July, 2003

Do It Yourself?

Pros and Cons of Manufacturing What You Sell

By Craig A. Shutt

As dealers search for ways to differentiate themselves and grow their businesses, many consider the potential ready to be tapped by operating their own truss plants or millwork shops. But while such operations provide benefits, they also present drawbacks that may outweigh the advantages for some. Knowing both sides of the equation is critical to determining if this type of investment offers a strong enough payback to succeed.

Certainly, such an operation can generate more sales for the company, boosting both revenues and profits. That was the case for Raymond Building Company in North Fort Myers, Fla., which in 1998 decided it wanted to actively generate higher sales. Executives invested in a computer-operated truss plant that expanded the business. physical size three times over. Since then, Raymond has grown from $11 million in sales to $26 million in 2002.

"It's become a big part of our business and a key part of what we can offer customers to get all of the package and materials they're buying," says Charlie Babb, president. "The efficiencies we created in setting it up decreased our costs of producing these components while aiding the quality."

The Upside
Indeed, better quality is a key reason why dealers consider this investment. "We have better control over our quality by doing these components in-house," claims Jay Ward, president of Ward Lumber in Jay, N.Y., which launched its own truss business in 1964 and has expanded several times. The company produces a better-than-average truss in general, Ward notes, and then overplates it, due to the heavy snow requirements in the area and to upgrade the components to meet any engineering requirement.

Quality control also gives Pixley Lumber in Claremore, Okla., the edge with its millwork shop, says Paul Pixley, president. The company has operated the shop for 20 years, expanding its product lines as customers request additional products. "We're not relying on someone else to produce what can be a complicated item," he explains. The cabinet shop operates at a hectic pace, since it often provides cabinet doors for frames that have already been built. "You're behind from the moment you take the order, so you've got to work quickly, but retain a high quality level." That level can best be maintained if the dealer himself is producing the millwork.

Along with better quality comes better service, all agree. "Our truss shop gives us an in-house resource to better serve our customers," says Ward. "We can go on-site more readily than a third party can to take measurements and offer design consultation. We also can be more responsive to lead times and move projects up in line if something's needed quickly."

Better quality and service help separate the dealer from his competition. "Having our own in-house truss plant lets us stand out and offer additional products, so customers are coming to us for more than just price," adds Ward. "If price is the only differentiator you've got, you won't be successful for long." That's also the case at Pixley, where the company offers three key millwork products--steel entry doors, wood prehung doors and custom cabinetry--and five species of flush door along with several patterns of panel doors and stile-and-rail doors. These products bring in new customers and help Pixley create an image of offering more options as well as unique items that customers can't find elsewhere.

Selling these items can generate more product sales than the sum of the parts might indicate, dealers say. "The construction business is changing, and people want to purchase more products from one vendor," finds Raymond's Babb. "Our truss shop lets us operate as a one-stop shop that eliminates some of the paperwork for the customer." That alone can make them more interested in buying all their products from the dealer, adding items to their list that they might have gone elsewhere to buy. "You can gain business beyond the added sale of the trusses because you can often get the whole-house sale," Ward agrees.

Ward encourages the package sale by pricing trusses at two different levels, depending on whether they are part of a whole"house sale. "We have a finite amount of capacity, and we've got a lot of work," he explains. "So we prioritize roof systems for customers who are buying the rest of the home with us. In fact, we really don't want the business of the builder who just wants to buy roof trusses," he allows. "Why slow down the schedule for our loyal whole-house customers?"

Margins also can rise while maintaining price levels, since operating the shop directly cuts out the middle man. In fact, "I don't see how a retailer can afford to buy from a distributor and compete against anyone that has a door shop," in Pixley's view. "There's not enough room, especially at the lower margins, for multiple-step distribution." He makes a margin of 15 to 30 percent on his millwork products, with higher margins coming from such custom pieces as mantels and cabinetry.

Operating the shop directly also ensures deliveries can be made as efficiently as possible, coordinating their arrival with other products. Mistakes or damage also can be returned and corrected more swiftly, with reordered products quicker to catch up to the rest of the delivery. "Returns can throw off a customer's entire schedule," says Pixley. The more levels added into that procedure, the more difficult it can be to make up the time. "It's easier to meet their needs and control those situations if you have the capability to make corrections yourself." This not only enhances customer service but cuts down on errors that the dealer has to absorb.

The Downsides
But along with those efficiencies and advantages come a variety of challenges that may not play to a dealer's existing strengths. Foremost among these is the competition in the market and the types of customers within the dealer's own clientele as well as in the wider market. A careful analysis of the market and its potential for absorbing this new service is vital before any investments are made.

