Like many large and growing home builders, Technical Olympic wants to order products from fewer suppliers to lower its costs and streamline its supply chain management. Over the past two years, this Hollywood, Fla.–based builder, which closed 6,135 homes in 2003, has aggressively negotiated corporate purchasing agreements with several leading manufacturers. However, the inking of those deals doesn't necessarily mean construction supply companies are left out in the cold: As often as not, the smooth execution of those programs has included a contractor, distributor, or pro dealer that is located near the 14 metro markets where Technical is active. "What we're trying to do is to take an integrated supply chain approach," says Ed Wohlwender, Technical's vice president of supply management. "You only have so much bandwidth to work with."
As large production builders consolidate their industry through acquisitions and expand through organic growth, their need for consistent, reliable logistical support has become increasingly pressing. In turn, many pro dealers—especially the larger players like Building Materials Holding Corp. (BMHC), Builders FirstSource, Stock Building Supply, and Lanoga—whose own geographic growth has kept pace with their builder customers have been well positioned to offer themselves as liaisons between builders and manufacturers. They are providing the products and services that big builders demand and delivering them precisely when customers need them. But holding on to that business long term requires dealers to understand just where they fit in their builder customers' distribution strategy. Just ask Bill Justus, vice president of supply chain services for Houston-based David Weekley Homes. He speaks approvingly of pro dealers' "tactical" role in the achievement of home builders' "strategic" objectives. Also on the same wavelength is Ric Rojas, vice president and director of national accounts for Dallas-based D.R. Horton, whose 47 divisions are separately responsible for purchasing decisions. "Our local point of contact often turns out to be a distributor," Rojas points out, adding that large consolidators on the pro dealer side have approached his company—which closed 37,662 homes in 20 states in 2003—about developing regional supply deals of their own.
Only a handful of pro dealers have reached the level of critical mass needed to serve as distribution points in multiple markets. And the "local supply chain solution" that has become most pro dealers' comfort zone with builders and manufacturers is suddenly up for grabs in many cases with the emergence of large service providers that can deliver products, installation, and logistical coordination on a multi-regional and, in at least one case, national basis. Which partner the builder chooses often depends on established relationships and the products being purchased.
Two-Step Still a Popular Dance
9113While products like major appliances and heating and cooling systems normally get shipped directly by manufacturers, a wide range of other building materials can and do travel between one to three points of distribution between the factory and the jobsite. Products that are price-sensitive (like roofing or lumber) or require fabrication (like countertops, cabinets, and millwork) are often destined to make stops at a lumber-yard or a distribution center before they arrive at a new-home construction site.
Backing up these facts, a recently released study from BIG BUILDER magazine , a sister publication of PROSALES, took the pulse of its readership and found that an average of just under two-fifths (38 percent) of the products used by the 409 respondents are delivered by a pro dealer or distributor, and that nearly one-third (32 percent) of their overall purchases are invoiced through these two-step suppliers. (See "About the Survey" and Figure 4.)
"You can't do a deal with a national manufacturer without talking about local distribution," asserts Mark Hodges, senior vice president of corporate operations for Hovnanian Enterprises, the Red Bank, N.J.–based builder that, since 1998, has paid out more than $1 billion in cash and stock to acquire a dozen companies and expand its market penetration into 13 states. "Manufacturers can talk all they want about just-in-time [deliveries], but it does us no good receiving six weeks worth of windows before we need them."
The fact that Hovnanian is also giving serious thought to developing an internal distribution network that would use as its model the distribution center its Ohio-based Summit Homes division operates, speaks to the importance for builders that their production schedules are uninterrupted. About half of the building products that Hovnanian purchases for the homes Summit builds—including lumber, doors, HVAC, plumbing, and bath fixtures—are stored and redistributed from Summit's 215,000-square-foot DC in Canton, Ohio.
Another builder—Joe Halpin, Midwest purchasing manager for Fort Mitchell, Ky.–based The Drees Co.—even emphasizes that a vendor's local distribution capability is ultimately "a deal maker or breaker" for his company's purchasing managers in the nine cities Drees builds in. When builders enter into purchasing agreements with manufacturers, pro dealers and distributors are commonly called upon to plug holes in manufacturers' market coverage or to reconcile quirks in a given market's product preferences. In Chicago, for example, local distribution is critical to Pasquinelli Construction, as this builder must handle 127 different product types—compared to only about 10 for its Charlotte, N.C., division—to stay in compliance with building codes that change from town to town, says George Smith, director of purchasing for this builder's Chicago division. "If we don't have the proper distribution or I'm uncomfortable with the setup, we won't go with that supplier," he says.
But local distribution isn't free, and the more layers of distribution that a product must wade through, the harder it can be for vendors to meet builders' demands for the lowest price. The BIG BUILDER survey found that price and service ran virtually neck and neck as leading factors that impact builders' purchasing decisions (see Figures 5 and 6). Look closer at the results, though, and you find that price is the primary criterion—sometimes by a wide margin—that builders use when they purchase lumber, siding, roofing, and millwork. On the other hand, price finished second behind "design and style" for buying cabinets. "The ideal situation for vendors is to be able to give us their best price based on the percentage of homes in which we'll use their product," explains Robb Pigg, vice president of operations for Walnut, Calif.–based Shea Homes. "But when a manufacturer has strong distribution relationships in some markets, that clouds the cost issue." (All things being equal, 63 percent of the builders in the BIG BUILDER Study said they would be more likely to purchase a product direct from the manufacturer that had the lowest initial price rather than the biggest rebate.)
To further illustrate how pricing can complicate a pro dealer's relationship with builders, Justus of David Weekley Homes recounts how his company went to the mat with a division of one of its trading partners (whose name he requested not be used in this article) to get that division to comply with a multimillion dollar lumber purchasing deal the builder and this partner had struck corporately. David Weekley Homes quotes lumber prices every 90 days, Justus explained, and the partner's division balked because it wasn't convinced that it could make money in a volatile lumber market under the terms of that arrangement.