CMs & Suppliers—Your Growth Supports Their Growth

In my last message, I concluded by saying, “If you are a smaller [component manufacturer] CM, I know choosing [to embrace engineering, building design, intellectual property development and engineering innovation] is a time and cost challenge. However, when you think about it, your highly capitalized suppliers should be willing to help, given that you provide a source of profit to them—your success is important to their success.”

Given all the money you have spent on lumber since the start of your business, have you ever asked yourself, “When is the last time my lumber supplier supported my business initiatives to help me differentiate and increase our opportunity for mutual success?”

Unfortunately, the value-added products our industry manufactures are sold using a different business model from the commodity-based business model that is used in the sale of lumber. Economically speaking, the lumber business model follows the commodity marketplace, where highs and lows are based on anticipated and/or expected future outcomes. Add to this the constant variability between lumber supply and demand, and it begins to make sense why the price of lumber is constantly on the move. This often makes raw material input costs quite uncertain. In a fixed customer contract that can last between one week and nine months, this uncertainty can cause CMs to get caught between a rock and a hard place. Consider this:

• To get a development loan, a homebuilder has to get a permit. The permit is based on a pretty well-defined set of plans and specifications that can be shown to comply with the local building code. From this set of plans, they can estimate the cost and then get an appropriate amount of money from the bank to build the structure. Typically, this approach establishes a relatively fixed budget to complete all the tasks, with minor modifications. A 50 percent increase in lumber cost, resulting in a 25 percent decrease in profit margin, is unlikely to be passed on to the builder who is working on a fixed budget with a fixed bid for the structural components.
• So in today’s short-supply, rising-demand lumber market, the CM takes on the aforementioned budget risk. In a situation like this, the CM had better hope his balance sheet is strong, given the opportunity to raise the price of the components is not good, and can never be as quick as the supply-demand equation adjusts raw material prices in the commodity marketplace.
• Simply put, can you adjust your structural component prices as fast as the commodity market adjusts its prices? Obviously, at 50 percent of one’s cost, this will have a big profitability impact.
• There are other commodity market and supply chain issues that can pop up with direct effects on a CM’s business model. These may include, but certainly are not limited to:
• Terms and conditions of sale and taking on-time payment discounts. Are the terms favorable to your business or that of your supplier? Does your customer expect you to be their bank?
• Product shipments are not always timely. If you bought your raw material at a very low price, and the market has risen so that more profits can be made by shipping the product in a timelier manner to other buyers, is it surprising if your shipments are delayed?
• In a falling lumber market, are you typically able to maintain your structural building component business model or does your buyer expect a discount?

There are certainly more examples of being caught in the profit squeeze between your builder customer and your lumber supplier. We would love to hear about and compile additional business model effecting circumstances to use for intelligence sharing in the future.

I know there are lumber manufacturing industry visionaries who are interested in championing our industry’s needs. Just a few examples of lumber companies that have recently shown strong support of CMs are listed in the side bar on page 8. They all have owners/leadership who understand the importance of listening to and supporting their component manufacturer customers and providing differentiated services (i.e., favorable terms and conditions of sale, protecting customer profit margins from the highs and lows of the commodity market, adjusting their grading to meet customer quality needs, etc.).

I am certain that there are more companies who likewise wish to partner in some way with their customers and can be added to this list. If you work with a lumber manufacturer who has worked hard to support your business, please let us know how and what they have done so that we can grow and support these types of actions and help to foster partnerships dedicated to changing the structural building component model for the better.

Here’s another way to think of it. Take a moment and quantify the amount of money you spend each year with your various suppliers (lumber; engineered wood; fasteners, connectors and related steel products; truss plates; engineering and business management software; or other large-ticket items). Look closely at the suppliers you have spent the most money with and compare that cost to the suppliers who have supported your growth the most. Since your growth supports their growth, shouldn’t those two lists be nearly identical?

I believe the time is right for our entire industry to passionately advocate for greater supplier support in the mission to help you differentiate your business and set both you and your supplier apart. All of our industry’s suppliers benefit from being engaged with their buying customers in planning for mutual success. This has the potential to change the profitability equation for you and your business teammates in materially beneficial ways. A change in thinking and passion would, by definition, have supply-chain and industry-wide benefits.

A final thought—SBCA members should ask themselves, “Which of our suppliers and supplier associations have done the best job of helping our collective industry grow by supporting industry-wide SBCA/component manufacturing initiatives?” This should be a passion of all SBCA members speaking with a loud and united voice.