The Traditional Building Materials Supply Chain Model
The traditional building materials supply chain (see Figure One) involves many different stakeholders each of which performs a variety of activities directed at delivering the right product to the right place at the right time.
Figure One—Traditional Building Materials Supply Chain Model
In this model (see Table One on next page), the manufacturer designs and manufactures products aligned with the needs of the homeowner and builder and sells them to the distributor or wholesaler. The distributor or wholesaler (e.g., lumberyard, electrical distributor, plumbing wholesaler) takes possession and title to the products, stocks them (along with a broad array of other products), sells the products to the contractor, bills and collects from the contractor and pays the manufacturer. The contractor generates a bill-of-material for the relevant commodity category for each home model, ensures that it complies with local building codes, aligns purchases of the materials with the construction phase, buys and kits the correct mix and quantity of products from the wholesaler or distributor, transports them to the job site, installs the products, bills and collects from the builder and responds to and manages post-installation warranty issues. While there are variations on this theme (e.g., the wholesaler kits the products and delivers them to the builders' job site), the supply chain generally works in this fashion.
The "Direct" Supply Chain Model
Table One—Supply Chain Activities and the Responsible Stakeholder
As its name implies, the manufacturer sells directly to the builder in the direct supply chain model. Consequently, these two entities perform most, if not all, of the supply chain activities in this model (see Figure Two).
Figure Two—Direct Building Materials Supply Chain
Compared to the traditional supply chain model (see Figure One), the distributor/wholesaler and the contractor do not perform product handling-related activities in the direct supply chain model. However, in many cases, the contractor continues to install the product at the jobsite. Therefore, we have included the contractor in Figure Two with the "labor-only" notation.
The appliance category is one of the earliest product categories to employ the direct model. In this product category, builders place orders directly with manufacturers like General Electric, Maytag and Whirlpool. As part of the order, builders specify whether they want the manufacturer to do one of three things:
- Deliver the products to a particular jobsite and lot number on a given date.
- Deliver the products as described in the first option, uncrate them and remove the packing materials.
- Deliver and uncrate the products as described in the second option and place them in the appropriate places in the home.
While the delivery personnel are capable of performing the activities described in this menu of service options, they are not licensed contractors. Consequently, plumbers, for example, must hook-up the water and gas lines when it is necessary. The delivery personnel will "plug-in" appliances, if that is all that is required.
In this example of a direct supply chain model, the manufacturer and builder have taken responsibility for each major category of activity, including those that the wholesaler/distributor and the contractor performed in the traditional model (see Table Two).
Table Two—Appliance Product Category Direct Model
For manufacturers in other product categories, the issue is whether they can architect a direct supply chain model that functions correctly. As the direct model for the appliance product category illustrates, manufacturers and builders must take responsibility for all of the categories of activities that are required to install an appliance in the right place at the right time. While the manufacturers and the builders removed the distributors/ wholesalers from this model and redefined the role of the contractor, they did not eliminate the fundamental activities that these stakeholders performed in the traditional model. For example, the builder creates the "bill of material" for the order, places the order at the right time, receives the product, takes title and pays for it. The manufacturer inventories the product, manages the order process, extends credit and collects accounts receivables, transports the product to the right place at the right time, installs it and responds to and manages post-installation warranty issues. With this reassignment of activities, this model ensures that all of the critical activities are performed consistently and on-time. In this direct supply chain model, the idea of "eliminating a step in the supply chain" does not translate into eliminating the activities that the "step" performed. Simply, it means that the stakeholder who traditionally performed the activities no longer does so.
Interestingly and importantly, appliances have a number of important characteristics that supported the transition to a direct model. They are generally free-standing finished manufactured goods that are installed at the end of the construction process. The installation is not labor intensive and does not require many additional parts or components. Due to these attributes, appliances do not typically pose a significant threat to a builder's critical construction path. If the appliance supply chain fails to perform the necessary activities on time, then the failure will most likely not result in costly delay and disruption.
Since many of the other building materials products do not share these important attributes, the manufacturer and builder must evaluate each one carefully. Together, they must determine if they can design an efficient direct supply chain model that performs all of the necessary functions while keeping the risk of delay and disruption at an acceptable level. In other words, manufacturers and builders must determine if a direct model is appropriate for a particular product category given its attributes and the potential impact that it might have on the construction process.
To start the evaluation, the manufacturer and builder must first determine if the "juice is worth the squeeze." In other words, is the potential cost savings available from redesigning the supply chain sufficient to warrant the significant amount of work required to do so? Does the transition to a direct supply chain model increase the probability that delay and disruption will occur? What is the cost of delay and disruption?
To evaluate whether a change in the supply chain is worthwhile, the manufacturer and builder must evaluate the characteristics of the product category. What is the aggregate value of the product category in a typical home? What is their ability to inventory, kit, ship, track, secure and release the products into the construction process consistently and on-time? Can existing resources perform the required activities or do the manufacturers and builders have to invest in new resources to enable these activities (e.g., personnel, facilities, information technology systems)? If new resources are required, what is the required level of investment?
What is the ramp-up time for these resources and how long will it take to get them to perform at the required level? Do the risk-weighted cost savings justify the incremental investments? The manufacturer and builder must also be confident that existing business models and practices accommodate the new supply chain model. Can distributors/wholesalers sustain their business models if they no longer sell to and support a segment of customers that they serve today? Can the distributors/wholesalers continue to serve the manufacturers in the other market segments? Will local trade groups accept a redefined role? Can the local trade groups sustain a profitable business model in the redefined scenario?
At the end of the evaluation, the manufacturer and builder must be confident that a direct supply chain model will deliver the right product to the right place at the right time. Each one must be confident that the potential savings justify the changes in their roles and responsibilities and that the costs associated with establishing an acceptable performance level justify the changes and the incremental investment.
As manufacturers and builders evaluate whether a direct supply chain model enables them to lower the total cost associated with purchasing products, they must ensure that the critical activities of the supply chain are performed consistently and on-time to avoid delay and disruption. To do so, they must identify, define and assign the required supply chain activities to the most appropriate entity because the idea of "eliminating a step in the supply chain" does not mean that a manufacturer and builder can simply eliminate the activities that the "step" performed. It simply means that different stakeholders take responsibility for them. If the direct supply chain model fails to perform the required activities consistently and on-time, then the costs of delay and disruption can quickly overwhelm the savings that a builder may realize on the lower net acquisition price that it may capture on a stock keeping unit level. Simply stated, a direct supply chain model may be appropriate for some product categories while it is not appropriate for others.