America's biggest home builders want you to share their pain. In fact, they're demanding it.
The builder-supplier relationship, rarely without hitches in the best of circumstances, seemed shakier in September when eight of the largest public builders matter-of-factly told investors attending Credit Suisse's annual Homebuilders Conference that these tough times for new housing construction require, among other things, more price concessions from suppliers. "We're not asking them to do anything we aren't doing ourselves," said Stacy Dwyer, treasurer for D.R. Horton, the industry's largest builder, which has been asking suppliers to chop their prices by 5% to 10%.
Such repricing demands might turn out to be the least of dealers' and distributors' concerns over the long haul. As builders slash operating expenses, they've homed in on reducing construction waste, making for redesigned house plans that require less building material. Market conditions are pushing builders toward greater regional control over their purchasing decisions, with an eye toward enforcing limits on which suppliers they let their divisions buy from.
And the housing slump has eroded trust, as more builders want suppliers to provide price "transparency" by unbundling their costs, so builders can see what their charges are for materials, labor, distribution, and so forth.
Dealers and distributors that thought getting bigger would give them an edge as suppliers with big builders better think again, because builders with construction activities in multiple markets and states say they see little evidence that supplier consolidation is showing many benefits to their companies.
Last June, Lennar, the industry's second-largest builder, caused a stir when it sent letters to suppliers informing them they would lose its business if they didn't lower their prices. That salvo gave voice to what a lot of Lennar's competitors were thinking: that construction costs need to be realigned as home sales and prices deteriorate. At the Credit Suisse conference, Larry Mizel, chairman of M.D.C Holdings, which builds under the Richmond American banner, complained about contractors charging "super retail" for products and services. Jeff Vogt, chief supply management officer for Florida-based builder TOUSA, tells ProSales that his company found, with only a little investigation, that electrical contractors demanding "massive increases" to cover escalating copper prices could buy wiring cheaper through HomeDepot.com. "Suppliers weren't watching the store" when it came to cost control, he says, partly because builders weren't paying attention during boom times.
That's been changing in a big way. Judy Kase, who joined Meritage Homes as vice president of purchasing in September, says her first assignment with the Scottsdale, Ariz.-based builder was to "dig into our costs and see where we should be going with our suppliers."
This re-evaluation at some companies corresponds with the entry of professionals into the housing industry from fields typically more sophisticated in supply chain matters. Vogt joined TOUSA in September 2006 from General Electric. Before joining Pulte Home in January as its vice president of supply chain and purchasing, Tony Koblinski spent 12 years with the Saturn division of General Motors, and also worked for Bombardier's recreational products division. When asked how the housing industry's supply chain compares with that of the auto industry, Koblinski doesn't mince words: "Well behind."