Ramping It Up...Things to Consider Entering a Better Market

Housing starts are not going to reach one million new units in 2012. However, most economic and real estate indicators seem to be pointing in the right direction. Okay, yes, you’ve heard this before, but sentiment seems different this year, from the large increase in builder confidence, to stronger and steadier SBCA publication sales that actually prove houses are being built. Sure, there’s still a lot of work to be done, whether it’s foreclosures or loosening lending requirements, but so far so good. With NAHB’s Improving Market Index reaching nearly 100 metro areas last month, we at SBC felt it was a good time to look at what component manufacturers should be thinking about as they begin to make decisions about increasing production.

To help, we contacted a few component manufacturers in markets identified by several sources as leading the way into 2012. Walking a mile in their shoes, we looked at what they learned as they increased production in the current market. What we learned will likely not surprise you, but it’s still good advice as the residential construction industry picks up steam. From cash flow to personnel, we look at the top concerns you will likely face while ramping up.

Markets Showing Strength

In a recent industry survey conducted by SBC, five out of six respondents felt that 2012 was going to be a better year than 2011. There appear to be plenty of experts willing to support their optimism. According to multiple sources, including the National Association of REALTORS^® (NAR), Fiserv, the National Association of Homebuilders (NAHB), the U.S. Census Bureau, the U.S. Bureau of Labor Statistics, and Wells Fargo, the country’s economic and housing indicators point toward a 14-20 percent increase in housing starts for 2012.

While some economists may paint such an increase as “moderate” or “slow,” the overwhelming feedback from the component manufacturers we spoke with said that incremental growth is much better than a swift uptick. To understand why, we talked to component manufacturers about managing cash flow, hiring personnel, bolstering sales and tricks for riding the wave of growth without drowning.

Cash Is King

“It takes a lot of cash to increase production,” said Rick Cashman (Florida Forest Products) in Tampa, FL. “Cash takes a dive when you first start out.” Cashman and others point to the fact that the money you have to outlay for raw materials, hiring and equipment can take a while to recoup through cash received from sales.

“With receivables being 60-90 days out, it can be a real challenge to cover the cash shortfall between the increased costs you incur as part of increasing production, and when the cash finally comes back in the door,” agreed Ray Noonan (Cascade Manufacturing) in Cascade, IA.

And while some component manufacturers have had some success working with their local banks at securing short-term loans to cover shortfalls, Cashman pointed out that many banks across the country (including theirs) are not as friendly as they once were. “In most cases, you’re best off just having the cash you need,” said Mike Higgins, (Higgins & Sons) in Tecumseh, OK. “That’s how we try to do it.”

Hiring & Retaining Designers

In the industry study conducted by SBC, most respondents indicated that hiring and retaining new designers was their biggest concern heading in to 2012. According to the manufacturers we talked to, these are two separate and distinct challenges. Hiring designers at the moment is likely not going to be the most difficult aspect of increasing production early on. “We held on to many of our designers through the past few years by asking some of them to work on the production line,” said Mark Smith (Trus-Way, Inc.) in Portland, OR. “They started out there, so they already had the skillset.”

Cashman also pointed out that there are individuals with design experience in your market likely still looking for work. “We ended up hiring back one former employee, and another from a long-time competitor who recently went out of business,” he said.

However, other manufacturers are concerned the pool of available designers may dry up quickly. “The concern is that our industry typically lags behind other industries,” said Noonan. “It is possible others may be able to offer a lot of promising designers good jobs before we are ready to hire them.” In this regard, retention of current designers may become a bigger challenge as other employers in other industries look for individuals with technical experience.

“Fortunately, one thing that is going our way is the apparent reduction in large homes with complex roof layouts,” said Noonan. “Hopefully, that will translate to less design headaches for the designers we have, and probably better margins as well.” In other words, lower design complexity will likely mean less experienced designers can be utilized more easily.

Finding Production Employees

“Like most truss plants, we currently aren’t running close to full capacity,” says Higgins. “As a result, we don’t worry nearly as much about purchasing new equipment as we do finding the right employees to man it.” This comment seems in line with the roughly 50 percent of survey respondents who indicated hiring, training and retaining production employees was their biggest concern looking ahead.

Again, in the short term, there may be a pool of unemployed (or underemployed), experienced production workers in your market from which to hire. “In a down economy, we’ve seen there are plenty of laid off production workers to choose from in our market,” said Smith. Cashman agreed, “We’ve been able to hire back former employees as we’ve increased production.”

An additional option is relying on temporary employment agencies to fill the void. “We have become increasingly reliant on temporary agencies to augment our search for production employees,” said Noonan. His company works with a temp company on a “90-day-to-hire” system, where the agency provides workman’s compensation insurance for the first 90 days as they train and learn their job duties. “The biggest challenge has been to offer a high enough wage so that the temporary employees we hire think of the job as a possible career as opposed to a stop-gap job until something better comes along.”

While Cashman agrees that their relationship with their temp agency has made hiring easy and cost effective, Smith observes, “Temporary agency employees are far more expensive than traditional employees. As the market improves and the hiring market tightens up, that premium probably becomes worth paying.”

Managing Your Sales Force

As you are keenly aware, the ability to cash in on an increase in building construction in your market is going to rest squarely on the shoulders of your sales staff. “While I am hesitant to accept that the current surge in the Tampa market is going to last, we have hired more sales staff to try to sustain the current level of production as long as possible,” said Cashman.

“Our sales department leads the way for our entire company,” echoed Higgins. “Their success translates into our success. So while we have to ensure we have good designers who can get the job done and a competent production line, none of it matters if the jobs aren’t coming in the door.”

For those component manufacturers who already have a competent sales staff, Noonan again points to the component industry’s growth lag as a potential area of concern. “Sales is filled with highly motivated individuals, and the better they are at their job, the more attractive they will be to opportunities in other industries.” Noonan offers a suggestion that is probably applicable to both sales and design staff: “Talk to them regularly and make sure their needs are being met. The happier they are, the more likely it is they will stay.”

Think the Turtle, Not the Hare

While economists and homebuilders may label the projected 14-20 percent increase in housing starts as “slow,” it is likely a very good thing for the component manufacturing industry. “In an ideal market, our current level of production would double over a period of the next five years,” said Smith. Why is that ideal? “A quick increase equals false inflation,” explains Smith.

“As I look ahead, the thing that I worry about most is cash flow and the rising cost of raw materials and fuel,” agreed Cashman. “So far, our mills have indicated they can produce what we need, but I’m concerned about when that might not be the case and lumber prices begin to increase dramatically and perhaps unexpectedly.”

Noonan also expressed concern over the idea of a rapid increase in production. “Slow and steady growth has really helped us keep control of our cash flow so far,” he said. “But if we get to the point where we are seeing rapid or variable changes in raw material costs due to demand quickly outstripping supply, it will be very difficult to operate profitably.”

Another way to think about it is that slow growth is more apt to be sustainable growth for the industry, giving you time to find and train employees, all the while increasing production at a pace that allows you to remain in a relatively healthy cash position. The hard part is that the pace of residential construction growth is largely out of our industry’s hands, and the last time it happened, lumber costs spiked and several component manufacturing companies went out of business.

The bottom line is that many of you can be glad there will not be one million housing starts this year, but watch the marketplace indicators closely. If they point toward a swift uptick, it will directly affect many of your costs!

“This period of increasing production has been stressful,” admitted Cashman. “But really, it’s been an overall stress reducer because it’s a lot more fun than dealing with the downturn and trying to make payroll while retaining your business viability and good employees. I don’t mind it at all.”