Seven wonders of the construction world: we asked 10 industry leaders to weigh in on the most thought-provoking trends impacting the residential housing market and uncovered seven issues that everyone is talking about
Contemplating their markets and competitive advantages and preparing for the future after a decade of gangbuster growth, builders, dealers, and distributors are constantly reevaluating and reinventing the lumber and building materials supply chain and the business of getting homes built. With the industry continuing to pump out record housing numbers, many pro suppliers and builders have consolidated in the quest for economies of scale and efficiencies as they battle for land, insulate themselves from construction liability, and attempt to improve margins while still satisfying today’s educated consumers.
To meet the increasing call for improved customer service, builders, lumberyards, and product vendors alike are looking within the supply chain to automate tasks, eliminate costs, and identify winning market strategies. At the same time, big builders are squeezing their way into infill, pro dealers are becoming installing subcontractors, and “partnerships” has become the buzzword of the day.
To get a top-level view on the most pressing issues and to explore the opportunities and pinpoint the challenges of the residential construction market, PROSALES tapped into a cross section of industry leaders, including builders and pro dealers from large, national companies and smaller, progressive independents, as well as Georgia-Pacific, currently the nation’s largest distributor of residential building products. Spanning seven different issues that are the talk of the supply chain, our exclusive LBM forum weighs in on what keeps executives up at night and what it will take–and if we indeed have what it takes–to grow and prosper in the home building industry of today and the future.
Jeff Allgood, who has more than 30 years of operational and supply chain management experience, is vice president of purchasing for Tampa, Fla.-based Jim Walter Homes. Founded in 1946 to build affordable homes on customer-owned property, Jim Walter Homes is now the nation’s 18th largest home builder. In 2002, the company closed 4,267 homes and has expanded its offerings beyond its traditional “on your lot” business, including financing for the land and the home, subdivisions in Alabama and Louisiana, and spec homes around its sales area.
Jim Gibson is the president of Washington, D.C.-based Gibson Builders, a high-end custom infill specialist that works on about nine homes per year in the $2.5 million to $10 million range. Gibson, who has a background in real estate law, has been involved in residential construction, renovation, and land development for more than 20 years. He began building custom homes full time in 1980.
Paul Hylbert is president and CEO of Redmond, Wash.-based Lanoga Corp., PROSALES’ 2002 Dealer of the Year. Lanoga operates five pro dealer divisions across the Western and Midwestern states: United Building Centers, Lumbermens, Spenard Builders Supply, Home Lumber, and Dixieline Lumber. In 2003, the company will generate $1.45 billion in gross sales from 275 locations. Hylbert has spent his entire career in the building materials industry and has held leadership positions at Wickes Lumber and PrimeSource Building Products.
George Judd is vice president of Eastern operations and sales, Building Products Distribution for Atlanta-based Georgia-Pacific, the nation’s largest building materials distributor. Judd has spent his entire 20-year career at Georgia-Pacific and is currently responsible for all company sales growth nationally. He heads all of Georgia-Pacific’s Eastern distribution centers, including the Marietta, Ga.-based sales center.
Nick Massengill is vice president of sales and marketing for Robert Bowden, Inc., a one-step manufacturer and distributor of building materials in Atlanta. Massengill has more than 20 years of building materials experience in management, manufacturing, marketing, distribution, and sales. He has been part of a management team that grew Robert Bowden to more than $80 million in sales and then transferred ownership to the employees through an employee stock ownership plan.
Kip Oram spent five years in the U.S. Marine Corps after graduating from the University of Colorado. He then worked at Fester/Diamond Lumber as a truck driver, contractor salesperson, assistant manager, and manager. In 1985, Oram became manager of Alpine Lumber’s Louisville, Colo., branch, followed by a position as general manager of Alpine’s Denver location. He became president of the Westminster, Colo.-based company in 1989 and chairman of the Alpine Beard of Directors in 1997.
Tom Sattler is president of Greenwood Village, Colo.-based Sattler Homes, a Denver-area high-end custom estate builder founded in 1983. He has developed systems to accommodate the needs of discriminating high-end buyers while maintaining stringent production methodologies. Named an America’s Best Builder in 2003 by PROSALES’ sister publication BUILDER magazine, Sattler Homes is focused on process engineering and the use of advanced management systems such as kaizen, a Japanese continual improvement concept.
