STRATEGY Z: Part II: Low Bid VS. Total Cost Purchasing—No Contest
The Folly of Low Bids
The first installment of this three-part series featured the story of a large commercial lumberyard and Green Brothers, their one homebuilder customer who was different from all the rest. (See “Strategy Z: What would Doc do?” LBM Journal, January 2016.) The question at the heart of that case history boils down to this, do builders really care about anything but bid price? I often make this statement in my presentations to homebuilders that some consider radical: “The only thing that purchasing on low bid price alone guarantees is you will never operate by lowest total cost—and total cost is the only thing that matters.” Why is that radical? LBM dealers are continually confronted by myopic, low-bid builder tactics that result in greater total cost. Whether dramatic and obvious or more subtle and revealed only after some time has passed, examples in homebuilding are legion.
One national builder wrote a low-bid contract with a supplier to direct-ship plumbing fixtures to job sites. The national purchasing staff got a big bonus that year based in large part on the money saved through this deal—on paper. Of course, the field was left to cope with the persistent delivery problems, theft of material, wasted trips by plumbers, vendor purchase orders for emergency orders, and compounding schedule delays. Many of their best plumbers left when corporate purchasing declared plumbers must freeze labor rates after losing their margin on fixtures.
The inexperienced replacements, desperately trying to “buy the business,” further eroded the builder’s schedule. On top of that, salespeople were unhappy with the fixture selection. All of this blew up when an internal audit noticed the costs for renting storage trailers parked behind the field construction offices—to inventory plumbing fixtures. The only way the field could manage the UPS deliveries of fixtures was to hold them at the site and have the plumbers stop by to pick up what was needed for each job. UPS, tired of wandering job sites in search of nonexistent street names and missing lot numbers, was only too happy to oblige. Bottom line? This low-bid deal increased costs significantly in the field, a net-loss for the company. By the time management figured this out, the bonus money was long since spent. A few more examples:
• A national drywall deal neglected to include stocking of the board in the houses. That had to be purchased locally. The outcome was damage and delays that exceeded savings on board.
• A regional insulation contract came with the lowest price, but material shortages forced local superintendents to rent panel trucks and drive long distances to Lowe’s or Home Depot in other cities, just to get the material needed to stay on schedule. A net loss.
• A builder transferred responsibility for window installation to the framer from the LBM dealer window supplier to save money. Within a few months it was clear that the framer’s quality and attention to flashing detail did not compare to the LBM dealer’s trained crews. Service and warranty calls soared resulting in many unhappy customers. Yet another loss.
Despite persistent losses, such arrangements often continue for years because the builder either does not know how to measure total cost, or employees who do are afraid to bring it up, and for good reason.
Here is one more of my presentation statements many builders refuse to acknowledge: “In the real world there is no such thing as a commodity.” Whether purchasing plywood, shower bases, trim carpentry or cleaning services, “all else being equal” simply does not exist, if you know how to measure the differences. There are always discriminating factors and to pretend they don’t exist is delusional, financially irresponsible and just plain lazy. Each homebuilder must develop its own total cost model for both purchasing and operations because it saves them money and if they cannot, perhaps a good LBM dealer could help them. Remember Green Brothers from last month’s column? How the loads were fulfilled was non-negotiable, and our yard got the business because we met the Green’s specific needs.
If you had that chance, what would you suggest to builders as a criteria model for total cost? Here are 10 elements to get you started. Whether you employ all of them, half, or make up your own set is up to you, but letting builders judge you under no other criteria beyond bid price is an untenable proposition for which you must take full responsibility.
Bid Pricebuy the businessCapability & CapacityCommunicationElements of a Total Cost Modellow bid pricemeasure total costParticipation in product developmentPost-close warrantyPre-close reworkProcess integrationQualitySafetySchedule & DeliveryStrategy Z