Regardless of market conditions, investing in and supporting knowledgable purchasing professionals pays profound dividends
Skilled purchasing professionals are a strategic asset in any market condition. They know their assigned trades and every other trade in the market. They know what materials they use, where they buy them, and who manufactures them. They know specific SKU-level pricing and the quantities required for each house. They know the different labor tiers needed to install those materials and understand the market rates for each level of skill and the hours required to install the products in every home.
All that knowledge enables skilled purchasing pros to avoid unnecessary price increases and to reduce costs when the cost drivers go down, having a profound impact on profitability. Every dollar saved by a knowledgeable purchasing professional goes directly to the bottom line; a sales professional would have to sell 10 times as much to produce the same bottom line impact.
In market downturns, I’ve seen builders turn to their purchasing department for help navigating the storm. But you must hire the right people, train them, remove roadblocks to success, and keep them focused on the end goal.
Hire the Right People for Your Purchasing Department
In my career, I’ve had the privilege of working with some of the best purchasing talent in the industry. But I’ve also worked with some real “paper pushers” who lack skill and aren’t informed or motivated to do anything but get things done quickly. A trade asks for a price increase; purchasing processes the increase. Change order? Simply call the trade, ask how much it will cost, and process the paperwork.
The problem is that having paper pushers on the payroll is a tremendous cost to your business. Direct construction costs are higher than the competition, and you miss out on more and more land deals because they simply won’t pencil out when you factor in those higher costs. You can’t sell more homes because you don’t have the margins to negotiate deals. Your ability to grow is limited.
You may rationalize keeping paper pushers on your payroll because they draw a low salary, but I can tell you that’s the costliest decision you will make.
Hiring the right people for your purchasing department is critical. Sometimes it takes money to make money—including investment in a good recruiter. Expensive, yes, but so is a bad hire. Good recruiters are plugged in to the profession and the industry; they know the movers and shakers and where the dead wood is, as well. Push your budget and hire the best you can afford. Think of it as an investment—because it is. A good purchasing professional will generate savings in excess of 10 times their cost. Where else can you get that kind of return?
Train Your Purchasing Team
Train, train, and continue to train your purchasing team. Companies typically do a good job of training their sales teams and even their construction teams, but most don’t provide training for their purchasing teams. That’s crazy. Think about it: Your purchasing team basically has your checkbook. Don’t you want to do all you can to make sure they’re making educated decisions? If so, educate them.
Training topics should include how to negotiate, do take-offs, use an ERP (enterprise resource planning) system, do trade performance appraisals, manage change orders, implement cost-avoidance strategies, resolve conflict, tap sources to identify new trades, onboard new trades, as well as knowing about supply chain techniques, Lean principles, continuous improvement methodologies, and cost indexing ... the list goes on and on.
Support Purchasing for the Team to Succeed
It is critical to remove roadblocks that prevent your purchasing team from succeeding ... and there will be many in your way to achieving a competitive cost structure, especially if you haven’t had one in a long time.
To remove roadblocks, it helps if you and other senior managers and leaders show and voice your support for the purchasing function. Give them a seat at the boardroom table and treat the purchasing department in a way that recognizes its strategic function.
One common roadblock can be suppliers and trades having well-established relationships with key leaders in your organization. Such familiarity and comfort isn’t a negative thing—unless your purchasing department has reason to believe the trade isn’t providing competitive pricing or is otherwise taking your business for granted. Be open to the potential that not every trade you do business with is the best one for your company, regardless of how many years they’ve done business with you.
Other roadblocks are budgetary. As the market tightens, so do budgets, and you may be tempted to shed “costs” (people) within the purchasing department. While SG&A (selling, general, and administrative expense) is always a financial focus, especially in a downturn, laying off good purchasing people is like letting go of the goose that lays golden eggs. Don’t get me wrong: A downturn is a good a time to let go of paper pushers, but not skilled purchasing professionals.
Stay Focused on the Goal
Keep skilled purchasing professionals focused on the end goal. They understand the difference between price and cost, what they pay for a product or service versus what they end up paying over the life of that product or service—the total cost of ownership (TCO). A skilled purchasing professional is focused on reducing TCO, not price.
Take change orders, for example. Skilled purchasing professionals aren’t just focused on how they can process change orders more quickly; that would be like trying to figure out how to scrape burnt toast faster, rather than understanding the root cause of why the toast is getting burned!
Rather, skilled purchasing people dig into each and every change order to make sure you aren’t being overcharged for it. Remember the picture of the yacht named Change Order and the dinghy named Original Contract? Instead of asking your purchasing department to process change orders faster, focus on why you’re having (or allowing) so many change orders.
Challenge Purchasing Professionals
Encourage new ideas and approaches. People are creatures of habit and generally don’t like it when you “move their cheese,” but a good purchasing professional will push people out of their comfort zone, which is where improvement is made, by challenging the status quo through their belief that there is always a better way to do something. Support that mindset.
An informed, skilled purchasing team is a strategic advantage. They manage your expenses through cost avoidance when the market is good and cost reduction when it is not. Trades rarely offer up cost decreases on their own, but are often willing to do so when you approach them with data that proves an adjustment is in order. To get those decreases, you need competent, knowledgeable purchasing professionals.
Access a PDF of this article in Pro Builder's August 2019 digital edition.