Purchasing & Profitability: 4 Keys

by Blair Kuhnen

Measuring performance is more than simply tracking leads and sales.  It applies to all aspects of your business.  The purchasing function has many things to be measured, but it’s more than simply trying to determine how much you might have saved buying faucets.  The biggest benefit of measurement is guiding management action to improve profitability.

Building a home is a very connected process.  One vendor issue can lead to multiple issues with other vendors, driving up costs and cycle time.  Poor automation can lead to excessive work across the organization.  If you analyze the right issues, you can find your way to more efficient operations and higher profits.

I spoke with Joe Pullen, a noted consultant from the Lee Evans Group, to learn more about what builders should be measuring and how they can use that information.  Here’s Pullen’s 4 things to consider when finding ways to improve Purchasing’s contribution to profitability: 

1) Start with your variances.  Look at timeliness and schedule variances.  Did vendors start on time and end on time?  Since homebuilding is a process, one variance leads to another.  According to Pullen, you have to dig and analyze.  By setting proper lead times, the flow of work goes smoother and is less costly.

Analyze your schedule variances.  When you have a big variance, you can often track it down to bad or changing assumptions.  Your lead times may have to be seasonally adjusted.  According to Pullen, “Lead times change.  Your plumber may need more time in the summer [to fit your project in].”  Are vendors getting notification of purchase orders (PO’s) in a timely fashion?   Variances in the start and end times can identify issues that, when solved, will save you money and lead to a more efficient homebuilding operation.

2) Dig into your warranty claims.  Here it does take a little digging.  No doubt, a vendor causing excessive warranty work needs the boot, but sometimes it is not clear cut who is driving your warranty expense.  “If you have a lot of water leaks, look at the plumber, or perhaps it is your dry wall installer punching nails into the copper or drains,” says Pullen.

3)  Review your insurance audit reports.  According to Pullen, this is an often overlooked area of low hanging fruit.  You probably have general liability insurance to cover non-covered vendors.  Are these vendors paying for their share of the coverage you are providing? 

4) Consider automation to streamline the purchasing process.  The math is simple.  If you have 100 purchase orders per home and build 200-300 homes each year, then, without automation, you have 20,000-30,000 invoices to process.  This means creating a PO, sending it to the vendor and the Builder, matching invoices received to PO’s, encoding it all into your accounts payable system and then researching the exceptions.  The savings can be huge. 

In a recent article at TecHomeBuilder, Dennis Webb, VP Operations for Fulton Homes of Phoenix, Arizona, shared how they not only boosted design center revenue, but dramatically reduced accounts payable expenses by automating their design center operations.  Read about it here: http://www.techomebuilder.com/news/19331.html

Sometimes purchasing, finance, and other administrative parts of your operations are overlooked and under-measured.  By focusing on this area, you may find a treasure of costs and time you can take out of your homebuilding process.

Blair Kuhnen is VP of Marketing & Business Development at BHI.  He can be reached at 512-289-7370 or bkuhnen@builderhomesite.com.