Lee Wetherington is the president and CEO of Sarasota, Fla.-based Lee Wetherington Homes and the recipient of a 2003 Hearthstone BUILDER Public Service Award. While building an $85 million company that will close approximately 250 homes in 2003, Wetherington, who has been based in the region since 1976, has become a local market leader in southwest Florida by focusing on quality construction and strong community ties with customers and suppliers.
Cliff White is the manager of Trinity Homes, a Beazer division based in Carmel, Ind., that builds approximately 550 homes per year in the Indianapolis metro market. A proponent of using pro dealer construction services and outsourced framing, he has spent much of his career working for big builders in the region, including M/I Schottenstein Homes and Crossman Communities.
Scott Williams is president and CEO of Traverse City, Mich.-based Brown Lumber, a single-location pro dealer with 2002 gross sales of $30 million. After seven years with Vernon Hills, Ill-.based Wickes, Williams became general manager of Brown in 1988 and purchased the company in 1991 with two other Brown employees. Formerly a high school English teacher and football coach, Williams has continued his commitment to education at the company.
Since 1992, the U.S. home building industry has cranked out an overwhelming 15.2 million homes, according to annual housing starts data compiled by the NAHB. Defying naysayer predictions of a housing bubble, the industry has chugged along at record or near-record levels, at times single-handedly supporting much of the U.S. economy, such as after the September 11 terrorist attacks, a time when it was already down and feeling the bite of recession and market corrections. The industry is on track to produce an additional 1.7 million homes this year, according to NAHB estimates, with home costs still at what the association deems an “affordable” average of $201,700–and the next five years are expected to remain upbeat, as well.
But that healthy volume doesn’t necessarily mean that just anything will sell. Savvy purchasers have raised the bar on quality, and many working-class people still can’t afford today’s “affordable” homes. And while quality expectations are helping to drive operational improvements that bode well for the industry as a whole, these demands can further increase overall housing costs. Now everyone is contemplating the industry’s achievements and how to use them to meet the challenges of balancing quality, price, and value.
Wetherington: One of the biggest challenges has been taking the home building industry into a customer satisfaction mode. Home builders compete against existing homes. So with that in mind, builders have to be aware if they don’t bring their customer satisfaction up [they’re going to lose sales to existing homes]. The other challenge that we are dealing with is that the buyer today is much smarter and a lot more emotional. It used to be that we just built homes. That’s what we used to do. Now we build homes and we’re psychologists.
White: In the Indy market, probably the biggest achievement has been that builders, contractors, and suppliers have been able to keep the houses affordable. We are getting more and more competitive with each other and giving the homeowner more house for the dollar [However,] municipalities in Indianapolis are pushing the other way They want to put in their own architectural requirements, which is driving up the costs of houses and making them less affordable.
Hylbert: The fact that we have built [millions] of new homes in the past decade at a very consistent and steady basis and haven’t had the major cyclical swings has been also healthy for the industry and also healthy for the homebuyer as well. I think the quality of the homes on an absolute basis has improved, but I also think the quality of the components has improved–homes are bigger, they have better features, they are better insulated, they are more energy efficient. [However,] I do think that affordability is still an issue in terms of problems.
Allgood: [Our] major achievements include energy efficiency–a greater focus on that–and improvements in quality, which is now much more consistent among builders. I also think we’re seeing a much broader offering in product at all income levels. Our biggest challenge is focusing on affordability We see so much focus on the upper end. Median house prices are skyrocketing.
Massengill: For companies to survive with the spiraling costs of doing business, they have had to become more efficient, and I think the vast improvements in operational efficiency have been one of our industry’s greatest achievements. If you look at sales per person and gross margin per person, you’ll see that people are doing a lot more with a lot less–and that speaks to the manufacturing as well as the distribution side.
