Real Issues. Real Answers. Rising lumber prices and the credit crunch

lumber prices

The housing market is strong, which is great. And lumber prices are rising sharply, which is good for the bottom line, because 10% markup on $1,000 is better than 10% markup on $750. But there’s a dark side to rising prices: faced with more expensive material but limited credit lines, many LBM dealers are able to stock less material— while their inventory value remains the same. Not a winning formula during a strong residential construction market. That’s why this month’s Real Issue focuses on Rising lumber prices and the credit crunch.

This months question came from a dealer in the Southeastern U.S. who wrote: “Prices on many building materials are up 25-50% in the last year but our line of credit didn’t grow, so we are now forced to change our buying habits. We stock less lumber and other materials than ever but our inventory value remains the same. How are other dealers managing the credit crunch caused by rising material prices?”

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As we do each month, we surveyed subscribers who’ve opted in to receive our email communications. A big thank you to the 270 readers who took a few minutes to weigh in on this issue. (Actually, according to Survey Monkey, the engine we use for our surveys, it averages less than two minutes to complete this very brief survey.) It doesn’t take long, and based on the feedback we get from readers, the insights they gain from other dealers on current topics are invaluable.

The question

What advice would you have for this dealer? “Prices on many building materials are up 25-50% in the last year but our line of credit didn’t grow, so we are now forced to change our buying habits. We stock less lumber and other materials than ever but our inventory value remains the same. How are other dealers managing the credit crunch caused by rising material prices?”

“Request a greater credit limit: now is no time to be running your inventory thin.”

“Pick and choose your inventory items, keep more of the A’s and less of the C’s and D’s. Your sales should be increasing too, so ask for a credit increase.”

“Need to really focus on collecting receivables and cash velocity at this point. Manage slower moving inventory JIT. Turn dead inventory into cash. This could be a great forced lesson and exercise in efficiency.”

“Your financial institution’s collateral evaluation should be flexible enough to account for inflation. Of course, their risk would be lending in advance of a falling (deflation) market move.”

“Make what you have work. We are all in a similar situation. The upside is turning our inventory over quicker. If the inventory factor is critical to your operation, then increase credit lines. It’s a tough call, you need to make sure the business conditions reflect taking on more credit.”

“We have approached our builders and request they give us a two-week notice on the materials they need. Seems to be working for us.”

“We’re managing it the same way you are: just trying to hold on.”

“Short cycle ordering. Instead of ordering your material needs one month at a time, you may have to order bi-monthly or even weekly. Not the best method but it works.”

“By narrowing some lines.”

“Bite the bullet, use your line of credit, and cut expenses elsewhere. Customers know the problems, this also gives a chance to increase prices a couple of points to offset.”

“Work with your lender to help them understand the industry and the volatility of pricing, they may grant you an over advance to help in season.”

“Buying smarter and watching your buying habits as to be careful to not overstock on items that are non-movers.”

“Working with our bank to get them to understand our industry better and create a different model for lending to our industry.”

“Talk to your suppliers. If you have been a good payer in the past, they should up your credit limit.”

“I’m more on the supply side of things but have heard many of our distribution partners mentioning this exact issue. ‘Costs have nearly doubled and the builders are playing catchup. How do we deal?’ While I don’t have an exact answer, I’ve noticed a big uptick in lumberyards that have traditionally asked to hold stock asking whether they can move towards an on-demand model. Our ability to offer on-demand product shipped within a few business days has been a great benefit for many lumberyards feeling the squeeze from the drastic increase in lumber pricing. Work with your suppliers and see what your clients need today, then do your best to stock it. Anything you can have on hand within a week of order won’t drastically affect your clients’ workflow while giving you desperately needed cash flow. It’s an interesting time in the industry and flexibility from all sides will help us overcome the issue.”

“We have positioned ourselves for ‘just in time’ orders/deliveries for our customers. They can actively sell out of our inventory, and continue as a dealer with the same price incentives without committing any capital to inventory.”

