Revisit Fuel Surcharges

Not long after Katrina hit, suppliers and subcontractors had no choice but to add a "fuel surcharge" line item to their invoices. This seemingly random cost has been born by the end user thus far because the proof was at the pump. As gas prices continued their skyward trek, no one would think of questioning this fee. Those that did got the following story:

"Because the price of gas is so volatile, it is much easier to keep the fuel surcharge as a line item. This means we don't have to keep submitting price increases every time gas goes up."

Well what about now. It is time to dust off those agreements and discover just what price constitutes a fuel surcharge. It very well may be that the price of fuel today is lower than when the deal was struck. Hmmm, is there such a thing as a fuel credit? Probably not.

Green Building for the Greenhorn

"Greenhorn!" I remember the first time I was hailed by that moniker. I was fifteen-years-old trying to assemble concrete forms using a twenty-eight ounce hammer and looking every bit the rookie that I was. I left a trail of bent nails wherever I went. The term greenhorn is not one anyone cares to have attached to themselves. But let's face it, some of us in the residential realm have turned a deaf ear to green initatives while our collegues were boning up. As an example I was speaking to a fellow purchasing professional yesterday who had never heard of LEED certification. Now suddenly we are expected to bring something substantial to the table. Well fear not. Here's a crash course.

First, there is no official government requirement for residential building yet when it comes to a green building program. Different municipalities have taken some steps such as requiring a specific percentage of impervious area on a lot not be exceeded. That leaves the private sector to sort things out. For homebuilders there are two organizations facing off.

The US Green Building Council which has established standards for residential, commercial and commercial remodelling construction. You can apply for LEED membership and become a LEED certified paractioner through this organization. They offer a mountain of information on green building across the spectrum.

Also in the game is the mighty National Association of Home Builders. Solely focused on residential dwellings, they are seeking to develop a National Green Building Program. Disenchanted with the approach of LEEDs, NAHB is seeking to create more cost effective steps toward introducing green initiatives. Make no mistake, they will have the same serious certifications that LEEDs does. In fact, they are currently seeking ANSI approval for their methods.

Beyond that is the actual products. I read an article today that led me to the Green Log Awards. This site is having a competition for the most innovative green products. As a result, you get to peruse numerous green products available now all in one place. To take a look go here. While this isn't a complete list of all products available, you may just find a few that are available in your area at little or no extra cost.

Finally, there is Energy Star. You know that little blue and white star symbol that came on your computer monitor. That symbol represents an EPA program aimed at energy consumption reduction. Considering that if you are astute enough to be reading this, you are probably working for a quality conscious firm. As a quality conscious firm, you are probably already taking many steps necessary to meet Energy Star compliance. What this program allows you to do is advertise your homes as Energy Star homes. Your buyer may qualify for a higher debt to income ratio as an added bonus. Who doesn't need that kind of edge today?

So there is your three minute introduction to Green building. With a little homework, you can quickly go from "greenhorn" to "green machine."

Thriving in Overdrive

April 8, 2008
Now that you have made the hard choices management has required and reduced your staff and even though starts are slower than you remember them since you started there, why is it that it feels like every week you get farther behind? How is it that with so little going on, your department is showing signs of burning out? The last thing you want to deal with now is attrition. Every department will be feeling this crunch at some point during this housing cycle. Unfortunately for you, your time is now.
The problem is that even though sales are slow, purchasing isn’t. As a matter of fact, I would be willing to bet that your department has done more negotiating, more contract revisions and more vendor reallocation in the last nine months than you have in any nine month stretch since hurricane Katrina. And to make the situation even more challenging, there is little chance you are going to get the go ahead to add staff at this point. So how do you keep morale up and productivity peaked when there aren’t enough hours in the day. Relax. That’s why they pay you the big bucks. Chances are, you are already doing some of the right things.
Beware of Whiplash- In a stressed environment; it is easy for a purchasing manager to put off completing routine tasks or to allow accuracy to slip a little. But bank on this, inefficiency will always come back to take four times the resources it would have taken to get it right the first time. If you gloss over the budget review on new house starts, you can bet the variance report will flesh it out. If you loosen up on your negotiating documentation, invariably, that vendor will have legal issues or at the very least, an internal audit will pick that vendor to review. Keeping a clean house now will ensure that you are ready for the coming market correction when you will be even busier than you are now.
Put First Things First- Steven Covey coined this as one of his Seven Habits of Highly Effective People for good reason. If you focus your resources on the projects with the biggest payoff, you will bring the most value to the firm. The trick is defining “payoff.” With politics, interdepartmental demands, lack of information from above and priorities that seem to change daily as sales and architecture are in a frenzy to find the secret recipe to resuscitate sales, it is difficult to get a firm grip on what is top priority. It is easy to get caught up in dollars when looking at priorities through the purchasing lens. But keep in mind, the organizations goals should always chart the course for the goals of purchasing.
When it comes to which contracts to allocate department resources on, one of the easiest ways to get a perspective on negotiating priorities is to take a sampling of your direct costs for a cross section of plans. Then sum the costs by activity code and sort the totals from greatest to least. Using a quick Pareto chart points out the activities that make up the largest expenditures in the house. The simplified sample below gives you an idea of the outcome.




