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Real Estate Blog & Resources

Optimizing Homebuilders' Supply Chains

Ever since the housing market bubble burst and the financial crisis of 2008 rippled through the economy, builders need to view their supply chain more carefully. As the good times came grinding to a sudden halt, it forced the industry to better manage costs in a time of historically low housing demand. During this time period following the bust, the driving factor was cutting costs wherever possible in residential real estate development.

Now that the housing market has not only picked up more steam, but has come barreling out of the station, homebuilders are taking advantage of the lessons learned during the crisis and incorporating them into the bustling world of residential real estate construction. However, as the World Property Journal noted, supply chain challenges are stymieing the building process and affecting the inventory of new homes.

But what are these lessons? For one, many builders believe they're operating in a new kind of economy. After shedding hundreds of thousands of jobs, the industry has combined jobs and functions, like options, purchasing and contracting.  In addition, automation has increased significantly in the past few years, and these factors have created an environment where contractors are now able to build more units with fewer people.

Keep your best people close
One of the driving forces behind the housing market boomlet is the continued strength of the labor market. Currently, the Texas unemployment level rests at a comfortable 4.2 percent while the lowest number of people filed for unemployment benefits in the last 40 years. This means more people are working and they're feeling confident enough to purchase a new home.

However, for every good sign, a negative one must also rear its ugly head. In the case of the housing market, this surging employment level means many of the individuals who left the homebuilding industry during the height of the financial crisis have been hired for other positions or have fled to different industries. While it made sound business sense at the time to cut staff and overhead, now these companies need the workers back, but they've already moved on. 

Since nobody was really building houses, one of the areas hit the hardest was purchasing, seeing as how contractors didn't need as many materials. With these individuals gone, homebuilders are missing a lot of valuable purchasing people, and the industry has not yet fully recovered from this mass exodus. Builders need to ensure they're properly comparing the cost of an employee to the actual value that individual is providing the company.

Keep an eye on your trades
The builder supply chain is reliant upon a large number of trade partners to assist in the construction process. However, during the height of the financial crisis, many of these trades went out of business overnight. This left homebuilders empty-handed when subcontractors suddenly stopped showing up to the jobsite without advance warning. Even now, many builders are left dealing with many smaller subcontractors who are failing, whether because of mismanagement, improper invoicing or not having the right skilled labor.

This shift has meant that many builders need to focus on keeping tabs on their trades and their financial health. While this task is easier said than done, it's still a crucial need for builders moving forward, for if the trade partners fail to show up, it throws a wrench into the entire construction process, leading to schedule delays, cost overruns and budgetary concerns.

Maintaining an open relationship with trader partners and distributors helps builders stay aware of potential risks or challenges that may arise. If possible, builders can consider helping their subs manage their own costs. While this doesn't mean paying a large premium to maintain a relationship, there are ways to help subs gain market share, either by purchasing materials directly from a distributor or arranging jobs to reduce commuting times.

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Understanding every point along the supply chain can help homebuilders cut costs.

Keep costs to a minimum
Prior to the recession, many builders weren't focused on cost saving. Credit was cheap and people wanted houses. Following the financial downturn, however, many builders had a lot more time on their hands and started paying much closer attention to the bottom line.

For example, BuilderOnline reported that Meritage Homes, a real estate development company, managed to cut $20,000 from its framing costs after a careful audit revealed they had been purchasing 600 two-by-fours for jobs when they only needed 480.

Performing this sort of "stick count" allows builders to minimize waste and maximize material usage for lumber, drywall, roofing, siding and more. In addition to the having a better handle on material costs and quantities, larger builders can also buy in bulk amounts and work out national-level deals with manufacturers to help drive down prices.

Builders can look for other savings up and down the supply chain by following the entire path of a product from where it originates to who transports it, produces it, distributes it, stores it and delivers it to the jobsite. By accurately understanding the entire supply chain, builders can get more involved in these verticals to cut costs where possible.

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By performing more accurate stick counts, homebuilders can better minimize waste and maximize material usage.