CONSTRUCTION DEFECTS LITIGATION
If you’re involved in home building, subcontracting, or installed sales, chances are that you also are no stranger to the threat of construction litigation. First there was radon, then asbestos, and now there’s mold. Indeed, more than 10,000 mold cases currently are pending nationwide, an increase of 300 percent since 1999, according to the New York-based Insurance Information Institute. Mold-related lawsuits in Texas alone have garnered some $1.2 billion in plaintiff payouts, including one single-family verdict against an insurer for $32 million. With celebrity Ed McMahon joining the fray, filing a $20 million suit arguing that a botched plumbing job created mold that killed his dog, it’s anybody’s guess when and it’ the litigation wave will crest.
Some of the internal industry debate now is centered on whether or not the litigation is a product of an unfocused and unsatisfied society or whether it is related to the quality–or lack thereof–of construction. Finally, builders, dealers, and manufacturers are all trying to identify the best ways to assuage the class-action wounds.
Williams: A mold liability suit that includes things like “mental anguish’ and adds up to $10 million is ridiculous. But we’ve brought some of it on ourselves. We don’t police ourselves properly–no one is watching construction techniques or maintaining standard operating procedures. There’s no teeth in the system that says you have to be professionally educated [as a contractor]. Simply building to code is a joke. Code passes. It’s a ‘D’ grade. If we’re going to build ‘D’ houses, we’re going to have ‘D’ businesses.
Allgood: We are living in a society where the first words out of everyone’s mouth seem to be, ‘Let’s sue someone.’ The impact on us is that we have to spend a lot of time educating the consumer. A lot of it starts off as false expectations [on the part of the consumer], and education is the way to eliminate that. We spend a lot of time in pre-construction meetings, post-construction meetings, and [building] hands-on relationships with the buyers, and it’s limited our issues. It’s sad to say it’s more driven by the society we live in than actual problems.
Sattler: Ten 15, 20 years ago someone might have a crack in their drywall and life goes on. Today it’s a tragedy and they call their lawyer. It’s just the nature of the beast and the time in which we live in. Of course that’s not all people. [Defending yourself] starts with quality construction. You just have to do it. If you build junk you are going to pay for it. You haze to inspect, and you have to prove that you are building quality.
Wetherington: It’s very simple: [We need to] stop litigation against home builders, period. First of all, you produce a decent product. That is a simple solution. Second, you put in your contract an arbitration clause that says each party in the suit must pay their own legal fees. If you have an arbitration clam*e, a right-to-cure clause, and both parties pay their legal fees, you will have virtually zero litigation.
Oram: There isn’t enough time for me to talk about trial lawyers, the greedy American judicial system, or the lack of reason and integrity among Juries. Where do they get those people, anyway? Let’s just say that until logic prevails in terms of personal responsibility and the size of awards and penalties, lawyers are going to continue to push the envelope because it is damn good, if ultimately destructive, business [for them to he in].
According to the NAHB’s “Builder’s Guide to the APA’s Growing Smart Legislative Guidebook,” the association’s response to the American Planning Association’s recommendations for future housing growth, home builders will have to supply an average of 1.6 million new homes per year over the next decade to satisfy base demand. At the same time, the paradox of simultaneous anti-sprawl and anti-density sentiments is reaching new heights as builders try to find hassle-free ground on which to build. And once land is allocated, local and regional municipalities continue to enact zoning and code constrictions that place further demands on how, when, and why lots can or cannot be developed.
As a result, where and how to get the dirt is unequivocally one of the biggest industry conundrums today, impacting not only building but also the delivery of goods–and right now there are definitely more questions than answers.
Hylbert: What hurts affordability is the Nimby idea–us soon as people get into a new development there is an immediate movement to restrain growth. ‘Now that I’m in, I don’t want anybody else in.’ That feeling aligned and allied with environmental issues is what leads to scarcity of land. It’s these artificial constraints that work on affordability, and they are a real problem and a real challenge.
Oram: Land availability moves our business from one place to another, almost at a whim. It heavily influences our volume and profit from location to location and year to year, and has caused us to relocate yards. The outcome on a zoning issue or growth referendum can have a huge effect on our success. Unfortunately, we have almost no control over these issues, and really very little influence, since we are automatically the bad guys in any discussion. All we can do is roll with the punches and move with the builders.
