Going From Red to Green
Let's face it. Everyone in the building industry is waiting for the customer to stop waiting and make the decision to go for it and buy a new home. However, it has been ingrained in us since grade school when mom made us wear the Christmas sweater to class and everyone had a laugh. No one wants to be the butt of riducule. So rather than homeowners stepping out and taking advantage of deals that will likely never recur in their lifetime, they are waiting for a better one, scared of the ridicule they would endure if the value of their new home dropped shortly after closing. Can you blame them? So what can a purchasing manager do to help in this situation. Go from red to green!While most builders are drowning in red ink, you can have a positive impact on the one facet of business most in need, driving qualified traffic to the sales floor. Face it, you've done your job so far. You've asked the vendors for price concessions. You've maybe simplified product lines as a trade off to reduce base prices. You may have even reduced your vedor count to try and cope. But there is one thing you may not have tried, go green. While we have been busy making deals and starting homes the US Green Building Council has been working tirelessly to make green building a reality. The commercial sector has already seen this wave coming. In the last 12 months alone, consumer sentiment about buying products whose brand supports a cause they believe in has increased over 8% to 72.4%. That's a huge section of the market to consider. With gas hovering around $3/gallon it's no wonder. So by establishing green initiatives within your processes and product lines you give your marketing people the ammunition they are looking desperately for, a way to separate your company from the pack. While the rest of the builders sit back and wait for legislation to dictate better practices, you can take this opportunity to turn your product line into one ready for the future. And after all isn't that about all that separates your homes from the used ones.
Wednesday, December 26, 2007
Monday, December 17, 2007
Boynton Place
Boynton Place- Shickedanz Brothers. Entry Level- As customer service rep and superintendent, this entry level community maintained a six week production time from start to close. I also worked on the three story apartments in the front of the community.
Saturday, December 8, 2007
Working Through Market Doldrums
When ancient trade ships were transporting goods from South to North across the equator, often times they would run into an area where the wind would just stop. For a ship transporting perishable cargo powered by nothing other than sails, the doldrums could mean loss of profit, bankruptcy, loss of cargo and even death. Sometimes it wasn’t the cargo that was causing all the stress, it was just sitting on that ship with nothing to do and watching the food supply dwindle that drove many a sailor to the brink of insanity.
Well the current weakness in the housing market isn’t necessarily driving anyone insane. But it does bear some resemblance. Builders are just sitting there with all this inventory racking up interest cost and no demand to drive them. Builders are throwing some of their cargo overboard with “clearance sales”, deep discounts, rate buy downs and free options. All these incentives do help generate cash flow but at the expense of profits. The result is tremendous pressure on purchasing to reduce cost. Meanwhile, petroleum is at an all time high, lumber and aluminum have been hovering near all time highs for months and subcontractors are facing the same cash flow crunch as builders. So how does purchasing achieve the goal of reducing cost in this environment? Here are a few ideas.
Put less focus on unit price. The quick pain reliever too often reached for by negotiators is to demand price reductions. It seems like the right thing to do. But it is based on the false assumption that subcontractors have inflated net margins. There are three fundamental flaws with this tactic. First, it creates an environment where cost is king. Vendors with dwindling margins and cash flow are tempted to replace current trade labor with cheaper, less experienced labor. As a result, callbacks and closing defects are imminent. A year from now, when market conditions are improving, your survey scores will be on the decline. Also, most trade contractors are not equipped with the analysis tools that large builders are. They may reduce prices out of fear at their own peril. Second, the margin reduction increases the vendor’s AP and pay cycle reducing their ability to reap volume discounts necessary to remain competitive. Finally, if the builder is of a scale to only have two active subcontractors for a given phase, the chances of price fixing are increased when price is the only issue on the table.
Place more focus on estimating. By teaming with subs to both refine and value engineer existing plans, both parties end up more profitable. The builder ends up with fewer variance costs and the vendor ends up with fewer return trips and short orders that eat into their COGS. Seek the vendor’s input for alternative materials.
Reduce repairs. It sounds too simple. But damaged materials before the home closes don’t do anything but reduce both the builder’s and subcontractors bottom line. Even if the subcontractor is getting paid for the repair, the overhead cost necessary to pull a mechanic off of a job to do a repair usually exceed anything the sub would get paid. In addition, in an effort to be a team player, the sub often doesn’t even bill for the repairs. Putting practices into place to minimize damaged goods creates a better presentation to the buyer as well.
