I'm often accused of being too positive, too likely to see the glass as half full. I admit to being positive most of the time. There are those times, though, when If you see something that walks like a duck, quacks like a duck, and swims like a duck, it's just gotta be a duck. That's the case now for our day-in-day-out commodities--OSB, Pine plywood, studs, even Hardie at times. With them, you just have to accept the fact that the market (i.e., our builder business) believes, OSB is selling at 5 to 8 points of maintained margin and thus you aren't gonna get 20 points on that product.
So, accepting the not-so-positive fact that low, low margins on commodities are often the reality, how do we deal with it? At Kimal, we have five basic rules. Let's start with the first four:
- Keep our ears and eyes attuned to what the (selling) market is doing. If competition is out "giving it away," we have to know that.
- Listen well to our sales team--our first line of contact in the field. Of course they're almost always going to say, "We're too high" (poor babies!!) but they're usually pretty good at knowing what's going on out there.
- We watch our quality. Sometimes one manufacturer will stand out as just having a better product and we can get a little bit more at times. In plain old spruce boards, the Gorman brand stands out as just better, and we do get a little better price.
- Because we're almost always dealing in large quantities, we try to closely watch our buying. If market is high and even seems to be heading higher, we try to buy just based on short-term orders; you can't look too far into the future. If the market is soft and getting softer, you of course have to ride it down; the competition kind of dictates that. However, when you are fairly confident it's at or near the low point, sometimes pretty heavy buying is the right thing to do. It may go back up a lot, and then ever "cheaper" purchased goods is helping your margin as you're riding it back up.
With true commodities, I never fret too much in the short-term on how much we lost (by selling at low margins) or gained (by selling at healthy margins). Instead, I focus on our "turns" and, looking at a given quarter,ask: How did we average out? What may have started out at 6 points may have hit 28 points six weeks later, plus buying frequently and turning it with maybe annualized turns of say 20 ultimately may turn out to be a pretty good program.
Rule No. 5 is more subjective but equally important: Strive for “creative" relationships with our builder customers. We talk, we ask questions: "Hey Jack. the market is soft, but from every indication it's going to go up. You know, it's the Spring season and all ... and you have a lot of contracts. I can buy a couple of extra cars of 3-ply, to cover you at a fair price, and guarantee that you won't get a price surprise. But can you front me half the cost up front?” (This is a true story, by the way.)
All this is part of having real good lines of communication with your customers. They know that prices will go up and down, and they just want you to be honest with them. I can't deny it: Lots of raw emotion can be involved. You need to communicate well and offer some creative dealing through the reality of the situation, and not the emotion. Emotion can wound you in many ways.
I’ve said it already, but having an up-close partnership/relationship with those customers is very, very key ... or you'll tend to be graded on price alone.
I'll end with this: Special order items and non-shopped items are fun and rewarding, and golly knows, looking at a big specialty wood order at 40 points of maintained margin sure feels mighty good. But I think the critical management of true commodities could be the most important component of your business…Poorly managed commodities sales can hurt your business to the point of putting you on life support if not managed extremely well.
Good Selling, and good profit.