PMI on Steady Increase

By Bruce Erickson

November 17, 2009

In October, the PMI or Purchasing Managers Index reported significant gains for the tenth straight month and for the third month over the 50% mark. A PMI over 50 indicated the economy is expanding while anything below the 50% mark indicates the economy is contracting. Since July, rates of growth in manufacturing have outpaced even the dramatic increases of the equity markets.

 

As indicated by the information below compliments of the Institute for Supply Management, although new orders have slowed since September, they are still growing. The only declines are inventories as wholesalers and retailers are still skittish about overstocking. Perhaps the most inspiring data point is employment which has transitioned form contracting to growing. Most of this is in temporary labor and contract labor at this point. But it is evident that as production grows, previous staffing models are going to be spread to thin resulting in new hires going into the new year.

MANUFACTURING AT A GLANCE OCTOBER 2009
Index	Series Index October	Series Index September	Percentage Point Change	Direction	Rate of Change	Trend* (Months)
PMI	55.7	52.6	+3.1	Growing	Faster	3
New Orders	58.5	60.8	-2.3	Growing	Slower	4
Production	63.3	55.7	+7.6	Growing	Faster	5
Employment	53.1	46.2	+6.9	Growing	From Contracting	1
Supplier Deliveries	56.9	58.0	-1.1	Slowing	Slower	5
Inventories	46.9	42.5	+4.4	Contracting	Slower	42
Customers' Inventories	38.5	39.0	-0.5	Too Low	Faster	7
Prices	65.0	63.5	+1.5	Increasing	Faster	4
Backlog of Orders	53.5	53.5	0.0	Growing	Same	3
Exports	55.5	55.0	+0.5	Growing	Faster	4
Imports	51.0	52.0	-1.0	Growing	Slower	2
OVERALL ECONOMY				Growing	Faster	6
Manufacturing Sector				Growing	Faster	3

Using Poka Yokes to Improve Data Gathering Techniques

By Bruce Erickson

11/17/2009

One of the most amusing terms to come out of my education in business was "poka yokes." The term is a Japanese term that loosely translated means idiot proofing. If you have ever filled out one of those internet forms and found yourself bounced back three times to correct information that wasn't formatted correctly, you have experienced a poka yoke. If you have ever assembled a piece of furniture where all the screws were so different that it was impossible to put the wrong screw in the wrong hole, you have experienced a poka yoke.

The term originated in the '80s with the Toyota production system. As the auto manufacturer continued to drive out waste in the production line, they discovered that by creating poko yokes along the production line, there were fewer errors. Today the technique is so widespread, that most people are unaware of them. So the question remains, how can poka yokes be applied to the purchasing function? Here is a list of six ideas to get started. If you think of others, please add them.

1. By creating a "vendor signup form" using either a web form or an email form, it is possible to route potential vendors through the form requiring critical data, like Tax ID number, before they can proceed to other screens. The result is data that can be filtered and retrieved more accurately.
   
2. When sending an excel spreadsheet to a supplier for them to fill in and return, first take the time to protect and lock the document. There is nothing more frustrating than getting your spreadsheet back after the supplier's estimator "improved" it. Also, add conditional formatting to key fields to disallow the wrong data type. This limits the supplier to the data you want to crunch. Just remember to indicate either on the form or in a comment the data type you are looking for.
   
3. Signing up vendors is a critical process. No one cares about the condition of the vendor files until something goes wrong. Then it can be a witch hunt to find out why the proof of insurance wasn't gathered. There are two poka yokes that work well. It all depends on personal taste.
   
   1. Low tech- In keeping with the KISS principal, take some time to develop the critical path to signing up a vendor and use that information to design a front cover for the vendor file. On the cover is a check off for each task or document necessary in the on-boarding process. Depending on the size of your firm, you may want to have two signoffs, the assembler and someone to review the file.
      
   2. High Tech- Many firms are using databases to manage their vendor information, Timberline being the most popular. There is no question that Timberline is a robust software package enabling the sharing of vendor information across departments. But because the system is so flexible, it is hardly goof proof. There are too many opportunities to miss pertinent information. In order to trap errors, each builder must develop their own system of fail safes.
      
4. Vendor insurance is one of those compulsory areas of homebuilding where no matter how good it is, it will never add a dollar to the bottom line. But managed improperly, poor insurance tracking can end up turning the profit of a company into a loss. A tracking system with alerts is an imperative step in reducing risks.
   
