It should be no surprise that when housing sales and prices fall, builders and contractors look to share the burden with their suppliers and subcontractors. Those desperate to find cost efficiencies in their building businesses tend to throw supply chain relationships out the window, often by increasing competitive bidding or requesting price cuts. It's a tactic that leaves dealers with a choice: either bow to bid requests that further narrow or even eliminate margins for commodity products, or refuse to play that game and risk sacrificing sales–and the resulting cash flow and profit potential–completely.
As bleak as those options seem, there's a third choice that appears to preserve the status quo even during a downturn. This choice relies on a dealer's ability to negotiate creatively with pros on almost everything but materials prices.
"What they say they want isn't always what they really need to get," says Ed Brodow, a business negotiation expert and trainer in Monterey, Calif. "Before you give into a pricing demand, think about delivery schedules, warranty extensions, credit terms," or any number of indirect or installed (versus materials-only) cost efficiencies and value-added services that create enough savings to satisfy a builder, while letting you maintain cash flow, preserve profits, and deepen–not darken–your relationships with pros.
It's not easy, especially if you're out of negotiation practice. "The supply chain rode the high times with the large and public builders, but now they're getting stretched out and pressured" to lower prices, says Glenn Singer, CEO of Builder Partnerships, a builder and supply chain consultancy in West Chester, Pa. "Manufacturers and dealers are going to smaller, privately held builders who need and are asking for different things."
A year ago, however, the value-over-price approach seemed to be working. Several months into the downturn, the NAHB Research Center in Upper Marlboro, Md., conducted seven focus groups with builders across the country, followed by a larger statistical survey to gauge how their supply chain relationships might change, or had already, in light of the slowing home sales environment.
At that time, 84% of builders stated they were more likely to negotiate lower prices with suppliers in the coming year than they did in 2006 as a way to hedge slow market conditions. Only 14%, however, reported a decline in materials prices to date. "Builders said their suppliers had been responsive [to their needs], but more in terms of providing higher levels of service than in lowering prices," says Ed Hudson, director of the Research Center's Market Research Division.
Hudson notes, however, that the housing industry had yet to hit bottom when his group conducted its research–and still hasn't, suffering worse conditions through 2007 and into this year. To update the data, he conducted the effort again late last year, and results are pending.
"The first study is directionally accurate, but I suspect that the second one will show more extreme responses," Hudson says. "Builders will surely be more price sensitive and more aggressive, presenting their suppliers with take-it-or-leave-it price requests or shopping around for the best price."
That will (or already has) put dealers and the entire supply chain in an even less desirable position, forcing them to either kowtow to such demands or think further outside the box to counter price sensitivity.
"Builders start with price and will hammer price, trying to get costs out of their building processes," Singer says. "But they also understand the difference between purchase price and the cost of doing business, even if they won't admit it right away," thus opening the door to negotiations beyond or exclusive of price.
Looking for Help
Among several critical considerations dealers should employ in their negotiations with builders and contractors (see "The Art of the Deal," page 54), they should exhaust efforts to find and build value before–or ideally instead of–a discussion about pricing.
"Always try to negotiate small issues that cumulatively make a significant difference in using your products or services more efficiently, easily, or effectively," says Bill Brooks, CEO of The Brooks Group, a global sales consultancy in Greensboro, N.C. "Don't apologize for your price or hesitate to quote it, but only after you're presented value."
Dealers who got fat and lazy from the housing industry's boom times may not recall where they have or can offer value to a builder, but it's there. "Builders are looking for help" to cut costs from their operations by almost any means, Singer says. "Even if they know what they need, they don't know how to get it from the supply chain."
Valued services, he says, such as just-in-time delivery, on-site installation training, trouble-shooting, dispute resolution with subs or upstream suppliers, extending credit or guaranteed pricing terms, timely notifications about changes in product lines and availability, value engineering, and an improved purchasing process, among others, can help builders weather a downturn without demanding materials price reductions.
