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.

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.

Going From Red to Green

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.

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.

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.