5. Bid requirements- the process of negotiating is seldom neat and orderly. With moving deadlines, changing specifications and fluctuating raw material costs, the final "deal" can end up with some key issues unaddressed. The quest for lowest price can blind purchasers to the obvious. One time, I got right down to inking the contract when I tried to confirm that the bidder had followed instructions and included sales tax in the bid. Of course, he hadn't. Clearly, there needs to be a final checklist prior to completing contract negotiations.
   
6. Billing- Nothing chaps the accounts payable staff more than trying to decipher invoices. There needs to be an apples to apples requirement between the purchase order and the invoice. Many firms are choosing to progress pay from the purchase eliminating the invoice altogether. Regardless of the method, it is the purchasing pro's responsibility to develop a system where invoices can be paid without research. The result is saved resources for both firms and improved cash flow for the vendor, a critical determinant of quality of service.
   

Regardless of whether you are tuning a purchasing function or any other function within the firm, taking some time to ask yourself "Can this process be goof proofed?" can take your firm from good to great. For example, Paul Hoernschemeyer, Director of Operations at TrueNorth Development recently mentioned a door installation poka yoke. By attaching the entry door to a sheet of plywood and squaring it prior to the install and removing the plywood after the install, the builder has experienced dramatically reduced callbacks for door adjustments. The solution doesn't have to be complex. It just has to do the goof proofing.

Diggerslist: A Benefit to Builders or Just another Craigslist?

By Bruce Erickson

11/03/2009

Got any extra 2x4s stashed in the rafters of your garage? What about that pile of left over cinder blocks? Up until now, getting rid of leftover construction materials wasn't worth the effort. But that is about to change. Recently, a new player showed up in the building materials sector under the name of Diggerslist. Created by co-founders Matt Knox and Johnnie Munger the site seeks to reduce the amount of construction materials going to landfills by creating a venue for builders, contractors and do-it-yourselfers to exchange the materials. So far, registration is free for both buyers and sellers. Like Craigslist, items are divided into several categories. The site also has the ability to post construction services and list projects being bid. This could turn out to be the best part of the website.

Currently, homeowners have been posting projects on Craigslist. Unfortunately, there are very few contractors who monitor Craigslist. Whereas, since Diggerslist was created just for contractors, the projects don't get lost in the noise. Registered users can sign up for alerts to be notified when the item they are looking for is posted. Contractors can also add a widget to their website that shows all the items they have listed on Diggerslist. The challenge for the administrators at Diggerslist is going to be what to do with all the non-construction related items that end up being listed. If left unchecked, they could lose their niche they are working so hard to create. For example, on the Raleigh site, there is currently a motorcycle and go cart listed.

Right now they operate in fifteen of the hottest markets in the US. There are plans to open new markets in the coming weeks. With around 4000 site visitors per day, the project is still in its infancy. But the potential and the need is there for this enterprise to grow. Similar to other social media, registered users can create connections to other users and even In addition, if you want instant access to new items being listed, you can follow them on Twitter.

Is Dollar General Ready for Prime Time, Again?

By Bruce Erickson, C.P.M.

November 3, 2009

Dollar General has announced an IPO due out in the next couple of weeks. The small box retail giant has been private since July of 2006 when an investment group bought the shares out. In order to raise capital to reduce debt, the firm is offering 22.7 million shares of stock to raise revenue. In addition, owners are selling 11.4 million shares of their own. It was interesting that in the prospectus they mentioned that DG had no dividend plans for the future. But they did declare a special dividend a couple months ago for over $263 million. At a sale price right about where they left off in 2007, the question is, is investing in Dollar General a good idea?

Considering that the economy has driven many to the dollar stores, it would seem like an opportune time. But there are two lingering concerns in the case of Dollar General. The transaction will create a half billion dollars in equity to pay down debt. But with $4.4 billion on the books, this doesn't get them out of the woods. With a debt to equity currently at 2.3, they are leveraged twice as much as competitor Family Dollar. The pickup form the new equity will only drop them to 1.6, better but still dependent on adding new stores which requires utilizing additional letters of credit.

Not mentioned in their prospectus is what they intend to do about their lagging information systems. Without an overarching ERP system to drive efficiencies in all operations, Dollar General relies on several management systems for individual operations. Although they have cracked the code on opening new stores quickly and efficiently, the store manager is still limited to a clipboard for many inventory management tasks. For more information on their information systems, download our full case study at http://bit.ly/16vDrg

Finally PMI Breaks the 50% Barrier

"Economic activity in the manufacturing sector expanded in August" for the first time in 18 months according to an ISM report on business. Good news for consumers who have been holding their breath so long their turning blue. PMI, the Purchasing Manager's Index hit 52.9% in August. 50% marks a manufacturing economy at break even. Finally, the economy is actually expanding. New orders are growing 9.6% faster than July and production has improved 4%. However, don't look for an immediate employment turnaround. Typically, employment rises several months after corrections in the PMI. August employment slowed but at a slower rate than July.

