Wielding their size and buying clout more effectively is how two of the industry’s largest production builders believe they can counter future anticipated shortages in construction labor and building materials.
The topic came up in May at a panel discussion during Builder magazine’s Housing Leadership Summit in New York City. By that time, housing had crossed the 700,000 annual-starts rate, and several of the industry’s largest builders at the summit said their sales in the first quarter had risen by 25% to 50%.
“If there were sustained 25% growth [this year], it won’t be ‘if’ but ‘what part’ of the supply chain fails first,” warned Tony Callahan, Beazer Homes’ former supply chain vice president, who now manages his own consulting firm. Callahan moderated the panel that included Brad Conlon, D.R. Horton’s vice president and director of national accounts; and Mike Smith, Toll Brothers’ corporate vice president of purchasing and product standards.
Conlon sounded less concerned about rising labor costs—“there’s still a wealth of subcontractors out there,” he said—than the potential for significant jumps in materials prices, especially in product categories where manufacturers could need anywhere from 18 to 36 months to restart mothballed plants. In the event of product shortages, Horton’s strategy will include presenting suppliers with more volume buys.
Both Smith and Conlon said they’ve had success lately getting drywallers and roofers to “unbundle”—that is, stop offering deals that combine material and labor costs. Through unbundling, builders believe they can reduce total costs.
Some relationships might need repairing coming out of a recession in which builders sometimes throttled and intimidated their suppliers for lower prices. “Most businesses pass the baton between companies and suppliers, but in this industry we beat each other with it,” quipped Callahan.
The panelists spoke favorably about cultivating long-term relationships with vendors through earlier communications facilitated by a more refined use of technology. But that doesn’t mean builders will stop short-term bidding, in which they request pricing for just the materials needed for a minimal time rather than for the whole project. That strategy leads to more invitations to bid, more competition and, theoretically, lower prices.
“Horton wouldn’t have survived as it did without it,” said Conlon. And Smith said short-term bidding remains “essential” in some instances.