Real Issues. Real Answers. The production builder problem

When it comes to supplying material to high-volume production builders, there are clear pros and cons. On the one hand, the large volume of material they purchase is very attractive. On the other, thin margins and a perceived lack of loyalty can be a real deterrent. As with all things, perception is reality. But as you’ll see from the answers to this month’s real issues survey, dealing with production builders isn’t always black and white.

This month’s real issue on whether or not to pursue business with production builders was suggested by two different dealers. Both readers, by the way, will receive an LBM Journal Prize Pack.

Our combined version of their questions reads like this: “We are always wrestling with the dilemma of how much national/production building business to accept given their large volume (stress on resources), thin margins (reduced returns per sales dollar), and fickle history (will they pull the pin and write off millions in a struggling market and leave scorched earth behind?). What do other dealers do?”

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As always, we used this question as the focus of a very brief survey sent via email to the readers who’ve opted in to receive our email communications. Thanks to the nearly 200 readers who took time to weigh in on this issue (the average time spent completing the survey was three minutes and two seconds.) If you’d like to participate in future Real Issues surveys, drop me a note at Rick@LBMJournal.com.

 

 

 

 

 

 

 

 

 

Question 1

First, we wanted to gauge the percent- age of readers whose companies currently supply materials to production builders, so we asked, “Which of the following customer segments does your company serve? Please choose all that apply.” As CHART A (above) shows, the top three customer segments served by LBM Journal readers are custom home- builders (93%), remodelers (87%) and homeowners (77%). At 53%, production homebuilders came in last of six choices, behind commercial builders (61%) and multi-family builders (59%). Still, at 53%, more readers sell to production builders than not.

Question 2

Next, we wanted to learn about our readers future plans, so we asked, “Moving forward, is your company go- ing to target production builders?” As CHART B (below) shows, with 41% saying no, 39% saying yes, and 21% unsure, there’s no clear consensus. Instead, the clear division between yes and no, and the healthy share that doesn’t know, set the stage for the mix of verbatim answers to the final question.

 

 

 

 

 

Question 3

How would you advise this dealer? “We are always wrestling with the dilemma of how much national/production building business to accept given their large volume (stress on resources), thin margins (reduced returns per sales dollar), and fickle history (will pull the pin and write off millions in a struggling market and leaving a scorched earth behind). What do other dealers do?”

Readers’ responses:

“Consider a percentage of your business that you are comfortable with. Often the fickle nature of production builder business allows for an off-and-on relationship with this segment anyhow. If targeting this market, look for the more financially stable, deep pockets or strong players in your region. This is usually national builders (public) versus large local or semi-regional players.”

“We have been there, done that. You have to know as a company what your model is, what you’re good at, and what you do really well. If your model has always been focused on the custom builder and remodeler, you will destroy all that you have built with that customer base by following your ego, rather than your heart. Stay with your model and focus on executing it really well.”

“Plunge forward, take on all comers.”

“Be very careful. From our experience, that segment of business isn’t worth it.”

“Tract builders are approximately 9% of our pro business. While they are somewhat demanding, we find that they plan and schedule better than most of our custom home builders. We manage orders via calendars on their website and always have advance notice to order material and schedule delivery. We also do not have to do take-offs  for material lists and we never pick up product once delivered. Our payments are received anywhere from three days to two weeks after we invoice. Considering all of these things, we feel the margins are more than adequate as a mix for these customers.”

“As with any type of customer, always precede with caution. Maybe compete for a portion of the business to learn more about the company’s operations and pay before jumping in with both feet.”

“Our yard is located in a rural area, so our experience with large production builders is next to none.”

“Limit your total volume with any customer to no more than 20%. Otherwise you become too dependent.”

“Don’t sell anything you can’t earn margin on, or to anyone who may not be able to pay your invoices on time.”

“Take them selectively as a slice of your pie. Never become dependent on them.”

“You need to handle the national production builders’ internal software, and all are different. If you don’t have the right staff that is tech savvy, then find them. The information flow from the builder is much better and the pay is also better if you follow their criteria for getting paid. We supply every national builder in our market and have very few problems. Yes, they are cheaper, but it works because of the volume, information and pay we receive.”

“Take the business and market share away from your competition if you can handle the low margins.”

“We do not sell to production builders. Margins are too small. Let someone else have that headache over a few dollars. We try to find guys who value what we have to offer and are willing to pay it. We miss out on a lot of high-volume builders and re-roofers, but I think we are executing our strategy well.”

“Only deal with one production builder at a time. Too much of anything isn’t good. Stay in your wheelhouse. Production builders will try to get you to supply things that don’t necessarily fit in your scheme of things.”

