Can Homes Be Built Cheaper? This Man Could Help Your Builders Do That—and Cut Your Costs, Too
Ken Pinto wants dealers to join his campaign to reduce home building costs at least 10% by urging their customers to do three things better: Clarify, cooperate, and communicate.
Pinto, a former chief purchaser and supply chain leader who has worked at four of America’s 10 biggest home builders, argues in a new book that too many builders are hurting themselves by failing to see how purchasing and production improvements can boost their profits, and that dealers need to help point them in the right direction.
He says that getting better begins with clarity: Knowing the price of the materials that go into a house rather than letting that price remain buried in a turnkey contract with a subcontractor. You can’t improve until you know that price, he says, just as you can’t shop better at a grocery store if the cost of the individual bread loaves, eggs, and cookies are presented as one total rather than being broken out. It’s why Pinto’s call for unit pricing is titled: How Much Is the Milk?
But Pinto puts just as much importance on the book’s subtitle: “Uncovering your greatest cost savings in residential construction by listening to your suppliers.” This comes first through builders learning what it is they do that costs manufacturers and distributors the most. Discovering and resolving those pain points in ways that benefit all parties will make for even tighter, cost-effective relations. For example, there’s communication: Builders who identify well in advance what SKUs their job sites will need 30, 60, and 90 days from now make it possible for manufacturers and distributors to eliminate costly guesses when they do their planning.
“Builders really don’t understand that there is a problem,“ Pinto told me in a Jan. 6 interview. “In the big housing boom in the ‘80s and ‘90s … builders lost their core competency of understanding the supply chain. [Now] they do a turnkey, lump-sum contract to the subcontractors, so contractors were responsible for materials, and builders were like ‘Hands off, I don’t need to deal with that anymore. It’s your job.’ I think we blew it
“Now this is where you [building material dealers] come in, because this is important.,” Pinto continued. “You can imagine a skeptical builder who reads the book, is still a little skeptical. The first thing he does is he goes to his LBMer and he asks him, “Have you read this stuff? What do you think about that?” And the LBMer goes, “Yeah, I don’t know. I don’t think it’s that big of a deal. There’s not as much money in it as Ken says there’s going to be.” Whatever they say to poo-poo the idea at all, the builder is quickly going to dismiss it, conclude there’s no value in supply chain management, and it’s out the window.” Thus an opportunity is lost.
Here’s more from my interview with Pinto. The remarks are lightly edited and reorganized slightly.
Craig Webb: I think you said in the book that your standard guarantee to a prospective employer is that you would earn back 10 times your salary. Optimally, starting from zero with a regional sized company, what percentage of savings do you think you could achieve in the cost of constructing a house?
Ken Pinto: Everyone has a different starting point. … In my experience, and it’s big-builder experience, pulling 10% out of the cost of construction was pretty easy. Ten percent on materials equals about 5% to direct costs. That’s 2%-3% to net profit. That wasn’t even a lot of effort; once we started it just kind of fell in our lap. A couple of years after that, you want to get another 10%. That took a little more work but we did that too. So there was a lot of money on the table.
One of the quotes in the industry is “Where there’s mystery, there’s money.” If you don’t know how much you’re paying for the milk, I guarantee you’re paying too much for it. If you know and you’re okay with that, great. But if you don’t know, then you don’t know what’s on the table, and generally speaking, the more the mystery of how much you’re paying for products and services, the more you’re paying too much.
CW: The biggest builders in the country are far, far different than the average builder in the U.S. who might build five, 10, 20 homes in a year. You had some [employers] that were building four houses in a day. How small can you be and have what you recommend still apply?
KP: I think that a lot of smaller builders assume … that because they don’t have a high volume, they can’t add enough value to a distributor or manufacturer to benefit them in pricing and service availability, whatever. It’s not exactly true. It would be if our industry was a sophisticated supply chain, if we were the Toyotas of supply chain management. But the reason it’s not true today is because there’s so much the bigger builders aren’t doing that distributors and manufacturers want, need, desire, crave, that they’re not getting. If the smaller builders were doing it, it would multiply their value to the distributor or manufacturer. And that basically is adding two pieces of information: SKUs and date needed—30, 60, 90 days in advance. And that would magnify the value of the small builder to the supply chain.
CW: Let’s talk pricing and supply chain difficulties. I have a feeling that some people will read your book and say, “Yeah, what he says is well and good when we’re in calm times, but these are rough waters.” What’s your response?
KP: If we had better supply chain practices we’d have less of an issue today than we do. Beyond that, supply chain principles are supply chain principles are supply chain principles. It doesn’t matter much what the industry is or whether it’s in good times or bad times. The principles are the same. If you want to increase the production capacity of your supply chain, if you make them more efficient and give them an opportunity to become more efficient, then you get more services out of them. Oh my gosh, we need that right now.
