Builders have been working hard to control supply, but it's difficult when everything is so fragmented and you don't have insight or control over the whole process. Unlike manufacturing, builders are localized. Trade contractors are usually independently owned, making it difficult for the home building industry to make sweeping changes. On the supply side, builders deal with 100s of products, plus scattered distributors and suppliers in disparate locations.
Recently the Housing Innovation Alliance hosted a panel discussion that I facilitated focused on supply chain challenges faced by the housing industry. The mixed panel featured a supply chain expert - Ken Pinto author of "How Much is Milk?" a forward-thinking supplier / trade contactor - Ryan Barry with Stier Supply, and an innovative builder hyper-focused on finding efficiencies and maximizing profit - Matt Collins with the Mainspring Group. These different industry perspectives facilitated a conversation exploring challenges while offering advice on managing a changing and unpredictable market. Highlights from the discussion are included below.
Over the last year, builders and suppliers have faced unpredictable challenges in sourcing the supplies needed to build their homes. Builders have had no way to predict which product category will face shortages next. Builders have been left scrambling to figure out how to move forward. Many products lack pipeline inventory – what's being manufactured today is being used quickly.
Shipping issues and logistics delays have also become the norm. There’s been zero slack for systems to catch up, so unforeseen shipping issues have directly impacted the building timeline.
Labor has been a huge component of supply chain challenges. Manufacturers, suppliers, and trade contractors are struggling to find and retain qualified talent. This is hurting production capacity on a grand scale. Although wages have increased, employees are still choosing to switch companies, which is not expanding the total number of workers in the industry.
The panel detailed how the current economic situation is a manifestation of pre-existing homebuilding issues. These challenges are highlighting industry inefficiencies that have been present the whole time.
The entire homebuilding process, from the manufacturer through the supplier to trade contractors and builders, is so cemented it is hard for any one company to control costs and find game-changing efficiencies. Builders will need to find game-changing efficiencies to solve today's issues.
So how do builders position themselves to get what they need to be successful in today’s market?
While many builders are focused on creating efficiencies and cutting costs, many weren’t prepared for the recent supply chain disruptions. Builders have always needed operational excellence in order to maintain margins, but now agility must be baked into their systems to deal with problems in real-time. Otherwise, builders are just playing whack-a-mole instead of moving themselves forward and problem-solving.
In the past, if there was supply scarcity, it was possible to buy your way out of the problem and not impact closing. That’s not possible today. The norm is disruption. Agility must be a priority in today’s market. Make sure to take the following steps:
As Ryan Barry from Stier Supply said, “If you were a decent communicator before the pandemic, now you need to be an excellent communicator. If you weren’t focused on this before, you need to absolutely make sure you are communicating now.”
As Ken Pinto says, “Builders keeping inventory...I think that is a phenomenal idea and I also think that is the worst idea...let me explain.” The current environment has led builders to lose faith in the supply chain, resulting in some leasing warehouses and stocking materials themselves. That is a great idea because then they have access to the materials they need when they need them. However, it is also an awful idea.
If inventory management is not done correctly, it could result in increased expenses, delays, damaged, or lost products. Ken recommends sticking to what you are good at and working with your suppliers to come up with a solution.
To explore more on this topic, we recommend you review this recent interview with Ken.
The better you communicate with your trades and suppliers, the better they can support your business. Builders need to work with the supplier so they can be part of the decision to new product transitions. Trades and suppliers can provide the builder with the best solutions they know are readily available or what’s coming up.
Because most builders have not historically carried and stored inventory, they typically operate with a just-in-time schedule. However, most builders have the full home spec’d out and confirmed with the buyer before even breaking ground. Imagine how much better a supplier could support your projects if they knew in advance what you needed, especially with the increased lead times. The challenge here is making sure to share accurate information so that they can rely on it. If not, it doesn’t help at all.
As a builder, you need to work with trades and suppliers who pay attention to operational excellence and can be organizationally agile.
Advanced notice for orders, such as 30-to-90-day lead time, is becoming necessary. Integrated technology allows the full team, including subcontractors and suppliers, to operate from real-time information and expectations. It also allows everyone to contribute to finding solutions to being more efficient and getting homes built and delivered.
Ultimately, builders need good data from their systems to make good decisions. Success can’t be based on luck. Improve operations by knowing when items are needed and push for advanced lead time.
Labor shortages have hit home construction hard. Organizations, such as Home Builder Institute (HBI), focus on drawing in new recruits to the industry. But in the short term, builders need to solve the immediate issue.
Examples of a strong relationship include establishing strong communication and feedback channels.
Working with the trades to identify the issues they are having.
Find solutions that help lower their overhead costs.
Given the uncertainty, trades and suppliers can be more selective about who they work with. Builders who are more organized and make it easier for them to work with, such as having the job site ready so there are fewer wasted trips, are more attractive to the trades.
To explore more on this topic, we recommend you review this recent panel discussion.
While builders and suppliers may work together to minimize the delays, there is no getting around the current reality that certain materials won't be available in a timely manner. Setting expectations with the buyer in advance that substitutions may be required and providing an alternative. Making this a priority during the initial selections process helps the buyer prepare for the possibility of having to choose a different item. Taking this step reduces frustration and helps your team better manage buyer expectations. A recent webinar with Kerry Mulcrone with Kerry & Co outlined some great ways to work with customers and manage their expectations.
As the markets continue to evolve, these steps will be crucial in managing an unpredictable market. As housing demand eases, builders won’t be able to keep raising the price of homes to compensate for cost increases and challenges, and some may need to reduce prices to attract buyers. The result: builder’s margins are going to get tighter.
As demand for certain products eases, some prices will come down, but for other items, builders can’t go back to suppliers to get a lower price. Matt Collins suggested maintaining a separate line item on the purchase order to track the increases that have been mandated over the last few years instead of just adjusting your line items and the builder and the supplier should agree to why it's necessary and then also when it would come off. For instance, “will pay a premium of $150 per home for diesel while it's above $5 a gallon but when it drops below $5 a gallon (based on some index), we will remove the adder.” That way, it isn't seen as a concession when you get it back. You can even set a date when it will expire unless it is extended, so the default is that you don't pay it in the long term.
If builders can’t cut supply costs, they need to look at other ways to increase their margins. Revisit systems and processes. This is something within your control regardless of the ups and downs happening in the market. Find ways to run your business more efficiently through a combination of incorporating technology and improving communication. Pay attention to overages and variances. Start with each product you are using in your house and do an evaluation. If it adds value to the buyer, keep it, if it doesn’t cut it. You may be surprised by how much you will find.
A continuous improvement mindset and agility are crucial in moving forward in this market. We wish you the best of luck!
Click here to watch the panel discussion "Supply Chain Perspectives | Housing Innovation Alliance".
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