Exclusive rights: with a dependable track record of consistent, on-time scheduling and material ordering, Centex Homes is forging partnerships with suppliers that have the mettle to commit to exclusive regional deals
In the big builders’ emerging world of single-source supply deals, Wade Hooker is uniquely qualified to comment on both the theory and practicality of funneling 100 percent of purchasing through a sole source. While home building executives and manufacturers can talk all day long about setting up national and regional supply deals, more often than not a builder’s local procurement manager makes those deals happen on a daily basis, or conversely, is hamstrung by them. Recently named manager of national purchasing for Dallas-based Centex Homes, Hooker spent the past three years directing regional purchasing for the company’s operations in the Dallas-Fort Worth metro area, the big builder’s largest regional division, and he sees the challenges on both sides of the fence.
“I understand the people who say, ‘I can’t work with production builders and make money,'” Hooker says. “Suppliers have all sat in that meeting room and beard the big builder say, ‘We’re going to do a bunch of houses and they are going to be ready, and we want a supply partner.’ Then as soon as the supplier commits, there are dry runs, there are back charges, the builder doesn’t perform, and it costs the supplier money. In a lot of cases it’s nothing like [having] a true partnership.”
But Hooker senses that the market will weed out adversarial purchasing relationships in the future. And he anticipates that Centex Homes will be a leader in that regard–a prediction he makes based on his company’s success in establishing single-source agreements through regional independent dealers like Dallas-based Texas Building Supply and Elgin Ill.-based Seigle’s.
“We need to mean something to our suppliers, and they need to mean something to us,” agrees Centex Homes vice president of purchasing and distribution Paul Dodge. “As our divisions have grown from 300 to 600 to 1,000-plus units in a market, we need to have suppliers that can handle the additional business, and we also expect to capture the economics of scale that come with our additional volume. If we split our business between additional suppliers, we never capture those economies of scale. So it becomes very important that our suppliers can grow with us, and we can share in the efficiencies that growth creates.”
Making partnerships like this work requires intense relationship building and supply chain engineering at the division level–and not necessarily exorbitant volume out of the gate. The ideal situation, says Hooker, is for Centex Homes to match up with suppliers that have an intimate understanding of their own operational capabilities and consequently can accurately and consistently determine where the margin is coming from and how much it needs to be. “People dying to get into the volume we have come in low [with bids], but in six months they walk away because they can’t do business at that price.” he says. “I think a small guy who knows his setup [has an advantage] in understanding costs well enough to know if they can make profit on the material, on the labor, etc.”
As Centex Homes focuses on more supply chain consolidation strategies, Hooker is aspiring to emulate the operational success he has achieved in Dallas working with Texas Building Supply (TBS), a drywall distributor with $7 million in annual sales that wasn’t even on the Centex Homes radar screen three years ago.
TBS president Phil Kohut started out in 1962 working at drywall yards in the New York metro area, and by the 1970s he was managing locations for LMW Supply (a United States Gypsum company) in Oklahoma, Colorado, New Mexico, and Texas. After taking a brief hiatus in the ’80s to run a hardware distributor in Detroit, he moved shop permanently to Dallas in 1989 and built a local reputation tot managing drywall yards before retiring in 2001. But Kohut round he had too much gypsum in his blood, and the lure of opening up his own yard found him launching TBS two weeks later to freely apply his business philosophy that suppliers should back up talk of forming strong relationships with their builders by engaging them in a more collaborative and communicative business union.
His first sales call was to Centex Homes, where Kohut felt there was a culture of taking care of vendors and embracing changes in the supply chain that might lead to cost savings and efficiencies on both the builder and dealer side of the equation. Still operating in a bid-based environment where drywall subs contracted for both material and labor, Centex Homes was highly receptive to begin streamlining the entire wallboard supply process and relying on subcontractors for installation only. “What TBS wanted to do was just he a supplier–a material-only kind of deal,” Hooker explains. “What made it unique … was the fact that we would share a lot of operational and cost information.”
Instead of haggling with subcontractors on price and logistics for every Centex Homes subdivision, the big builder saw TBS as a way to separate material price and delivery logistics from the equation, allowing Centex Homes to then use the most qualified and talented labor, rather than just the most economic package deal. “For me and for the company, it was a new horizon,” Hooker explains. “If we actually do what we say we are going to do [in maintaining consistent scheduling and material ordering], then TBS will pass the [cost] savings back to us.”
