Nearly half of the housing industry's largest production builders identify local suppliers as their primary points of contact to purchase materials and services for new-home construction. But pro dealers and distributors, which serve as intermediaries for builders and manufacturers, still can get caught in the middle between trade partners that don't always see eye to eye about their supply chain priorities.
That's one of the main findings in the recent BIG BUILDER Study, a nationwide survey of 582 builders, which uncovered disconnects between these groups about the importance that pricing, rebates, installation, product design, post-sale service, and information technology play in builders' purchasing decisions. (See “About the Survey,” page 58.) Builders themselves sometimes can't agree on these topics, either, which further complicates suppliers'efforts to anticipate and fulfill these customers' needs and demands.
National Purchasing Agreements The survey found that 90 percent of the builders polled claim to have positive relationships with suppliers. Finding common ground with big builders is imperative for suppliers at a time of rapid consolidation that's placing greater control of home building and sales in the hands of fewer companies.
The industry's largest builder, D.R. Horton, completed its fiscal year on Sept. 30 as the first U.S. home builder to close more than 50,000 units in a 12-month period. The company is not alone when it comes to growth, as nearly three-quarters of the builders polled expected to build more homes in 2005 than the previous year, more than three-fifths planned to add between five and 50 new communities, and more than half plan to expand into new markets. At the American Housing Conference, an event produced by PROSALES' parent company, Hanley Wood, LLC, Sept. 20–21 in Chicago, Margaret Whelan, housing analyst for the investment firm UBS, predicted that by 2010 the 10 largest builders would control 50 percent of the market, up from an estimated 30 percent in 2006.
Purchasing Objectives Builders participating in the study said that, as they grow, their biggest concerns are sustaining customer satisfaction, fortifying their land positions, and managing materials cost. In light of those challenges, and to better understand what criteria drive big builders' selections of one supplier over another, PROSALES reviewed the survey's results with executives from 11 of the 100 largest builders around the country.
Contrary to what many suppliers believe about price making or breaking a deal, these builders insist that price is only one variable they use to determine a supplier's value. First and foremost, builders seek suppliers that consistently provide problem-free delivery. While most builders would prefer to purchase from a single source, two- and even three-step distribution remain the foundation of the industry's supply chain architecture for many products. And as the labor pool gets shallower, subcontractors are playing increasingly vital roles in how products are bought, delivered to jobsites, and installed. But while most builders and suppliers concede that the housing industry should be more sophisticated in its application of information technology, there doesn't appear to be much urgency to develop communications systems around which the industry could rally.
Two-step Tango At the American Housing Conference, Gordon Berken, vice president of purchasing for Technical Olympic's Transeastern Homes division in Coral Springs, Fla., probably spoke for many of his colleagues when he described distribution as “the most important factor in deciding whether to [enter] into an agreement with a manufacturer.” “I would prefer to buy direct, but I don't think it would be very efficient for manufacturers in most cases,” he said. “[So] we're looking for manufacturers that have multiple points of distribution in any given market.”
Tony Callahan, director of corporate sourcing and procurement for Atlanta-based Beazer Homes USA, expressed sympathy for manufacturers that are “struggling” to discern who their customers actually are: “Is it the big builder or is it the dealer?” That's why, he said, Beazer likes to get manufacturers and the manufacturers' distributing partners in the same room when it negotiates purchasing agreements.
Certain categories—appliances, cabinets, windows, bath fixtures, and faucets—are purchased by many builders directly from manufacturers. Two-thirds of the survey's respondents have struck at least one national purchasing agreement with manufacturers of these products, and a growing number have negotiated similar deals for categories such as lighting and HVAC (see Figure 1, right). “We enter into these national-type agreements so we can set the expectations up front that, in these times of tight supply and demand, we expect [suppliers] to step to the plate,” said Mark Voetsch, vice president of purchasing for Red Bank, N.J.–based Hovnanian Enterprises, at the conference.
Importance of Criteria in Purchasing Decisions Fulton Homes in Tempe, Ariz., prefers single-sourcing whenever possible, and doesn't even send bids out for certain products, like insulation or countertops, because of its longstanding relationships with manufacturers, according to Julie Foshie, Fulton's purchasing manager. However, while this builder rarely orders through lumberyards or building supply outlets, it does buy roofing through a distribution network supporting its vendor, Eagle Tile, and purchases other building products through five different framing contractors. In fact, half of the survey's respondents said their companies invoice lumber and building materials purchases through subcontractors. Another one-third invoice commodities purchases through pro dealers and distributors.