“1: Work with suppliers to get credit lines increased. 2: Work with your bank(s) to get credit line increased to handle additional business in dollars and sales. 3: Work harder to turn inventories. 4: Work harder to turn receivables into cash faster, first through your A/R team and customers and then by offering a fast pay discount.”

“We have changed our estimates from being good for 30 days to just two weeks. In order to receive that pricing, we ask for a 25% down-payment. If we don’t receive a down-payment, then we requote the project when they start.”

“Managing low inventories, just in time from the manufacturer. It’s not the bestcase scenario, but it’s necessary. We carry such a broad range of items that it’s the only way we can manage at the moment.”

“Buying from multiple sources and buying on a timely basis. Buying early in the month will give you at least 60 days before payment is due, and product may have turned by then. Projected sales and purchases should be closely monitored. Direct deliveries should be considered on large enough orders.”

“Rely more on the wholesale distributor, reduce your inventory for slow-moving items, look for vendors who will deliver more frequently.”

“Here’s what we do for special order lumber sales. We sell a job through a wholesaler, and have the wholesaler deliver straight to the customer, which means no added inventory on hand.”

“I would work with both your vendors and your customers. Vendors are willing to be more flexible and creative, we have found. Whether it is carload programs converted to trucks that ship more JIT, VMI, or simply receiving your cars and not charging you a storage and delivery fee until you use it. With customers, they understand the crunch and will work with you to give you better starts estimates to optimize inventory planning.”

“You had better talk to your banker about, at the least, a temporary credit or start looking for another banker.”

“Our profits are greater as a result of higher prices, greater sales volume, and more activity generally in our market. We have been able to use these higher profits to buy the lumber and materials we need within the boundaries of our credit line.”

“We have increased our line of credit to make sure we have plenty of inventory.”

“We’re spending more time looking for better values instead of the easier standard packages.”

“We are leaning heavily on our distributors to grow our business. Our theory is that more turns will make you more money. This also keeps the banks happy.”

“By seeking other sources of supply. Loyalty to a vendor is marvelous, but survival is slightly more important. Many suppliers are more than likely to take an existing account away from one of their competitors by establishing a credit line for a new customer.”

“Biggest advice I have for this dealer is: Don’t depend on a LOC to help manage your business. Instead, focus on controlled profitable growth. It seems extremely risky to borrow funds to load up your yard with expensive inventory which will inevitably drop in value. Stay liquid enough to match your business model. Also a recession will come again at some point, and having a large debt could be your ruin.”

“Increase your credit line. Do not hurt your ability to serve your customers. Work on getting your DSO [days sales outstanding] as tight as possible.”

“Rising material costs can be helpful if the dealers can raise their sell price. Money can be made on the existing inventory. If the material dealers have collateral on inventory dollars, the increase should increase the collateral which should increase the borrowing capacity, provided they are not at the limit.”

“The hand-to-mouth approach and not keeping as much inventory of all items on the ground.”

“Look at buying groups to leverage your terms and, if you have a good relationship with suppliers, ask for longer terms. Lastly, try to extend your limits with the bank. If all that falls though focus on your A items you cannot run out of, and trim your inventory of B and C items.”

“Work very hard at managing your accounts receivable.”

“I told my venders that I was not buying any more material than I had bought in the past, and the problem was that they had just raised prices. That being the case, they could also raise credit limits to correspond. So far, no problem.”

“We joined with a buyers group to use their leverage in the market and to get more rebates. Even though they charge a percentage, the rebates more than make up for the cost.”

“We have enough capital or the availability of capital to carry the quantities (at a higher investment) needed to satisfy our increasing sales.”

“It is wise to increase inventory levels to manage the risk of higher prices. Pay promptly and negotiate higher credit lines. Buy ahead especially on staple items. Sequence deliveries to manage cash and meet customer needs.”