Throughout the spring of 2001, Centex Homes and TBS held several meetings and ran a few trials at several subdivisions to hammer out the viability of a single-source deal. Under the agreement, Centex Homes gets a single-source supply of wallboard with assurances on product quality and availability, near error-free delivery, and the consequent savings in efficiency and cost. In turn, TBS gets 100 percent of Centex Homes’ drywall business in the Dallas metro area–which in 2003 was 3,500 homes. Purchase orders are fast-tracked to allow TBS approximately four weeks to fill a house order. In addition, Centex Homes shares job-start data and projections and makes a commitment to even and consistent scheduling. The builder also agreed to move with TBS’ costs, continuing to pay a certain margin over market prices as the commodity moves.
“We partner on what I can work on margin over and above my operating costs and a portion of overhead,” Kohut explains. “But there’s a lot more that goes into it. Centex [Homes] has to do things to make that possible–we get the purchase orders way ahead of time, the pricing is set, there are no dry runs, the houses are ready [for delivery]. Those things make it a true partnership.” In particular, Centex Homes’ Schedule Builder even-flow construction initiative, which attempts to minimize spikes and troughs in the company’s local and regional production cycles, has been a key driver in enabling TBS to reach astounding levels of inventory control and cost savings. “It’s almost like they are doing manufactured housing, but they are doing it in the street,” Kohut says of the Schedule Builder process. “They have a piece of land and come through and set the slab, the lumber comes, the [roofing] deck gets built, then we come.”
According to Kohut, the scheduling dependability resulting from the production system allows TBS to carry a lower level of inventory because the yard does not have to hedge against swings in production activity. TBS is outperforming traditional high-20s drywall inventory turns by approximately 25 percent, and return on inventory investment is in the high triple digits, matched by a fill level at 99.42 percent. “Our cost on inventory comes down and tutus go up because as soon as we get a delivery trigger, we “know we have 26 to 29 days to deliver that house, it has really made a big difference in our business.”
Centex Homes’ payment systems also have made a big difference to TBS, providing much needed cash as the fledgling distributor grew in the past three years. “Starting out a business, cash flow is numero uno,” Kohut says, “and we get a check [from Centex Homes] every single Saturday. You deliver the board, they hit their PalmPilot, bam–we get the check. That is tremendous support.”
Centex Homes’ commitment to consistent scheduling is also beginning to differentiate the big builder among pro dealers in the Chicago market, where it closed approximately 1,000 homes in 2003. “Where other production builders may just give lip service, they try very hard to flatline their starts throughout the year versus the hurry-up-and-wait process that many of their competitors put you through,” says Harry Seigle, chairman of Seigle’s, one of metro Chicago’s largest pro dealers with 2003 sales of $205.8 million and a leading millwork and cabinet provider in the market since 1881.
While Seigle’s has been selling building materials to Centex Homes for years, the pro supplier’s existing exclusive market deal with Aristokraft cabinetry turned into big business in 2001 when Centex Homes made a regional single-source supply agreement with the Jasper, Ind.-based cabinet manufacturer. That business winding up at Seigle’s was hardly a case of luck, says Mike Wallor, Chicago division purchasing manager for Centex Homes. “When working in [a] local market and having to engineer and work with larger buying agreements, Centex Homes’ management and corporate people understand local flexibility,” he says. “When we start looking at a regional agreement with someone like Aristokraft, part of that agreement in its infancy is looking at their supply chain. A national deal could get us a great product, but if there’s a supply chain problem it costs us all kinds of money in the long run.”
According to Wallor, the dealer’s reputation and track record as a top-notch supplier assured the builder that distribution could meet their volume demands, and that belief was likewise supported by Aristokraft management that already valued Seigle’s as a standout supplier. Seigle’s, in turn, understands that 1,000 homes worth of cabinetry is not handed over haphazardly and has worked stridently over the past three years to exceed both vendor and customer expectations.
“At the risk of being immodest, our logistical abilities in millwork and cabinetry are well matched with what I think is the brilliant performance of our millwork vendors and Aristokraft cabinetry,” Seigle says. “It’s a great combination of local expertise matched with excellent vendors from a national standpoint?
But like Kohut, Seigle credits much of the single-source success to Centex Homes’ ability among big builders to streamline and simplify the theory of production building while adhering to the practical day-to-day logistical issues of construction supply and jobsite cycles. “They get their specs right the first time, and they take delivery on the date they ask for,” he explains. “You can load your trucks the day before and you “know when the driver leaves Seigle’s there’s someone on the other end to receive those goods, versus the builder who says, ‘Oh gosh, we’re not ready to receive those goods today, the driveway’s not in yet–do you mind turning around and unloading and reloading?’ and all the incidental headaches that come with that.”
