Winning hand: industry pundits weigh in on Harvard's recent LBM supply channel study and offer a glimpse into how dealers can stack the deck in their favor to ensure viability and profitability in the future

Prosales, Dec, 2004 by Rich Binsacca

Dave Beck is no gambler. Despite several years as the vice president of construction for Pulte Homes' Las Vegas operations, Beck prefers to make the safest wagers he can when it comes to securing adequate supplies of lumber, panels, drywall, and other building materials for his portion of Pulte's annual (and growing) output of 30,000-plus homes.

His current play? To unbundle labor and materials, even from some of the largest turnkey framers in the country, and use Pulte's purchasing power to leverage direct buys with lumber mills and manufacturers. "If I can save 3 percent on $10 million worth of materials and still allow my framers to be profitable on the labor side, I'll do it," says Beck, who now oversees the company's California operations as a national vice president of construction. "I need to be assured I can get materials."

Product availability is just one pressing issue facing builders these days. Construction defects liability, a shrinking labor pool, and competition for available land and market share, among other concerns, are quickly changing the landscape of how they do business and remain profitable.

As builders--especially giants like Pulte Homes-streamline their operations to remain competitive and continue to grow, they also logically change (and perhaps threaten) their relationships with local LBM dealers. "Dealers are nervous about increasing manufacturer involvement [with builders]," says Kermit Baker, senior research fellow with the Joint Center for Housing Studies (JCHS) at Harvard University in Cambridge, Mass. "They're trying to position themselves to be central to it," rather than being left out of the mix.

That's the key message for dealers from Residential Supply Chain in Transition, a JCHS report released earlier this year derived from nearly 100 dealer survey responses nationwide. "The continuing concentration among home builders toward national and regional domination has a significant impact on the [building products] distribution channel,' says David Weil, an associate professor of economics at Boston University School of Management and a member of the JCHS research team with Baker. "'Larger home builders and their demands for certain services require a different type of distribution setup."

The report outlines both the drivers and the vehicles that are likely to reroute the road map for dealer success in the future. The pressures include a shifting customer base toward larger-volume builders in markets beyond the big metro areas, an ever-increasing variety and number of products from manufacturers, and consumer demands for housing customization on a production scale.

In response, the report encourages dealers to take on a service (instead of product sales) mentality and become active participants in more sophisticated and integrated inventory management strategies that help lower their risk while enabling them to serve and supply increasingly demanding builders. "It's no longer an issue of nicking each other on price," says Isaac Heimbinder, president and CEO of Kimball Hill Homes, a Chicago-area builder on pace to close more than 4,000 homes in several regions this year and a member of the JCHS advisory board for the report's research efforts.

In the near future, he says, "The paradigm has to shift so that both sides [builders and dealers] see the value of a partnership [to where] those you're doing business with are the most profitable, not the least."

A Service Approach

Among its findings and suggestions for dealers, the JCHS report confirmed what many LBM and housing industry experts already know: Services, not products, are the key to remaining a vital link in the supply chain in markets where big builders dominate. "I don't need the middleman unless he brings value to the operations,' says Beck.

Among the dealers responding to the JCHS survey, combined with research regarding consolidation among home builders. Baker and his team found that suppliers either forced to or choosing to focus on large-volume builders must shift away from traditional and uncharged services, such as blueprint takeoffs, to 'premium" services, such as installed sales and components, if they expect to keep that business and remain profitable. "These [premium] services ... allow dealers to increase their revenue and potentially their margins compared to traditional materials sales." Baker writes in the report.

With that, production builders are less attracted to "free" services, making them an even greater revenue drain on a dealer. "These aren't the services that national builders would necessarily value [because] they have those capabilities in-house," Baker says.

In addition to an increasing number of dealers offering just-in-time delivery, installed sales, and component manufacturing to maintain or capture more sales to large-volume builders (see "Service Trends." page 64), leading suppliers are upping the ante. "Builders are asking how they can have more turnkey kinds of services to impact their overall profitability," says Dick Rose, a member of the JCHS advisory board and the senior vice president of logistics for Raleigh, N.C.-based Stock Building Supply, the country's largest residential construction supplier with more than 220 locations and nearly $2.6 billion in annual revenue.