Massengill: Land and lot acquisition is ultimately what differentiates builders in the market today. In Atlanta we’re seeing a fair amount of infill and higher density village-type architecture as an attempt to make the land costs work and projects more affordable. But we’re also seeing sprawl–and the impact to us is that we are driving a lot more miles and sitting in traffic a lot longer to do the same amount of business.
Gibson: For us, the single biggest issue is the unavailability of land. Where we used to buy a lot for $475,000 we are now paying $700,000 for it. We’re probably 80 percent custom home builder and 20 percent spec developer, and a lot of times we will try to buy ground and we will control that ground and try to bring the customer in. It’s a way to perpetuate our custom home building. You own the ground and if they want it they have to use you as the builder.
Wetherington: The most pressing issue is land, finding it and finding it at a reasonable cost and getting it through the system. It used to be that the big builders wouldn’t touch anything less than 200 [lots]. Now they will go into the boutique areas of 20 and 30 homes because they need land so bad…. Local builders usually don’t have the buying power of the nationals and they don’t have the marketing power [which makes it hard for them to compete].
Sattler: I think you see companies that are large arm in most cases public that have a full department of people and all they do is seek land opportunities. They have the financial horsepower to pursue and tie up the ground. The little guy doesn’t have that as often and that can be seen as a disadvantage.
MERGERS & ACQUISITIONS
Out of the $7.3 billion in sales made to pros in 1992 by the PROSALES 100, our annual ranking of the nation’s leading construction suppliers, the top 10 pro dealers accounted for $2.6 billion–a 36 percent market share. Fast forward to 2002, and the top 10 suppliers increased their share to $11.4 billion of the top 100’s $22.6 billion market–just over half.
These numbers parallel market share numbers on the builder side, where the top 10 builders accounted for 56 percent of closings in 2002 according to the BUILDER 100, a list of the nation’s top building firms compiled by BUILDER magazine, a sister publication of PROSALES. Some pundits have even estimated that the nation’s top 20 builders will account for 75 percent of new construction by 2011. But where some see efficiencies and economies of scale, others see homogenized products, loss of focus, and the disruption of local market and community dynamics.
Allgood: On the consolidation side, I see a lot of benefits. As you get larger there are certainly economies of scale. Quite often that size allows you to focus on managing the quality of the house. The sad thing is most of the consolidation seems to be focused on the upper end of the equation so it does present somewhat of a challenge [for] affordable housing in general.
Oram: In my experience, consolidation frequently results in lower standards, poorer ethics, and less responsibility at the local operating level. As a result, the biggest builders become the least desirable customers. The predictable outcome is poor working relationships, inadequate communication, bottom-end quality, and mediocre results. You have to wonder about their long-term prospects. How much customer loyalty and repeat business will this approach engender, and what kind of reputation?
Massengill: Bigger is not always better, and bigger is not always more efficient. Sometimes you see larger companies on both the builder and dealer/ distributor side losing track of some of the details.
Gibson: What I don’t like about consolidation is that some of the legacy we’ve managed to achieve in the past 10 or 15 years in building better homes, particularly in the infill, are going to be lost because there is going to be more production building. There was a deal that I lost in town to a big production builder. They decided, ‘Hey let’s try some infill custom home building and see how we do with it.’ And they died, but I lost a site that I could have made work.
Wetherington: As more national [big builders come into the market], the more it’s going to squeeze suppliers. Now you have two types of companies. You’ve got a national builder that’s totally driven by the bottom line. If a guy comes in with a truss price that’s $10 less, they will go to it. Nationals come into town and they are like a big vacuum cleaner. Local builders are part of a community. They are usually on boards of different organizations, they live in the communities, and they know all the suppliers and trade partners personally.
Judd: Many times, an industry’s greatest achievements are in fact the same industry ‘s greatest challenges…. Today [The] Home Depot and Lowe’s are both bigger and more successful than most could have dreamed, yet the independent dealer also has done very well. The consolidator pro yards have bought up some of the largest independents, and they now thrive as part of large regional or national pro yards. With each change in the supply chain, a new link is formed and our ever-changing industry only gets stronger and presents new opportunities for all of us.