“We target only higher margin products with them such as interior trim packages. Because they also demand dating terms when we quote commodity products, we include a price disclaimer which allows for a price increase when the markets move more than 5%. In that regard we have been unsuccessful winning any bids, but that very well may have been to our benefit.”

“The added volume in business should help this dealer buy better and increase margins on smaller customers which should offset the thin margins on the production builders, i.e. economies of scale. I think it is important to always take care of smaller customers just in case the larger builder pulls the plug on you.”

“Avoid them…there’s no money to be made there.”

“Sounds like you have a good grasp of the realities of working with the production builders. I would recommend drawing a strong line that limits the volume of business you accept in order to minimize the stress on resources and the financial damage when they drop you like a bad habit when a competitor goes low to try and gain their business.”

“We don’t sell to the production builder because it isn’t worth the hassle for the margins you get.”

“We deliver and install most of our products. Try and sell your product installed and try to increase your profit margins through your service.”

“Only put a fraction of your business into production builders. It can be risky having to hold pricing for 90 days on volatile commodity items. On top of the stress, you can lose money for long periods.”

“All comes down to communication.”

“Stay away or enforce very strict credit terms.”

“My company has a set minimum profit margin. If we can sell to them and not dip below this margin, it has proved to be a good thing. And seeing that this type of account takes much less time and effort (by drop-shipping from the manufacturer), we fare okay.”

“We are far enough away from the production builders that we don’t have to deal with them, thank God!”

“Attempt to carefully manage the process and develop an understanding/ relationship so the rug isn’t pulled out from under you. You need to be set up to serve, and serve well. Many dealers may not have or should not want to develop resources to serve production builders.”

“We only sell items to the production guys that we can make money on, since we have enough good custom builders to service.”

“I would stay away from the production/ national builders unless they play by my rules, which would create a fair and equitable partnership. I need to protect my investment in my company which needs to make a profit. Generally, profit is a dirty word from the builder’s point of view.”

“Stick to your profitable margins or walk away.”

“No matter who the customer is, make sure it makes dollars and sense.”

“I cannot speak for this dealer’s dilemma, but from our perspective, we deal primarily with specialty lumber products, so we tend to have some insulation from commodity-driven segments. But even in our business we will run across large quotes and do treat them differently than our normal day-to-day business. When it comes to those types of opportunities, we look at the total profit dollar per transaction and if it does not meet our threshold, we’ll walk away. At that point, I have no regrets in losing the business. Lastly, despite the size of those types of orders and customers, we expect to be paid our normal terms. We will not carry extended terms for those types of customers.”

“If we can do the business with our current staff and fleet without having to add to either, then we look at doing the business.”

“Don’t take the risk!”

“We avoid exposure to national/ production builders for all of the reasons listed.”

“The national/production building business was never our forte. We shy away from it due to thin margins and poor returns, plus fickle history.”

“First, I would say the dealer probably has the wrong attitude with the perspective of ‘leaving a scorched earth behind,’ so they probably shouldn’t chase a customer as complicated as a production builder. Yes, pricing is number one and it is the gatekeeper, but I think that with time you can build a relationship, improve overall margins by finding other products to sell to make up points. With the right sales team and structure, production builders can be profitable.”

“We go after the business but hold a certain margin. If that pricing gets the job great, and if it doesn’t, then it isn’t worth the effort. It makes no sense to do all the work just to break even. If there’s no money to be made, the smart play is to move on.”

“We have had some luck with small regional production builders that better fit our culture of service.”

“Focus on the national builders that have had a long-term presence in your market. Build a great relationship with their purchasing staff by becoming a back office that supports them. You will get more loyalty and last looks. From our experience the key is to bid the base low but add margin on options. Most homes have some options and it pushes your overall margin. Yes, they can be frustrating, but they can also be great customers and pay well.”

“Careful and constant contact with your production builder’s management. Know the customer so you can see the signs of impending doom.”

“We are a smaller operation and have not pursued production builders for the reasons named. We have enough margin pressure from our custom builders.”

“Margins are thin, and the risk is high, but when approaching the deal, the stress on resources is key. For example, is this a drop-and-forget type with prompt payment, or do they require multiple shipments and a high level of service? There has to be a balance maintained so that both sides can develop a partnership no matter how long the relationship runs.”

“Keep this segment at 10-15% of your company’s total volume.”

“We prefer to be their secondary supplier. That way, we maintain our margins, give them good service and same- or next-day delivery. Our loyal, core customer base is our priority and they know and appreciate it. We also try to get work in the developments for our local landscapers, fence builders, and maintenance contractors.”