Think of manufacturing as a ship making a right turn. We need about five miles to make it happen. More good news includes a shortage of customer inventories and rising exports.

On the non-manufacturing side the market is still contracting at a slower rate indicating course correction in the right direction but still going the wrong way. The NMI (Non-Manufacturing Index) was at 48.4% in August up from 46.4% in July. The brightest spot is new export orders that actually expanded in August with an index of 54%. To read the whole report, go to ism.ws.

 

 

Four Reasons to Consider Outsourcing Purchasing

The concept of outsourcing your purchasing or supply chain efforts within the homebuilding industry may seem foreign. But upon closer inspection, you may discover that the opportunity makes a lot of sense. Let's take a few minutes and look at for key skills that NEMAsource can add to your organization beyond the obvious.
 

Pursuing Entrepreneurial Creativity

Considering all the business types as a whole, perhaps few can claim to be more creative than the custom home builder. Carefully crafting a homebuyer's dreams into a million dollar reality is their mainstay. This requires a creative entrepreneur. On the other hand, the vendors who hone this idea into a completed product are also of a creative mindset. Homeowners seldom stop to consider the gyrations that the builder, framer and air conditioning contractor had to go through to get vents to that remote corner. But they did it.

Purchasing within this environment requires no less entrepreneurship. Oftentimes, the solution is not as much a mathematical tactic as it is a face to face conversation on the supplier's plant floor improving safety, lowering his insurance modifier, reducing cost.
 

More than Looking at the Lowest Price

NEMAsource is constantly looking at ways to help their suppliers improve. True negotiating involves asking the important questions to suppliers, questions like: What can we do differently that is costing you money? Can you explain the steps that you currently take to get your product to us? How many trips to the job are you currently making?, then acting on the answers to pursue long-term cost reductions. These negotiations strengthen both companies.
 

Lowering Cost of Ownership

Purchasing is so much more than getting three bids and choosing the lowest one or simply demanding lower prices. A good purchasing process continually prunes cost from the supply chain from your business as well as the vendor's business. They consistently reconfigure and redesign processes to remove cost eliminating the processes and even specifications that are no longer bringing either party benefit. A good supply chain professional takes the time to listen to both sides to discover areas where quality can be improved, innovation can be used and costs can truly be reduced rather than just taking a cut and run approach.
 

Adding Depth to the Purchasing Process

When speaking with a local vendor, he quietly mentioned that he would take any work at any price just to move product. Some days later when speaking to his competitor, he seemed almost aloof at the thought of supplying to a custom home builder. Instead, he boasted about all the commercial work he had gotten into. All the while, the price for the raw materials to make the product has been trending downward for months.

Relationships like this and ongoing research allows NEMAsource to see weakness in the supply chain and where the best long term supplier fit applies. By partnering with a supply chain professional, builders can reach beyond their sphere of influence and tap into otherwise unseen market conditions.
 

Consider the Possibilities

Five years ago, even two years ago, most builders were so inundated with new contracts that using the vendor from the last project was the safe bet. Any inefficiency could be covered up with higher prices and passed off to the consumer as market appreciation. Today, the landscape has completely changed and with it, the purchasing function has become a key player in driving down costs without losing focus on timeliness quality and relationship.

Now is the time to expect the maximum value from your supply chain. If you are looking to add depth to your purchasing function, NEMAsource is your best place to begin creatively lowering your cost of ownership without losing touch with your business. For more information, visit nemasource.com

Maximizing Value With the Triple Constraint

The triple constraint for a home builder is a relationship between the cost of a project or scope, the quality of the workmanship or materials, and the time to complete the project or scope.


The three are related that unless there is a change in an outside dimension, any change in one will affect one or both of the other. In order to maximize the value of the project, two major actions need to take place. First, the project stakeholders need to fully understand the priority of each face of the triple constraint. Second, an outside dimension must be added to test the current value. Without the second action, the best goal is status quo.

Understanding Priorities

Before a project begins, it is important to get beyond the feeling that all three of the constraints (time, money and quality) are important. Since each project is unique, drivers must be identified to determine which constraints are a higher priority than the others. For example, is the completion date immovable? Perhaps the buyer has a contract on their existing home with an existing closing date. On the other hand, the buyer may not be as critical of the deadline. It is important to note that this is an exercise in priority setting. Each constraint has a cost whether it is a priority or not. If time is not important to the buyer, it still is to the builder because of the interest carry on the work in progress and the opportunity cost of not beginning another project.