Hylbert: Our market as we define it for our products is about $100 billion a year lf you take the top 10 pro dealers, we account for maybe $12 or $13 billion of the market. So there’s a huge amount of growth opportunity for everyone–the industry is still very fragmented. And when you add in the development of new services, it becomes unlimited as to what growth opportunities are out there.
Crossing the Line
Home building has always been a customer service-oriented industry, and in the past decade vertical integration has increased as pro suppliers strive to capture more of the total home package and more of their local market share, especially when it comes to the big builders on the block.
For example, according to the 2003 PROSALES 100, activity in installed sales has jumped to 67 percent from approximately 20 percent in 1992, and many dealers now are making the products they sell, including wall panels, roof trusses, doors, and windows. But amid the whirring production lines, some executives are concerned that manufacturing and installation services don’t meet their customized needs, and some are even contemplating whether value-added service is just a buzzword for catering to big builders. Yet despite the concerns, it looks like vertical integration is here to stay.
Judd: Vertical integration is a form of consolidation. Any change in the supply chain that produces a larger reduction in cost than reduction in services is a good thing. If you do not produce more value than incremental cost, you are in danger. If a dealer can reduce supply chain cost by managing an installation crew, scheduling framers, supplying trusses, etc. and be paid a return for this increased service, this will be a good long-term strategy for our industry.
Massengill: Customers are interested in vertical integration and installed products because of the shift in liability and the reduction in management, time, and energy required to supervise the labor activity. It stands to reason we cannot offer just labor and material as a package; we must also offer the supervision. Using the same subs, same level of management, the same material, and the same installation techniques is unlikely to yield a different outcome. Companies who are able to sort through these complicated issues are going to significantly increase their competitive advantage.
White: Vertical integration allows us to focus on other aspects of the business. It allows for us to have tighter scheduling and we tend to lose a lot less material when [dealers] do the installations and supply the materials. Because [the dealer] is responsible for both the material and the installation, we typically get a better quality job because they are inspecting it and they don’t want to have to come back and fix problems later. In the past it was always a question of who was at fault [when there was a problem].
Gibson: Vertical integration in concept is good, but I’m not sure if it will totally work under the umbrella of [all companies]. When it comes down to selling product and then finding someone to install it, that’s where I think it gets a little dicey. I’d love to have a sole-source provider, but I’m happy because I can count probably 60 percent of my materials for any one house from my [primary] supplier.
Sattler: We’re certainly aware of the trend [toward vertical integration]. As far as the advantage to us, it could offer more services and maybe be more competitive, but because we are so diversified in the products that we handle [we may or may not take advantage of them]. These types of companies are usually more geared toward the production builder and handling what I call standard products.
Allgood: The advantages of integration are that supply chains are much more efficient. It is reducing the cost of getting and using material on your site. One of the negatives is certainly as you get that consolidation and integration you start to lose some of the ability to customize and some of the ability to offer broader product lines.
STRENGTHENING THE SUPPLY CHAIN
Supply Chain Utopia
Ten years ago, communications within residential construction supply were essentially fax and fill–a builder faxed in a materials list or blueprints, and a dealer performed takeoffs, quoted prices, and loaded product onto the delivery truck. Now enter the Internet, wireless communication, and industry consolidation and today’s supply chain can just as often be found on a cross-indexed customer database or managed two steps above by inventory management software at a regional distributor’s warehouse.
Indeed, 40 percent of respondents to the 2003 PROSALES 100 reported future plans for investing in electronic communications programs, including customer account access, order tracking, and online purchase orders. Now, both builders and suppliers are trying to reach a meeting of the minds on the best ways to optimize their business models by asking themselves: What is that one key spot in the supply chain that could be improved? But for all the user-friendly efficiencies, behind-the-scenes automation, and elimination of redundant tasks that technology can achieve, it still doesn’t replace the need for good old-fashioned communication.
White: Sometimes the builder is on one side and the supplier is on the other, and we don’t understand each other’s businesses. At the field level, the communications between the supplier and the builder has to improve.
Allgood: From the home builder all the way back to the manufacturing … there are too many steps along the way. There are a lot of distributors that used to provide service [but] are now more or less a middleman. There seems to be distributors for distributors and I think we need to dramatically shorten the chain. Some of that streamlining is going to be done by suppliers who offer more turnkey from design to product to installation.