You can download this template in Excel 2007 here.
Regardless of how you ultimately choose to sort priorities, the important thing is that you use this new information. Take some time to get an idea of how much resource you currently have allocated to each project or task. How closely does that resource rationing equate to your priority list? Maybe it is time to reallocate. Just don’t forget to communicate your change in plans to your stakeholders.

Retool- At first blush, this sounds like a counterproductive proposal. How could you afford the time to improve your staff when they are already overtaxed. Two reasons rise to the surface. First, your staff has been chugging along for nine months to a year now looking over their shoulder for the pink slip. Investing in their skill set not only sends the message that you continue to have confidence in their future at the firm, but it allows them to get out of the routine if even only for an hour. Second, and most obvious is that the more trained your staff is, the more efficient you will work together. Don’t worry about busting the budget. Look for no cost, or low cost solutions such as:
• Recruit your staff member with the firmest grasp of one of your software products (enterprise, office products, or even html) and have them give a one hour tutorial covering a few new tasks that can be mastered. Remember to assign labs so you can gauge your teams mastery of the concepts.
• Invite two of you’re a-list suppliers to come in and give a thirty minute state of the company address.
• Check with your IT department. They may have online training tools you are not aware of.
• Share what you know. You achieved that position because you have what it takes. So identify some aspects of purchasing that you can share with your staff to empower them
• Make it a “best practices” sharing event. Individual staff members may be surprised at the level of ingenuity being exercised by their teammates.
• Conduct a local plant tour. Make it a long lunch and tour a supplier’s facilities.
Communicate, Communicate, Communicate- You are the manager. You have been appointed to steer the purchasing ship. Part of your responsibility is to keep in constant contact with your stakeholders. As their needs shift, it is imperative that you alter priorities before wasting energy on a cancelled project. In like manner, apprise other department heads frequently of your progress. You can prevent some of those uncomfortable assumptions by insisting on face time with sales, production, architecture and accounting department heads as often as possible.
As a final word of encouragement, you can and will make it through this downturn. Just brace yourself for the hill in front of you and align every effort with the organization’s goals.

Finding the Gold in Direct Costs

So much has been said and written about purchasing managers reducing their direct cost. Sometimes their entire bonus structure is written around that one concept. After all, a builder's direct cost is his biggest expense. So what's a PM to do. He could try another round of competitive bidding. How about looking over those plans one more time for some value engineering that was missed. Well I am suggesting a different approach. What if the focus was shifted from reducing the builder's direct cost to reducing the supplier's direct cost. Think about it. For every dollar in direct cost you can save the supplier, you save yourself anywhere from $1.33 to $2. Now that I have your attention, let's think this through. Where can you make an impact. You can't possibly work with every supplier. So take a few moments to measure the ones with which you can have the greatest impact.

First is in the area of communication. Sit down with the supplier face to face (preferably in his plant.) I visited a drywaller once at his office to review some takeoffs. You should have seen the looks on his staff's faces when I walked in and was introduced. I was the first builder in twenty two years to ever come to his office. But beyond building rapport, being on the supplier's turf allows you to see what you are working with. Are the systems antiquated? You don't want to suggest something that is clearly out of their league. But no matter their level of sophistication, it is possible to make an impact with just a little discussion. Invite their front line into the conversation. This includes the person who creates your order, the person who orders your materials, the person who schedules your work and the person responsible for quality. Now sit on the edge of your seat and listen carefully. Chances are, you will find your missing dollars rather quickly. Remember, the supplier probably has the advantage of working with several builders. Each builder has different strengths they can share with you. The supplier is also keenly aware of your weaknesses. Are your purchase orders too cryptic? Do errors take too long to get addressed? Do variances happen too often? Are your specifications unnecessarily costing you money? Are your superintendents not watching the bottom line? This meeting can be a wellspring of information.

Next it is your chance to speak. Ask questions. How does their ordering process work. Remember, this is where your skills are the sharpest. Helping them see the advantages of a Kanban system for some high rotation supplies, showing them how to capture more discounts, increasing their inventory turns are all examples of how you can help them help you. Remember, by helping them improve, they are not just improving your account, they are improving their entire business.
Before you leave, take the time to quantify your findings. While it may be a magnanimous gesture to improve their business and their margins, make sure it is clear that your goal is your cost reduction through their cost reduction. Get some numbers on paper. Them commit to following up on any proposed changes to see how they are going. In the end, you will have been one of the elite purchasing managers who truly understands and exhibits the concept of a trade partnership.