In regards to cost, is the budget fixed? In some cost plus contracts, quality is far more important than budget. In this case, the priority shifts away from cost and more toward quality.

Sometimes quality needs further definition. The builder may see quality as meeting all the spec’s and the scope of work. But are there unnecessary specifications that can be removed to reduce cost or time? Have spec’s crept into the project that the buyer is unaware of? These may establish room to reduce cost.
Once these and other probing questions are answered, there is a clearer picture as to the priority. Only then is the purchasing team prepared to set goals for maximum value accurately.



Testing Maximum Value

Armed with these priorities and a refined set of scopes and spec’s. the purchasing team must assess outside suppliers or vendors to ascertain that the builder has the best value and that transitioning from an existing vendor to a new one provides enough additional value to offset any switching costs. By following a systematic approach to bidding the work and evaluating the vendors, builders can expect far more reliable results. Reducing the risks of the new vendor inherently reduces the switching cost.




During the Phase Sourcing of the procurement process, the purchasing team focuses on three key areas, price, performance, and liquidity. By drilling into each of these areas, builders can be assured their new vendor is up to the challenge of their project.

Price is the dimension that most often receives the focus. But with a clear understanding of the triple constraint priorities for the project, the purchasing team can balance their efforts. Regardless of priority, the goal is to establish a bid that allows the vendor to make a profit and saves the builder money. Pricing is established according to a cost breakdown specifically set up for one scope of work. In this manner, all bids are received with the same parameters. By doing this work on the front end, precious time is saved after the bids are received getting to apples to apples.

Performance is perhaps the greatest overall factor in vendor selection. Custom home buyers don’t remember the additional cost or additional days of construction five years later. But inferior work is never forgotten. In addition, the vendor’s ability to master the builder’s unique requirements quickly is an important consideration in the decision process. To measure vendor performance, two different metrics are used. New vendors are required to submit references of work in progress and completed work. Clients are contacted and interviewed regarding specific key measures of performance. Vendors that have worked with NEMAsource in the past are benchmarked after each job they perform. This a running performance rating is maintained for each key measure. Finally, whenever possible, field visits and plant visits are arranged to assess the work itself and the vendors operations.
During the plant visit, NEMAsource meets with the vendor to measure their financial ability to accomplish the builders project. Considerations such as credit lines available, creditor references, number of crews, percent of capacity and work in progress are all considered.



By following this approach, builders can trust that when it comes time for them to make the decision to reduce cost by changing vendors, every effort has been made to reduce switching cost. The result is a projects with maximized value for all stakeholders. If you are interested in enhancing the value of your next project, contact NEMAsource today at 704-519-9841.

When is it Time to Pull the Trigger on Government Contracts

When it comes to construction entrepreneurs, and especially homebuilding entrepreneurs, there are two types "the quick, and the dead." Both interpretations of this quote are equally applicable. In the King James Acts 10:42 Jesus is depicted as the judge of the quick and the dead, that is those who are alive (quick) and those that aren't. In this case, the economy is the judge of the quick and the dead.

We will spend decades learning from the mistakes of those run bankrupt and the good fortune and wise direction of those prevailing in this economy. One of the common threads that will be found in those that survive is their flexibility, their ability to maneuver "quickly" which brings us to the second translation of the "quick and the dead." In swordsmanship as well as martial arts, the difference between emerging the victor and not emerging at all can be a difference in reaction time of milliseconds. Their success is also greatly attributed to the ability to follow a given set of standards while simultaneously being innovative enough that the opponent cannot predict their next move. If you watched Mariel Zagunis beat Sada Jacobson in the 2008 Olympic Sabre event, you could see how Zagundis invited Jacobson to attack by dropping her sword while simultaneously stutter stepping toward Jacobson. Jacobson held her sabre out in front while retreating as far as the warning track. Invariably, Zagunis scored a subtle touch in the side of Jacobson with such swiftness; it is hardly perceptible on slow motion replay. In order to remain among the quick, businesses must swiftly review their business plan (or write one) locating any weaknesses not shored up and exploring their strengths in the context of today's economy, not last years.