The Research Center study adds teeth to that theory, reporting that builders are more likely to purchase new and attention-grabbing products, for instance, from dealers that offer on-site training, especially to construction managers and sales staff, the latter a reflection of a builder's first point of attack in a slow market.
"The survey indicated that builders are most likely to improve or innovate their sales processes," says Hudson, more so than any other means, including supplier relationships. To that end, he says, "They're looking for products that convey value [to buyers] effectively and quickly."
In turn, "Dealers need to provide builders with messaging and marketing materials [about new and high-profile products] to help their sales efforts," says Hudson.
LBM dealers also can help builders by being smarter about ordering materials and construction waste. Clark Ellis, principal with FMI Corp. in Raleigh, N.C., which focuses on supply chain and materials efficiencies, has audited more than 500 sets of residential construction drawings against their as-built conditions, with staggering results. "We found from $750 to $10,000 per house, just in waste and lack of control" within ordering, delivery, condition, and use of building materials, most notably lumber and panels, siding, drywall, and interior trim–key categories for most dealers, he says.
Example: a dealer sends two sections, a 10-foot and an 8-foot, of header material to the site for a pair of 5-foot and 4-foot openings, respectively. But the framer cuts the 10-footer for a 4-foot opening, resulting in waste and production delays. The situation could be mitigated or remedied by the dealer marking materials or tying them directly to details on the plans, pre-cutting the material for each opening, or offering on-site training to the framing crew.
"If a dealer goes to a builder with ideas for reducing costs, there are a lot of opportunities to succeed and develop strong relationships with builders versus just dropping the price," says Ellis. "You may sell less lumber, but at the same price per foot."
Creative ideas and approaches, available rebates or other purchasing incentives, and readily available inventory, among other talking points, are approaches that are perhaps best accomplished with a tag-team manner among dealers, distributors, and manufacturers. In fact, Hudson's research indicates that builders are more likely to consider direct purchasing during this down market, not so much to get better pricing but to boost purchasing and production efficiencies.
"Traditionally, dealers and distributors don't want manufacturers calling on builders, but that's short sighted," says Singer. "The goal is to better understand a builder's needs and what each link in the supply chain can provide to deliver them."
The Straight Dope
If the negotiations do veer to pricing–and eventually they will–Singer says all pros really want is the straight dope.
"Builders just want open and honest communication about pricing," he says, including changes; product line changes that might impact the builder's schedule or list of standard features or upgrades; prompt answers to technological and product performance questions. "If the supply chain can deliver that, the priority of price will go down."
And it appears that builders may be more willing to sit and listen and get off their one-trick price pony than dealers might suspect.
"Builders appear to be much more innovative and open to improving their business in these market conditions," Hudson says. "If you can meet a builders needs today, you'll gain market share, maintain sales, and be in a much better position to profit even more when the market turns around."
The Art ofthe Deal
Make no mistake: negotiating is a skill that needs honing and refinement to remain effective. Try it off the cuff or hesitate for a split second, and you could end up with the short end of the stick–or no stick at all. Consider these tips the next time a pro asks you to lower your prices: Find out what the customer needs and values before beginning the negotiation. Tailor sales presentations to those needs. Eschew small talk and superficial relationship-building in favor of real solutions and results. Ask probing, open-ended (vs. yes or no) questions, and take time to listen and learn. Be ready to confidently defend your pricing. Talk about total cost, including installation and call backs, not just price. Be willing and ready to challenge the validity of a customer's position. If price never comes up, don't bring it up. But if it does, be set to talk. Don't make the first move, accept the first offer, or offer to split the difference or accept that proposal. Flinch or hedge on the first offer, a tactic that indicates surprise or dissatisfaction even if none exists. Whenever you make a concession, get something in return. If not, the customer will ask for more. Offer your biggest and best concessions first, then go progressively smaller. Keep your emotions in check and out of the conversation. Set a time or date that your offer expires to avoid delay tactics by a customer, during which time he may be gathering other proposals. Never disclose that you "can't live without" the business. If you do, there's no more room to negotiate. Always be willing to walk away.