It's possible that the dealer can rise to the top even in a competitive market, but gaining that necessary foothold can be difficult if the competition is well developed or the customers are secure with their existing service. Dealers should sound out their own customers and talk with other builders to learn if dissatisfaction exists with current suppliers and whether they'd be interested in buying from a new source.

The cost to set up an operation also can be daunting. It will take years to recoup the investment required in land, equipment, personnel, material, marketing and other expenses, so dealers have to embrace such decisions for the long haul. "Many investors and dealers are scared to invest in the building-material business," says Babb. "But you have to invest in the business to keep it growing and successful, and some dealers haven't invested in theirs in a long time."

That investment includes adding and training labor, especially those skilled in working in key positions in truss plants and millwork shops. That represents a stiff challenge in today's tight labor market, dealers note. They must be prepared to recruit key people and find ways to retain their services to ensure an efficient operation and one that can train new people as turnover occurs.

Finding the appropriate people is getting even tougher because these products are more complicated than ever and the equipment becomes increasingly sophisticated, dealers note. At Raymond, for instance, the company has continued to upgrade the system it originally installed to include computerized drafting and labeling systems to ensure pieces fit properly and setup time is minimized. It also has created an underground pit to handle scrap, keeping work areas cleaner. The operation is virtually paper-free, with drawings sent to framers as each table is ready for the next design. Running this system takes more than simply knowing how to wield a T-square or hammer.

As an operation becomes more efficient, it generates the need to hire more designers and increase business to keep the plant producing at capacity. "We had to figure out how to increase our design capabilities, which required hiring more capable people, to keep everything flowing," says Babb. "If you decide to grow your shop, you need additional engineering and design people to supply the production people with materials to produce."

The components those designers and framers are creating, especially in truss plants, are as complex as the machinery they're using. "We have found that roof systems are much more complicated today," Ward indicates. As more hip roofs, valleys and bump-outs are designed into rooflines to add interest, the trusses supporting those features become more complex. That requires more front-end engineering than was previously needed when trusses simply supported a basic roof. A corresponding reduction in skilled labor employed by builders leads them to want the truss plant to build these trusses for them on their end rather than at the site. That adds business but also requires skilled labor to complete each component.

The time involved to design and build the truss also has grown, dealers note. Trusses now can take four to eight hours to frame rather than the single hour earlier designs required, says Ward. "We used to be able to do one set-up and be done. Now, each is different." Ward passes those costs along to customers, but these added complications mean more places for errors to arise in construction or in miscalculating how long the truss will take to build. "There's more risk in ensuring it's designed correctly, and there's more scheduling required."

Deliveries may not be as smooth as one might expect with all products coming from the same location, dealers warn. Coordinating those deliveries can be as difficult as if they were coming from separate locations, even if the timing can be better communicated. Today's longer, more complicated trusses also are more difficult to handle, requiring special equipment in some cases. Ward transports his trusses with 40-foot, low-boy type flatbed trailers, which make the trusses easier to offload. Rolling-bed trailers also are used to slide trusses off the truck, and a "tip off" trailer delivers trusses peak down so they can be rolled off one side of the truck and stand right-side up upon removal.

As trusses become larger--and Ward says that many of his trusses are as long as 64 feet and nine to 12 feet wide--they begin to fall under highway regulations that restrict delivery times and approaches. These can require escort cars as well as special lighting and signage. Escort-certified drivers also may be required. In some cases, oversized loads can be transported only during specific hours and not within one day of a holiday. These limitations make deliveries more complicated, requiring careful attention to schedules.

Trusses in particular also bring more liability, because production of these components shifts the dealer from being a seller to being a manufacturer. That increases his liability insurance costs significantly. Millwork too can pose challenges, with the dealer having to absorb costs for any mistakes in sizing or finish as well as damage.

Dealers also must be certain their customers understand how to properly use these products. For instance, while roof trusses are extremely strong once they're in place, they can be fragile during installation and must be properly braced and secured. This means dealers must take precautions to educate their customers about proper handling and installation techniques to ensure any mishaps don't reflect back on them as the manufacturer.

Ward Lumber, for example, has prepared a set of industry-approved instructions along with warnings about the need for proper installation and bracing during construction. These papers are provided with each sale, and customers must acknowledge in writing that they have been received and understood with each delivery. "You want to reduce your risk as much as possible," Ward counsels.

Even with these challenges, all three dealers swear their decision to add these manufactured products was a good one, and they continue to enlarge their operations when the opportunities arise. "We do have plans to expand," says Raymond's Babb. "There's more ground available to us, and we see potential. But first we'll concentrate on making our existing facility as productive as possible. We plan to be in the truss business for a long time."