Massengill: I still think there is a lot of channel conflict I think a lot of manufacturers and home builders undervalue the distribution channel. I’d like to see the channel cooperating more. You already see the more progressive builders taking cost out of the relationship through integration of systems and improved order correctness with suppliers–but we still do a lot of things twice. That’s where the dollars are, to figure out how not to do things twice, how not to duplicate services.
Sattler: [Improving the supply chain] could be reduced to something as simple as just do what you say you are going to do.
Hylbert: Automation of the supply chain in terms of information flow is still in its infancy. I think there’s a lot of potential in that area for cost savings, but it is going to take a lot of cooperation starting with the builder back through suppliers all the way to primary manufacturers go get that to work. In the ideal world, we could objectively look at the supply chain and work together with both customers and manufacturers and divvy up both the responsibilities and the savings. lf you could just press a button, that’s what I’d like to do.
Oram: I wouldn’t want to significantly change the residential supply chain in this state. It is very much a two-step market, and the local suppliers have made it that way. It is very competitive, the level of service is extremely high, and the builders are spoiled rotten. They get multiple levels of product support from the local suppliers. Communication is almost intimate, response instantaneous. This is a very good tough, clean market, and it’s too bad more aren’t like it.
Customer service, it’s all-important, but it also means different things to different people. In looking for common ground, dealers and builders are treading on issues such as delivery, knowledgeable sales support, product and service availability, and pricing. While dealers are trying to figure out exactly what it will take to ensure that trading partners become and remain loyal patrons, builders are looking to improve the channel’s understanding of business processes, scheduling, and value.
Gibson: I’d like to be able to get supplies faster in certain cases. Our market has not slowed down at all, [and] whether it be subcontractors or just supply people, you have to wait your turn until they get around to you…. I’m so busy in my business. I just feel sometimes that I’m just not informed of all the new products out there, and that clearly would be a really good way [For the dealers to serve me].
White: We need more understanding. We need to be able to step in somebody else’s shoes, and it’s true on both sides. To us, it’s a simple phone call to say, ‘I need this piece of material out here now,’ and we don’t understand what the dealer has to go through sometimes. And I don’t think the dealer always understands that if, for example, the countertop doesn’t come [out with a delivery] it affects everything all the way down the line to the final customer, who then gets upset with us for something we can’t control.
Allgood: The key [is whether dealers] truly provide a service. It can be delivery, it can be delivery and install. Too many [dealers] are just using the old network, the glad-handing, the social events. That needs to go by the wayside. Now there has to be a pure focus on ‘Do we really provide value or not?’
Wetherington: It’s all about making sure that you have a salesperson who can establish a direct relationship with the head person at a [home-building] company or at least the person that is most responsible for purchasing. And that relationship does not consist of bribes, which means I’m going to give you this to get that. Rather, it should be a [relationship] that says I’m going to be your point person, I’m going to work for you and help to solve your problems.
Williams: If we are going to be partners and help builders, they have to help from the communication side. Some builders want to squeeze you as the dealer thinking that you have enough clout in turn to squeeze the distributor or manufacturer and give them a better price. Well, the squeezing is about done at all levels.
Massengill: My advice to builders is to choose good vendors. “[he better vendors are listening to the market, and good distributors can be a great conduit for builders to the best, most responsive manufacturers. You can choose national products, but distribution has to be chosen on a local level I’ve got a vested interest in that answer, but if you cannot get the product you want in a timely manner at the right jobsite, than what good is it?
Builders Take the Stand If you’re interested in hearing more from the builders who participated in our exclusive LBM forum, be sure to join us at the PROSALES Executive Summit, November 6-8, 2003, in Boca Raton, Fla., where they will present more on pro supply opportunities and builder/dealer relationships during two special sessions, “Supplying the Builder Universe: Size up the Players” and “Connecting for Profit: The Builder/Dealer Relationship.” For more information on the conference, see the insert beginning on page 65 of this issue.
COPYRIGHT 2003 Hanley-Wood, Inc.
COPYRIGHT 2003 Gale Group