what is not and what they can do to help builders. But until builders learn to understand and identify total cost and total value in every part of the supply chain, this situation won't improve.

Despite what you might assume by my comments in these last three columns, I do look at both sides of this issue. Manufacturers, suppliers and trades are hardly guiltless. There is a lot they can do better. We're working on them, too.

But builders won't solve these issues by pointing fingers. If builders take a good look at themselves, they will find that manufacturers, suppliers and trades are so frustrated with low-price-mentality builders that they have a hard time hearing the message about what they need to do to get builders' business. And all of this is happening in a sellers' market! Imagine what it would be like if things really do slow down, as predicted each year for the past six years.

So what's a builder to do? I heard a good prescription just recently. I had breakfast with one of the best suppliers I have known. He started 10 years ago with nothing and now does $12 million a year, supplying labor and materials to most of the significant builders in his market, except for a few on which he has given up. He is aggressive, innovative and pulls no punches. Every builder I know in this city sings his praises. He is the real deal.

Between the second and third pancakes, it occurred to me that rather than reading the will to builders, perhaps I should let this supplier do the telling. I asked him to lay out for us, simply and directly, what builders need to do to establish trust with manufacturers, suppliers and trades and help everyone be more profitable.

The 10 key points he made are about as straightforward a message as you will find (see box).

I suggest you use those 10 "directives" and evaluate your organization step by step. Follow his advice, and you'll mend your supply chain. You'll have the pick of the litter for suppliers and trades. By developing that kind of relationship in an atmosphere of mutual trust, you can reap the product and process improvements that will save you real money improvements that will look good on the job site as well as on paper at the corporate office. Improvements that last.