As a part of the business arrangement, Seigle’s communicates operational and strategic data back to Centex Homes, offers long-term price guarantees, and commits to virtually error-free and back order-free supply of cabinets to every Centex Homes subdivision in the Chicago market. The agreement is reviewed and renewed annually, and Seigle’s executive and sales team typically meets with Wallor and Centex Homes regional president Data Star to roundtable issues, trends, and challenges about every six months.
“Everything is detailed in contracts that we signed at the outset of the partnership,” Seigle says, “but the measure of the quality and the success of the relationship is the fact that I have never opened the file on those contracts. I have never had to go back and reread them.”
The development of that type of intimate trust and harmony between a builder and supplier is exactly what Centex Homes is looking for as it mines for single-source arrangements in other markets. “A lot of companies ‘know this is what it takes; but very few execute at the level Texas Building Supply and Seigle’s do,” says Dodge. “It really does take an exceptional level of communication, and both of these companies communicate continuously at every level of the local organization–from field managers to purchasing managers to division presidents.”
Centex Homes is now leveraging this flow of information as it negotiates other single-source deals around the country. Learning from TBS, for example, the builder has been able to evaluate the critical aspects of drywall supply. “Phil knows the business,” attests Hooker. “He’s been working with some unique ideas to make drywall distribution more efficient for [several years]…. The intelligence that we get from that process is unbelievable–we know what it is coming out of the plant, we know what the freight rate is, and we can compare it to other drywall suppliers [in other markets to see] if they really know what [those costs] are.”
Similarly, in Chicago, Centex Homes’ purchasers consult with Seigle’s to determine competitive data not just on cabinets, but on LBM commodities as well. Lumber experts at Seigle’s, in particular, have helped Centex Homes to evaluate lumber volatility and determine when locking in price could be disadvantageous. “Their lumber guys talk to us quite often, helping our decision makers as we look at whether it is time to go short or time to go long,” says Wallor. “Being able to pick up the phone and say, ‘I’m looking at this material or product–what do you guys think?’ gives us definite market intelligence.”
According to Dodge, this type of cooperative approach is what single-source supply is really all about. “As we continue to develop our internal systems in construction, estimating, purchasing, scheduling, etc., they are all aimed at streamlining our business processes, both internally and externally in the supply chain,” he explains. “The assumption is these systems ultimately will be integrated with our suppliers’ systems. If you are going to continuously put business partners in a position where they are not sure if they will have a significant portion of your business, why would they commit the time, effort, and money it takes to integrate the systems and processes? On the other band, once we commit our business to a supplier, we expect them to take our business practices to a new level.”
Both Seigle’s and TBS are prepared and anticipating to do just that. In July 2003, TBS opened a second location west of Dallas in North Richland Hills, Texas, to better serve local Centex Homes subdivisions, as well as some other big builders that the supplier is beginning to sell to. According to Hooker, Centex Homes is ready for TBS to grow into additional markets as well, although both parties are proceeding slowly at this point.
“I don’t want to go to a place just for the sake of going, and opening up and then not being able to service them,” says TBS’ Kohut. “They are much better off with someone that is taking care of them [in a market] until it makes sense for both Centex [Homes] and TBS to go there. Partnership or not, you can’t operate on your ego–you have to operate on good business practices.”
While TBS waits to develop that scale to handle Centex Homes’ operations beyond Dallas, Seigle’s stands ready to incorporate even more products into their supply partnership with the big builder through the dealer’s four lumberyards, three showrooms, three manufacturing facilities, five distribution centers, and a contractor product selection center. In particular, the dealer’s acquisition of framer Michael Nicholas Carpentry in September 2003 has spawned a new construction services division that Seigle hopes can bring even more of the house package into the Centex Homes/Seigle’s deal.
“With Michael Nicholas, we can come to them with a rough frame package that can include carpentry, all components, loose lumber, and windows,” Seigle says. “[If Centex Homes] doubled their size in Chicago, we would grow right with them…. We look forward to it; it’s an opportunity.”
Seigle even predicts that within five years the dealer’s partnership with Centex Homes will streamline to the point where it becomes paperless as logistics, delivery, and point-of-sale systems and processes match up. And that’s exactly where Hooker would like to see all of Centex Homes’ current and future supply partners heading.
“We want to focus on the relationships that communicate and share enough information where we are confident that we have aligned with companies that want to help us achieve our goals,” Hooker says. “In turn, the suppliers must also flourish in their business by us holding up our end of the bargain. Let’s both make some money.”
COPYRIGHT 2004 Hanley-Wood, Inc.
COPYRIGHT 2004 Gale Group