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.

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.