In other words, what may have sounded like a ripe market segment last year may well have dried up today. It may be time to look to use resources in normally unconsidered areas. Some contractors are leveraging their satisfied customers to secure renovation contracts. Others are pursuing other market strata altogether. One of the potentially overlooked possibilities may be government contracts. Of all the jobs a contractor has ever had to bid on, perhaps government contracts are the ones with the most detail going in. This can be good and bad. If your firm is used to bidding a homeowner's dream house at a nice round $xxx per square foot, the necessary details of bidding government contracts may appear intimidating. On the other hand, if you are capable of reporting your variance on any given job today, it may not seem like that much trouble. Here's a couple things to consider:

If you have never done work for the city, county, state, or federal government, you will need to get registered. Every entity has its own rules. But be prepared to answer a lot of questions about your finances, past projects, and diversity within your organization. Once you have registered, there is a (small) chance you may be contacted directly to bid on projects. More than likely though, you will need to find out where they post new opportunities and monitor the list yourself. Also, be prepared to buy bonds, not the good kind where you make money, but surety and bid bonds.

Next, the government loves small businesses (for most things). If you are a custom builder, you are most likely a small business. When you bid, there is a significant amount of small business recordkeeping involved. Remember to be diligent from the beginning of the process all the way through. The last thing you want is to lose a bid because govco asks for detail and you don't have it. Don't worry, they already have a form for everything. And in the spirit of efficiency and 21^st century technology, everything is hand written on photocopied forms.

The good news is low bid wins unless they get themselves disqualified. It is imperative to know and follow all due dates. For instance, if bidding on a project is due September 15^th and today is September 1^st, you may not even be able to bid the job because there was a mandatory pre-bid conference two weeks ago. The other good news is govco pays.

So if you are in the process of dusting off your business plan looking for answers, try googling small business and your municipality and make a few calls. It could be the start of a beautiful friendship.

 

Are Custom Builders Ready for Behavioral Targeting?

As Custom builders hunker down in a dormant economy, many are turning to new approaches to keep employees on the books and improve cash flow. Some are turning to remodeling and others are even looking at government contracts. One builder is even working with a modular builder according to a recent Custom Home Magazine article. But is you ask any of them, they will tell you their number one headache is getting more traffic in the door. With everyone watching their wallets, even the well to do are cautiously approaching the custom home concept. So how do builders gain a larger share of a shrinking market?

Many are taking the time to reinvent their web presence. By adding video and how-to's to their site, they are attempting to capture the casual shopper's attention in a way that begins the process of creating a relationship with the buyer. One builder doing an excellent job with this technology is Wisconsin-based Westbridge Builders. But even with all the flashy video, is the customer being reached on their level.

The problem with marketing on the internet is that whatever product is put out there, the entire world has access to it. Unfortunately, only a finite portion of the public is interested at all in the product. In addition, each one of those interested has a unique set of wants, needs and limitations. The challenge then is to present page content that appeals to a specific buyer. That technology is called "behavioral targeting." There are two approaches to behavioral targeting.

The first method uses information gathered from the client while they are surfing your site. Which pages they have been to combined with which videos they fire or images they click on as well as strategically placed questions can give the site programmer what they need to alter page content when the user goes from one page to the next. Although it is not as appropriate for a custom builder website as it is for, say, ebay, getting users to register opens up a whole gambit of options for gathering profiling data. Although it is done by countless websites, the second method is a little more insidious. This method searches a user's computer to determine where they have been (browsing history) and uses that information to alter page content. To experience the power of this technology, go to www. Amazon.com. If you have registered as an Amazon user, you will immediately see a list of things Amazon thinks you would like. That is behavioral targeting.

Some see this as an invasion of privacy. Others see this as an effective way to use the internet efficiently. Regardless of opinion, the technology has statistical merit. According to one Behavioral targeting project manager, the use of behavioral targeting can result in a 1000% improvement in the number of times a user makes the choice to investigate a product. It only makes sense because the company is giving the user content that they can associate with. And after all, that is the goal of your website, to forge new relationships with clients. What better way than finding things you have in common.

Behavioral Targeting is not without its challenges. Beyond the privacy issue is complexity and cost. Trying to figure out which behaviors lead a builder to believe a particular user is interested in French Country style and which behaviors lead them to Italianate can become quite subjective; whereas, some content is more straightforward. For instance, a user who has just browsed your competitor's sites definitely has some interest. What a great time to tell them you are better. Or a user who has just been to bankrate.com is not only a serious buyer but one that needs to learn about your financing options. Sadly, there is a direct and almost exponential correlation between how powerful this marketing tool can be and how much it will cost.

Nonetheless, in the bitter wake of popup ads, behavioral targeting is a technology that will become more pervasive in our browsing practices as more companies realize the gains to be made. Whether or not it is the right product for custom home builders has yet to be seen. Maybe you will be the first to gain from this method.