Most production builders that are active in the four Southwestern states served by Foxworth-Galbraith Lumber Co.’s 60 yards still place orders primarily through their respective divisions. Ted Sojourner, the Dallas-based dealer’s vice president of sales, believes that any purchasing agreement, no matter how broad, is only as good as the local distribution that supports it. So over the past few years, Foxworth-Galbraith has beefed up the staff and inventory—in particular framing lumber, cabinets, flooring, and drywall—at all of its yards.
The concept of servicing builders on a regional basis does seem to appeal to some dealers, however. Hillsboro, Ore.–based Parr Lumber, for example, ships one builder, Hayden Homes, from six of its 27 yards in Oregon and Washington. Nate Bond, Parr’s director of sales, says he oversees Parr’s “regional sales mechanism” that develops programs for builders and coordinates distribution from the yards involved. Saginaw, Mich.–based Wolohan Lumber, with 23 yards in four Midwestern states, empowers its branch managers to negotiate on the chain’s behalf multi-state distribution deals with builders. Those managers then supervise those agreements with the dealer’s other branches and Wolohan’s 72-person sales team. “Several builders see value [in] that we have multiple locations, and our managers have gotten past the ‘what’s in it for me’ mentality,” says Peter Hartmann, Wolohan’s vice president.
Lanoga does business with nine of the industry’s 10 largest production builders and has locations in 20 of the 50 largest markets. It has entertained discussions with large builders about regional purchasing programs in which several of the dealer’s divisions could participate simultaneously. “We could provide them with consistent market-to-market product and service, which has been a frustration for builders and manufacturers,” says Finkenstaedt. Rock Lee, general sales manager for one of those divisions, San Diego–based Dixieline Lumber, says his yards would have no trouble supporting such an effort for most commodities, but would probably need to open a warehouse if purchasing agreements included finishing products. “The big challenge for us would be how to deliver products like toilets or locksets to a jobsite the way we deliver lumber, which is how our [builder] customers need them.”
Installation Extra Lee notes that 90 percent of the business Dixieline does with builders in California is actually through large framing contractors that provide construction labor. He also claims that a few large builders, as a cost-saving measure, are trying to “break through the stranglehold” of those framers by relying on divisions within their operations that provide materials and labor. Centex has indicated that it might open a branch of its CTX Builders Supply division—which currently provides lumber and components for about one-third of the homes it builds annually—in Southern California. (Paul Dodge, Centex’s vice president of purchasing and distribution, says he expects CTX to eventually be supplying the builder with half of the commodities it buys.) Pulte, according to its COO, Steve Petruska, is also contemplating a California expansion of its Phoenix-based Pratte Building Supply division, which supplies materials and manpower for concrete foundations and framing to Pulte’s home-building activities in Arizona and Nevada.
The jury is still out on whether vertical integration is the answer to builders’ construction prayers. But Tom Rhodes, president of TWR Enterprises, one of Southern California’s largest framing contractors, doesn’t think most builders are ready to sacrifice profit and invest in the inventory, manpower, and equipment they’d need to assume more control over the supply chain process. “What we do is very efficient, and I don’t think builders can do it better or cheaper,” says Rhodes, whose company will purchase 200 million board feet of lumber this year and employs 2,600 framers during peak building periods. Corona-based TWR also depends on what he calls “world class” distribution from the likes of Dixieline and other pro dealers and distributors, but it makes no difference to him whether his company purchases lumber through a yard or a builder-owned subsidiary because “we still need to charge the same amount for the services we provide.”
BMC Construction, a division of San Francisco–based Building Materials Holding Corp. (BMHC), provides turnkey installation services for 19 of the largest 25 builders and last year framed or poured concrete foundations for 25,000 homes. BMC’s president, Mike Mahre, says his company is now taking “baby steps” toward devising a national contract for large builders (he declined to say which ones) that, interestingly, would encompass training, indemnification, insurance, and other operational issues, but not purchasing, which BMC continues to do at a local level. “We provide a service that builders are willing to pay for, and it’s our job to figure out how to buy materials efficiently.” Sometimes, that local source is BMC West, BMHC’s pro dealer chain with 60 locations in 11 states; in markets where BMC West doesn’t have yards, “we’ll buy from local dealers, Builders FirstSource, Stock, whoever’s there,” says Ellis Goebel, BMHC’s senior vice president of business development. Both officials say that their corporation set up a separate entity to provide labor so “we wouldn’t disrupt BMC West’s business,” says Mahre, who concedes that BMC Construction sometimes gets “pushback” from builders about its markups on materials. “My response to that is ‘Where, then, do you want the markup?’”
However, other pro dealers and distributors that bundle products and labor view turnkey installation as a necessary evil in the current competitive environment. “It’s not a business we really want to be in,” says Segal of Bradco, which installs windows and fiberglass insulation in certain markets. Allied doesn’t install anything it sells, says Feury, because it does not want to compete with its contractor customers. Wolohan will install most of the exterior products it sells, including framing lumber, panels, trusses, and siding, but Hartmann says his company doesn’t push the service. “It depends on how aggressive the branch manager is.”
This reluctance is understandable, as managing labor can be tough and complex. But companies whose primary business is selling product grumble that turnkey installation is yet another expense that builders expect their suppliers to absorb. “We take on added risk [by hiring and insuring installers], but it’s hard to get back the value you provide,” says BFS’ Snyder, whose comments echo those of other sources. And as purchasing agreements become regional or national in scope, some dealers and distributors say costs related to operational and logistical support can wither their profits.
The aforementioned marketing vice president for a large national distributor notes that his company recently walked away from participating in a purchasing agreement negotiated between a builder and a manufacturer because, this source states, “the pricing didn’t take into account the cost of delivery, terms, returns; it was all assumed.
“The biggest component of cost is labor,” this executive continues, “but when builders talk about unbundling products and services to know what projects actually cost, they also want that [total] cost to be lower, and they really don’t care about the financial impact on suppliers.” This individual cautions that dealers and distributors should be more wary of any regional and national purchasing arrangement because “all it does is set a benchmark for my competitors to beat. Why would I want to do that?”
Edward Hines Lumber, with locations in Illinois and Indiana, isn’t pursuing regional supply opportunities aggressively because, Hines explains, “We’re worried about our margins, and I’ve found that big builders are not the low-cost proposition they make themselves out to be. Builders like to say that if we give them savings, they’ll double their volume with us, but it doesn’t work that way because my costs go up, too.”
Hines says that dealing with big builders’ paperwork, insurance requirements, and sales administration can be a lot costlier than those of smaller local builders, and can cut deeper into his company’s profits. “I don’t find big builders to be the cheapest to service, not by a long shot.” —John Caulfield is a contributing editor for PROSALES.