“Let others race to the bottom.”

“You have to decide who you are in your market. Either the quality and higher priced store or the lower quality and lower priced store where the big volume folks want to shop. If you are only known for being cheap then the production builder will be your best friend, but it’s all in how you go to market.”

“Avoid high volume production builders. Lack of loyalty and thin margins are no way to do business.”

“As the introduction states, there are pros and cons, with very real financial impacts. Long term, all sales and all customers’ relationships need to be profitable. That is why the true cost to serve needs to be analyzed. You should know your projected or expected gross margins dollars created by the sale. Here are some items to factor in: Does their contract or purchase order include Hold Harmless or Pay When Paid sections? Customer A/R days…what is their pay history and the related carrying costs you will incur? Do they require special term discounts, or special volume discounts? What are the commission costs? Is this customer known for back-charges or invoice deductions? Will this require additional inventory or new inventory, and what are the related inventory carrying costs? Will the additional volume create opportunities for increasing gross margin dollars? Can you service this new business and maintain your existing customer relationships without adding supporting yard staff, drivers, and equipment? If not, what are those additional and new costs? Also, in the future, when those new project sales go away, what financial impact will there be from the additional staff and equipment? Is this customer high-maintenance, are they well-organized, how many deliveries are required for each sale, will there be material pick-ups, did you guarantee the list of materials?

“Selling to production builders can be a good thing and make financial sense. It does require a team and facility that is focused on very efficient operations. It also requires a seasoned sales person or account manager, to manage the account and its impact on operations. Support from the purchasing department, and those that manage the company’s cash flow. One thing the addition of production sales will not do is fix a broken location or a company that is not already secure and financially successful.”

“If you need the work, then you go get their business. If you can do without their business, save yourself the headache and move on to a more reliable contractor.”

“I let them go to bigger yards with more resources. Between the low margins and the slow pay, I am not interested in the stress.”

“We remain comfortable in our own skin and realize who we are best capable of servicing well while maintaining acceptable margins and avoiding unnecessary bad credit risks.”

“Before the Great Recession in 2007, we had the ‘get it all’ mentality. Since then, we’ve stiffened up our credit requirements, and do not discount products. We may offer an end-of- month rebate if paid in full within terms. If the customer does not want to follow our new, stricter rules of doing business, they can go elsewhere. As you stated if there is a hiccup in the market, they will leave you holding the bag and affect your business, your employees and your future credit negatively.”

“I would keep the business with this customer group to a manageable percentage of your overall business. The volume can contribute to higher profits with other customers as a result of improved buying.”

“Production builders are all about price and bids are sent out to a lot of competition. There is no loyalty and you will work on very low margins, praying there are no mistakes with a project. The upside is not as good as you think, and it is a lot easier to lose money.”

“We service the local production builder and multifamily builders but not the national production builder. We partner with the local builders and can control cash flow better than letting the national builders dictate terms and pricing to our company.”

“Do not chase the business.”

“Our customer mix and strategy have been ever-evolving. I don’t think there is one perfect strategy. The volume of the nationals is certainly appealing, but you definitely have to pick and choose who your team aligns with most closely in order to work deals that are mutually beneficial. The important thing is that you have a reason/strategy for choosing why your customer mix is segmented the way it is, and being able to capitalize on and execute whatever strategy is implemented.”

“You have to know what you can handle and what you cannot. Stay true to your company’s mission. Make sure that you can still live up to your current customers’ expectations when you go after big business.”

“We only go after this type of customer with specialty products that we can at least sell at acceptable margins.”

“If you can’t find a way to add value you’re going to compete on price. The question comes down to whether you can develop a system to be more efficient than your competitors.”

“Do not become a slave to volume unless that is your model. You end up no longer running your business. Your regular, profitable customers will blame every hiccup on their perception that they are now secondary to the nationals and they will seek alternate suppliers.”

“Fortunately we have enough sales volume to avoid the production builders.”

“We don’t pursue that business at all. Occasionally we’ll review a production builder’s most recent purchase agreement and we’re reminded why we don’t pursue that business. Let the national suppliers take that risk.”

“We have made the decision to not pursue this business, however we do deal with subs who purchase material, especially deck builders, that do work for them. We do some fill-in business and we have not had a problem getting paid or adding a lot of strain on operations.”

“Make sure your cost to serve matches the margins you receive.”

Hundreds of readers share their insights for this every-issue feature. Have a Real Issue? Contact Rick@LBMJournal.com.

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