Focus on payables. Before going to a subcontractor looking for price concessions, review their payables. In today’s computerized world, failing to pay a sub is usually more a matter of budgets not matching up than a builder’s unwillingness to pay. By cleaning up past dues prior to negotiation, you place your company above the other builders in the pecking order. Any sub is quicker to concede to a builder who pays their bills. In the current market, this is also a great opportunity for margin pickup by requesting terms. Most subs are net 30. But with less cash coming in, they are much more willing to concede 2% for bills paid in less than ten days. 2% is a good days work.
Consider reducing vendors. If last year, your division had three electricians, chances are with the reduction in sales velocity, two or maybe even one may get the job done. Offering a vendor 100% of your work bolsters their cash flow allowing them more wiggle room. Beyond the immediate benefit, the sub is also looking at future benefits as the market recovers. This is not always the best choice, however. Before awarding a contractor more market share, remember to recheck their credit standing. If they are not keeping up with their own payables, the sudden increase in production could backfire. Also, there is always a turnover cost when letting a subcontractor go. Be sure to factor this number in when making the decision.
When all of these issues are combined, a more complete agreement can be reached. By adding value to the vendor/builder relationship, there is more value to be divided in the deal. Sooner or later, the wind did pick up and most ships made it back to land. It was the ones whose captain kept a cool head that made it in one piece with all their cargo and crew.
Well the current weakness in the housing market isn’t necessarily driving anyone insane. But it does bear some resemblance. Builders are just sitting there with all this inventory racking up interest cost and no demand to drive them. Builders are throwing some of their cargo overboard with “clearance sales”, deep discounts, rate buy downs and free options. All these incentives do help generate cash flow but at the expense of profits. The result is tremendous pressure on purchasing to reduce cost. Meanwhile, petroleum is at an all time high, lumber and aluminum have been hovering near all time highs for months and subcontractors are facing the same cash flow crunch as builders. So how does purchasing achieve the goal of reducing cost in this environment? Here are a few ideas.
Put less focus on unit price. The quick pain reliever too often reached for by negotiators is to demand price reductions. It seems like the right thing to do. But it is based on the false assumption that subcontractors have inflated net margins. There are three fundamental flaws with this tactic. First, it creates an environment where cost is king. Vendors with dwindling margins and cash flow are tempted to replace current trade labor with cheaper, less experienced labor. As a result, callbacks and closing defects are imminent. A year from now, when market conditions are improving, your survey scores will be on the decline. Also, most trade contractors are not equipped with the analysis tools that large builders are. They may reduce prices out of fear at their own peril. Second, the margin reduction increases the vendor’s AP and pay cycle reducing their ability to reap volume discounts necessary to remain competitive. Finally, if the builder is of a scale to only have two active subcontractors for a given phase, the chances of price fixing are increased when price is the only issue on the table.
Place more focus on estimating. By teaming with subs to both refine and value engineer existing plans, both parties end up more profitable. The builder ends up with fewer variance costs and the vendor ends up with fewer return trips and short orders that eat into their COGS. Seek the vendor’s input for alternative materials.
Reduce repairs. It sounds too simple. But damaged materials before the home closes don’t do anything but reduce both the builder’s and subcontractors bottom line. Even if the subcontractor is getting paid for the repair, the overhead cost necessary to pull a mechanic off of a job to do a repair usually exceed anything the sub would get paid. In addition, in an effort to be a team player, the sub often doesn’t even bill for the repairs. Putting practices into place to minimize damaged goods creates a better presentation to the buyer as well.
Focus on payables. Before going to a subcontractor looking for price concessions, review their payables. In today’s computerized world, failing to pay a sub is usually more a matter of budgets not matching up than a builder’s unwillingness to pay. By cleaning up past dues prior to negotiation, you place your company above the other builders in the pecking order. Any sub is quicker to concede to a builder who pays their bills. In the current market, this is also a great opportunity for margin pickup by requesting terms. Most subs are net 30. But with less cash coming in, they are much more willing to concede 2% for bills paid in less than ten days. 2% is a good days work.
Consider reducing vendors. If last year, your division had three electricians, chances are with the reduction in sales velocity, two or maybe even one may get the job done. Offering a vendor 100% of your work bolsters their cash flow allowing them more wiggle room. Beyond the immediate benefit, the sub is also looking at future benefits as the market recovers. This is not always the best choice, however. Before awarding a contractor more market share, remember to recheck their credit standing. If they are not keeping up with their own payables, the sudden increase in production could backfire. Also, there is always a turnover cost when letting a subcontractor go. Be sure to factor this number in when making the decision.
When all of these issues are combined, a more complete agreement can be reached. By adding value to the vendor/builder relationship, there is more value to be divided in the deal. Sooner or later, the wind did pick up and most ships made it back to land. It was the ones whose captain kept a cool head that made it in one piece with all their cargo and crew.
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