Streamlining the Construction Supply Chain with Technological Innovation

In 2017, a McKinsey Global Institute report on the ‘The Path to Productivity’ identified construction among the least digitized industries in the U.S. This is a stark contrast to the accelerated rate of change in business practices globally due to the adoption of technology—the housing industry needs to catch up!

As an industry, increasing the availability of affordable housing is our greatest opportunity, and leaders in our community know we must adapt if we are to meet this challenge. Among the key constraints to be addressed, ongoing labor shortages, lack of productivity, significant waste, volatile raw material costs, and more recent social distancing requirements are in the forefront.

Home builders and their subcontractors need to be aligned in terms of reducing the cost, time, and waste to build each house; the entire home building chain must embrace change to avoid being disrupted or displaced altogether. We can learn from other industries and countries to look at things differently, just as economist and Nobel laureate Thomas Schelling’s quote suggests: “One thing a person cannot do, no matter how rigorous his analysis or heroic his imagination, is draw up a list of things that would never occur to him.”

As we move into a new decade, five trends are shaping the housing industry:

1. New standards for “well” homes. Consumers are increasingly focused on wellness. They are concerned about air quality, from the risk of virus transmission to how the chemicals used in building materials can impact the air they breathe. Builders are adopting to meet this need in various ways, from installing more sophisticated HVAC systems to offering cleaner insulation materials.
2. More resilient materials. The industry is seeking more durable products to resist damage, from fires to hurricanes. Along with needing to meet new building codes, they also must be easier to install with reduced build times.
3. Reduce waste and process inefficiency. While the availability of affordable housing is limited, the opportunity to reduce waste and cost is significant. Investing in engineering and design is the easiest way to address this upfront, by building each house twice, the first time online, the level of precision and productivity can be increased meaningfully.As the Structural Building Components Association’s (SBCA) “Framing the American Dream” study found in both 1995 and 2015, a stick-built house uses 25% more wood products than a component-framed house. Who is paying for this overage and waste?
4. Offsite construction. To reduce the need for skilled labor, reduce waste, improve consistency, and increase efficiency overall, the demand for fully installed structured products and components will continue to rise. In a press release announcing its acquisition of the comprehensive framing solutions company, Innovative Construction Group (ICG), PulteGroup noted, “The acquisition of ICG builds on PulteGroup’s … long term strategy to drive greater production efficiency and overall build quality.”
5. Increased automation and connectivity. Sophisticated consumers want and expect new homes to have ‘smart’ automated and integrated technology solutions, from alarm systems and Wi-Fi to heating /and cooling controls.

Direct Distribution is Poised to Transform the Industry
Today, the indirect distribution model dominates the LBM industry, from wholesale to retail or one-step to two-step, inefficiencies abound and the process needs to be streamlined. In 2015, the Boston Consulting Group estimated that by 2030 digitally-enabled direct distribution of building materials and products will be more common. This time frame has likely been accelerated due to the pandemic, and we already see it deployed successfully by BMC with their READY-FRAME initiative.

In the digitally-enabled model and online marketplace, manufacturers can sell their products directly to installers or end customers. Established e-commerce practices allow for direct communication, mobile payments, and reliance on third-party logistics services for fulfillment and delivery. Furthermore, the availability of online tools is increasing pricing transparency in the industry, reducing the leverage of long-term relationships as technology consolidates the buying power of smaller users. As one of the first companies to embrace e-commerce to sell and distribute building products and materials, The Home Depot has demonstrated the potential for revenue growth. It now offers more than 700,000 items online, compared with 35,000 in a typical store, reaching 90% of its customers nationally with next day or two day delivery.

To fully embrace a Business to Consumer (B2C) digital venture, building industry companies must pivot to position themselves as sellers of services, not products or commodities, as they solve for customer pain points with direct communication. The benefits of a customer-facing online presence include having direct access to information and feedback, and the ability to leverage this insight to continuously improve product offerings and pricing, to drive higher sales and margins.

Those industries that have experienced unprecedented disruption by e-commerce mistakenly believed that established business models or investments would provide a competitive advantage, while missing new entrants focused directly on B2C solutions. From Netflix displacing Blockbuster, Amazon’s exponential growth in retail, Uber’s impact on the taxi industry, Airbnb versus hotels, there is a growing trend in customer-direct, convenience-focused successful disruptors that focus on creating demand versus contributing to supply.

Positioning for Inevitable Disruption: BCG’s Five Imperatives to Success
While the adoption of technology and the resulting disruption has been more common in other industries, there is a material opportunity in construction to protect profit margins and increase return on capital. Industry leaders must reconsider the cost required as an investment, rather than an expense. BCG succinctly outlines the path to success in these five steps:

1. Make the digital transformation a C-level priority. The board and C-suite leaders must be engaged and invested in the transition, and accept that it is a long-term commitment often with little near term return.
2. Establish an independent digital unit. Don’t try to force synergies between online and offline businesses, invest in a new technology savvy and independent team.
3. Become agile to innovate. Don’t be afraid to pivot as necessary in the strive for continuous improvement. Consider partnering with a customer or supplier to form a symbiotic relationship and share feedback and benefits.
4. Implement digital ideas effectively. As much as possible, start with the end in mind, with milestones for each stage, to manage expectations and anticipated costs.
5. Measure results. You can only manage what you measure, be realistic about the time frame and celebrate the wins along the way.

Jump or Get Pushed
As an established and collegial industry, we have a lot to leverage as we pursue digital and defensible strategies. From well recognized brands to high barriers to entry, meaningful market share positions, trusted relationships with industry partners throughout the supply chain, and in many cases permanent, lower cost capital, the industry has a distinct competitive advantage over new entrants, if technology is successfully adopted. Most industries have embraced technology more consistently, and as a result do not present the size or scale of the opportunity available to us.

Seen from another perspective, that opportunity is also a huge risk, as significant new investor interest and resulting capital is flowing into our industry in the pursuit of outsized returns. Some of the national homebuilders are addressing this risk by investing in venture capital funds such as Fifth Wall, where a team of seasoned professionals invests in startups and growth companies committed to bringing innovation to the construction industry. Among the benefits of investing in these funds is access to smart entrepreneurs as they embark on bringing permanent and positive change to our industry, collaborating with them as business partners and potentially acquiring their business once the proof of concept has been established. Another strategy is known as corporate venture capital, where an established company invests directly in external startups, such as Ferguson Ventures.

Whichever route you pursue, the opportunity far outweighs the risk, by listening to your customers, collaborating with partners and offering value add services, your margins, return on capital and market share will improve.

This article is a summary of Margaret Whelan’s presentation during the panel session “Tomorrow’s Dynamic Supply Chain: Creating Value in a New Economy” at the 2020 ProSales 100 Conference.