In pricing, it’s the same thing. If we were taking costs—not margins—if we were taking costs out of the supply chain, then that’s sustainable. When you negotiate hard and an LBMer gives a price for a certain amount of material, [after a] time, the price of the material goes right back up. It’s not sustainable. But if you take costs out of their operations, then that is sustainable cost savings, which we hope gets passed down into pricing. Because we’re such a competitive industry, I think it will.
CW: Give me an action plan: Let’s say I haven’t thought that much about supply chain management in my construction company. I’m just worried about when the windows are going to arrive. I think some people would say “I don’t have time to read your book, and I don’t even know what I would start with if I were to start after I read your book.”
KP: It’s important for us to keep sharpening the saw, no matter how busy you are. …. One of things I do recommend is that you pick one or two or three categories. Drywall is pretty easy; it’s a big spend category and there are fewer SKUs in it, so it’s a pretty easy one to start with, and it’s one I detail out pretty specifically. But I recommend they choose the categories that they particularly have core competence in—there’s someone in the company or they themselves, who are really good with roofing, or drywall, or cabinets and paint. Whatever they are good at, start there first. That way, they can gain some confidence in the process. I detail out a process to get started with the drywall and that’s a pretty easy way to get started. Once people get started and find out how easy it is, they’re like “Oh my gosh, why haven’t we always been doing it this way?” And so I love those epiphanies that occur.
Even within the company that I worked for, I had to go from division to division and re-convince the whole team over and over again. They’d say “We’re better than that other division. We’re different. That’s why it worked for them but not for us.” I had to re-prove myself in every division over and over within my own darn company. So I understand the change that happens here and how difficult it is to push it through.
Finding ways to save money through supply chain management was so easy, it was like shooting fish in a barrel. So my job wasn’t finding those. My job was culture change.
CW: One of the editors of Builder [magazine] once said to me, when I talked about the need to improve supply chains, “Builders don’t care because the money is really in the dirt.” I would imagine that, over the course of your time, people said “I make so much more money developing an undeveloped piece of land and selling it that the relative cost of building a house doesn’t matter all that much to me.”
KP: I have two comments on that. First, you just pointed out how we kind of lost the core competency of construction operations in our industry, where our leaders—whether they are CEOs or the president or whatever—isn’t really an operations guy, he’s a real estate guy. So he buys a piece of land, improves it, and sells it. And construction operations are just a necessary evil to get that done so he can do his real estate deals. In our industry, even guys who grew up as operations guy and now are CEOs of the companies have kind of lost that urgency of improving construction operations.
The second part is that I remember walking into a division president’s office and talking about supply chain management strategies, about something I wanted to do. It was a little bit risky, given the time. And he’s like “I don’t think we need to focus that much resources on this because that’s not really where we make our money. It’s the land deals where we make our money.” And so I pointed out to him how the price of a house is broken down.
Forty-two percent of the cost of the house is broken down as direct cost from construction operations. .… You save 10% on your construction materials, you can make a big impact, at 5% net profit impact, to the price of the house. And I think the reason our industry leaders don’t realize that is because there hasn’t been a big movement to prove that that’s true. There have been a few like me who have done some great things, but it hasn’t really caught on and people don’t really understand what we’re doing. So I hope that the book makes some light bulbs go off and people say, “Hey, maybe we should pay some more attention to this.”
CW: When it comes to unit pricing, say for a framing material take-off, the dealer does provide it. The complaint I hear is that they’ll take it to the builder or the subcontractor, and the builder or subcontractor will blow right past that and go to the bottom page, look at the total, and make a decision based on that. And the dealer complains in two ways: One is that they aren’t looking at the unit prices. [The other is that] they’re also not looking at the work involved, the service provided by the dealer, to help figure out the best and safest way to build a home. The thing that concerns me is that you’re saying in the book that people really don’t understand the supply chain process. What I wonder about is whether builders, to a certain extent, don’t understand how to build a house.
KP: Yeah, core competencies are being lost. … In different parts of the country, builders understand different pieces of the supply chain. Nowhere in the country that I found, at least for large production home builders, do they understand the whole supply chain and are involved in making it better.
The one question that I asked that made it better in all the supply chains was “Hey, what is it that we do that costs you money?” And oh my gosh did I get an earful from every single entity that I asked that question to. And I learned so much. That’s the goal: To get builders and LBMers to talk to each other and say, “Hey, what can we do to lower each other’s costs?” That’s where the magic happens.
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