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Big business strategy reduces risk and increases profits

by materialsDIRECTadmin

  • Posted on February 22, 2010

  • News

Supply Chain Management—a shrinking market and close margins compel contractors to look for better ways to do business. Technology is addressing industry needs: rugged new computers and desktop software make contractors more efficient, while radically optimizes their supply chain to make the materials side of their business as profitable as the labor side. One of the primary challenges to small and mid-sized builders is that half of their business operation is dedicated to nonprofitable activity. You can break down a contractor’s business into two distinct parts: the labor arm and the materials arm. Typically, a builder’s profit is derived exclusively from the markup on labor, with no profit from the materials arm. If a contractor is operating from an estimate, he is expected to forecast the cost of materials, months in advance. If he UNDER estimates, or materials are damaged or stolen, replacement costs and cost overruns come out of his pocket; but if he OVER estimates, he is often expected to refund the difference to his customer. In other words, the builder accepts business risk for 30-50% of the project budget with no possibility of profit, but plenty of opportunity for loss. Handling materials means builders incur all the costs of a retailer including inventory control and transportation costs. If an employee is hurt while picking up supplies from the store, it’s the builder’s workers comp that’s attached. Contractors don’t make any profit on materials, but they’re the only one in the supply chain that doesn’t! The materials that a contractor uses are produced in a mill or a factory that sells at a profit to a wholesale distributor who marks up the price and sells to the retailer, who marks up the price again before selling to the builder. If the item comes from a foreign manufacturer, you can add a trading company or two, and at every stop along the way, each company makes a profit. In fact, up to 40% of what the builder pays for materials is marked up by those middlemen. Even the homeowner makes a profit, because the materials increase in value when calculated as improved equity in their home, over time. The builder does have leverage, however, because he usually decides where to buy materials. What if the builder owned his own trading company, wholesale distributor and home improvement center? He could buy from his own supply chain and the 40% profit would go directly to his bottom line. becomes the builder’s own complete supply chain from the factory to the job site! Builders shop and buy products that are still on the factory floor; so builders pay what a wholesale distributor or a trading company would pay; that’s even less than what the stores pay! When the builder itemizes the materials for his customer, he lists them at fair market rates, and for each job, the builder makes thousands of dollars of retail profit for himself without increasing costs to his customers. gives builders direct access to the factories, mills and other manufacturers that supply a complete line of building resources from forming materials and ready-mix concrete, to kitchen cabinets and appliances.

A New Billing Model—in an effort to minimize risk, many contractors that operate a classic estimate and contract style construction business, are moving to a new billing model. Instead of setting prices with a contract, the contractor and his entire operation act as a single entity employed by the homeowner. At the beginning of each week, the customer pays the contractor for materials purchased during the previous week and also cuts a separate weekly check to the contractor to cover payroll and profit. This pay-as-you-go billing system resolves the issues associated with builders trying to forecast costs; but, contractors still accept the responsibility of transporting, securing and maintaining thousands of dollars in inventory (materials) without any profit associated with it. Clearly, there is no way to avoid the responsibilities associated with managing materials inventory; but, this function can be monetized. Positioning as the contractor’s supply chain management solution helps them absorb the roles of wholesale distributor and retailer, with outstanding compensation and no additional burden.

The new billing model and optimized supply chain complement each other to reduce risk and increase profits. Mortgage Industry Impacts Contractors—much of the $7.5 trillion spent on residential construction in 2006, and often, all of a contractor’s business, comes from home equity loans or construction loans. According to a UBS report, in 2006 the default rate for “subprime” loans was more than double what it was in 2005. Lenders that specialize in subprime loans are scrambling to stay afloat. Accredited Home Lenders Holding Co. reported a $37.8 million loss for the fourth quarter and as major subprime lenders, like Brea, California-based ResMae Mortgage go bankrupt, the number of potential home buyers that can afford to fund a project is significantly reduced. As the housing market slows and sub-prime lending becomes much more difficult, builders are forced to look for new and better ways to grow the bottom line. Now that has put builders in the supply chain business, expect to see more technology to service them.

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