This story was originally published in Builder.

Business culture eats strategy for lunch

When it comes to building new homes people who earn moderate incomes might be able to afford, builders and developers tend to reach for three arrows in their quiver.

  • C and D land positions
  • Smaller, greater density, and/or attached product design
  • Materials, products, and process cost reduction via concessions from vendors

Few builders--you can count them on one hand--have the capital depth and flexibility, the product portfolio range, and the discipline and clout to use all three arrows effectively. Typically, the majority of builders--small, single-market, and most regionals with private capital access--lack the nimbleness to pivot into new, lower cost-base land positions, and they lack the heft, scale, and leverage to wrest pricing and cost concessions from suppliers.

They counter-punch, and dial up focus on value with customers, and sweat out submarket dynamics that see "the big guys" driving down costs on both the direct expense end and on the asking price end.

They fret, and watch their sales per community per month like hawks, and they use every known scheduling, operations, and construction cycle tactic--one trade and one building stage 100% completed per day per house, for instance--to shave days, waste, and carrying costs off each inventory turn.

Meanwhile, the market dominant, more-deeply-locally scaled players do their version of the same drill, and they're literally hammering product, materials, and labor suppliers to agree to lower prices, rates, and to develop friction-free, error-free installation and service to further drive down direct expense. At last week's ProSales 100 Conference, three purchasing and procurement strategists discussed--in thinly veiled terms--opportunities for suppliers and builders to "work together to bring value to each other."

Most folks, on both sides of the relationship equation, know well what that means. ProSales staffer Vincent Salandro reports here on remarks from Chuck Chippero, the national director of strategic sourcing for Pulte Group, Royal Erickson, the vice president of national strategic sourcing and design studios of Meritage Homes, and Kevin Wilson, the vice president of purchasing and national accounts for TRI Pointe Group. He writes:

Brian Kelly

Chippero said more proactive collaborations between Pulte and material suppliers during the design phase could bring greater value. He additionally said some suppliers could be more open-minded to expanding their services.

“There are many pro dealers and CMs that are reluctant to look at installing windows in a factory where we panelize,” Chippero said. “It does take some investment, some risk, but we’re starting to see a lot of change there and I think there’s a lot of opportunity for the pro dealer to kind of grow into it and offer more services. Because for us minimizing the number of tracks we bring to the jobsite is of great value.”

Erickson said with many builders moving toward panelization, or off-site construction, they will need greater help in that regard in terms of efficiency and cost parity.

“We need to get to the point where we have some cost advantage of going down that path [of panelization],” Erickson said. “That’s one of the greatest things we can get out of our dealer partners. The other piece is transparencies in costs and working with the builder, the manufacturer, the distributor to establish pricing, to help us pull that through the supply chain to support the quality.”

Somewhere in those remarks--nested between the code and the euphemism and the necessary delicacy around making statements freighted with implications on current negotiation stances--Erickson is spot on in his "we're in this together" assertion. And the "this" that builders and their partners are in is full of challenge to get new home asking prices to where more people who earn moderate livings can make a new home purchase a reasonable thing to aspire to and work for.

Fallout beneficiaries of the intensifying "testiness" in unit and task pricing dynamics between the mega builders and their vendor counterparts are private regional and local home builders, who, by putting emphasis on the relationship, can move up the chain as "preferred customers." In the end, however, volume, consistency, and visibility of demand that only the biggest and most operationally efficient of players can ensure, will grind away at the sinews of "preferred customer" assumptions. Depending on the length and slope of adverse conditions, this could undo more than a few privately capitalized builders that don't have a store of their own dry powder to draw on.

Meanwhile, big, big builders have added a fourth arrow to their quiver--one that allows them to both pull through their overhead infrastructure costs, and at the same time, introduce people by a new means into their customer funnel.

Single-family rental. It's relatively uncharted territory where ultimately the "home buying journey" is concerned. But, as a operational model that can reduce land investment exposure and generate cash, at least until demand for homeownership regains its mojo, word is that seven in 10 big builders are adding it to their mix in some form or fashion.

The biggest priority focus area for the next stretch across the middle and into the back end of 2019 is on extracting cost and friction from directs and indirect expenses. This makes for some testy times in big builders' relationships with suppliers as they try to ratchet down what they pay for materials and work.

This story was originally published in Builder.