Building Materials Supply Chain for US Home Building - The Basics

The Building Products Supply Chain for US Home Building - The Basics -
By Rod MacKenzie, Grandview Consulting

Many years ago, building products were generally manufactured and sold in a very small geographic area by the very same manufacturer due to inefficient mean of transportation. But railroad expansion, interstate highway construction and a deregulated trucking industry all played roles in improve shipping efficiencies and have allowed manufacturers to reach a wider geographic audience. Equally important to the increase of manufacturer’s reach was the development of firms that moved their product in the marketplace. There are several levels and many categories of building material distributors, each having their unique value-add in the supply chain for US residential home building. But understanding the different levels and categories can be challenging. Terms used to describe supply chain players can confuse and jargon created to define supply chain actions often shrouds the industry’s inner workings. This paper strives to reduce some of the mystery associated with the building products supply chain and reveal the reason why they exist – their unique value-add. The building products supply chain can be depicted as follows:

 Manufacturer [sells to] Wholesaler [sells to] Retailer [sells to] End User

Note that two types of companies link manufacturers with end users - wholesalers and retailers. Firms in these two segments distribute (or broker) essentially all residential building products to end users.

Segment Players and Value Add
Manufacturers 
Manufacturers add value in the supply chain by developing and producing high quality products in plants that are strategically located close to their raw material source. They ship manufactured goods in bulk (ideally railcar loads) to the market areas where they have the best chance of being sold quickly; all at the lowest possible cost. Along the way, they must compete with other manufacturers like them (domestic producers) and some unlike them (international producers) who are all eager to be “top of mind” with end users.

Core Value Add: New product development, production and bulk shipment of high quality product at the lowest possible cost.

Examples: Dow Chemical, Louisiana-Pacific, Weyerhaeuser

Wholesalers 
Wholesalers (Asset Based)
The wholesaler is a true middleman who buys products directly from industry manufacturers and sells those products to retailers in their geographic delivery area. Since the wholesalers sell to retailers who sell to end users, wholesalers are known in the industry as “mid-stage distributors” or “2-steppers” since they sell almost exclusively to retailers – thus 2 transfer steps between the manufacturer and end user. Most have a local or regional presence and take bulk shipments (carloads, truckloads) from industry manufacturers, store them in cavernous buildings in key home building markets, break bulk and ship out smaller quantities (multiple/single units and sometimes pieces) to the retailers.

Core Value Add: Acceptance of large quantities and break bulk service of broad array of building products 

Examples: BlueLinx, Dixie Plywood, US Lumber

Wholesalers (Non-Asset Based)
These entities, also known as “office” wholesalers, assist manufacturers by buying production and shipping the product directly to retailers or other wholesalers. They exist on very small margins as there overhead is relatively small as they do not have the capital investment of an asset based wholesaler. 

Core Value Add: Outlet for mill production; facilitates direct and often lower cost shipments for retailers.

Examples:  Tampa International

Buying Groups
Buying groups are member-owned organizations that exist to leverage the purchasing power of their member firms. Buying groups buy building materials direct from manufacturers as well as from wholesalers. In either case, they negotiate low prices and rebate programs with their purchasing sources and distribute discounts in proportional shares to their members.

Core Value Add: Leverage the purchasing power of member firms, warehousing and break bulk of some products

 Examples: ENAP, Lumberman’s Merchandising Corporation, Independent Builders Supply Association 

Cooperatives
Cooperatives are organizations that, like buying groups, are member owned and also seek to leverage the combined purchasing power of their membership. But, in addition to purchasing, cooperatives share best practices across multiple business disciplines with their members.

Core Value Add: Leverage the purchasing power of member firms, promote best operating practices and warehousing and break bulk of some products

Examples: Ace Hardware, Do-It-Best Corporation, Independent Lumber Dealers Cooperative

Retail Lumberyards
These entities, sometimes also referred to as a pro-yards or dealers, exist to service the building contractor and home builder. They stock a broad array of products, perform some light manufacturing (pre-assembly of doors/windows and construction of roof/floor trusses) and provide just-in-time job site delivery. Most pro-yards are local and fiercely independent yet may be part of a buying cooperative. Larger Pro-Yards can be multi-regional in scope and have been building their networks through acquisition of smaller dealers in key building markets.

Core Value Add: Ability to source products needed by contractors/builders combined with expedient job site delivery capability

Examples: Pro-Build, Builder’s First Source, Stock Building Supply and local independent lumber yards 

Specialty Distributors
The companies that occupy this space are a combination of wholesaler and pro-yard. These companies buy direct from manufacturers and sell directly to contractors and home builders. They carry a narrow but deep product offering that answer the needs of contractors that build well defined sections of a home – predominately insulation, siding and roofing. They are often referred to as 1-steppers as they are the only distribution step between manufacturer and end user.

Core Value Add: Low cost retailer for well defined portions of a home buildout.

Examples: ABC Supply, Beacon Roofing, Harvey Industries

Home Centers
There are two types of Home Centers – warehouse and traditional. The warehouse style home center was made famous by The Home Depot. The warehouse style home center is usually in excess of 100,000 square feet and stocks multiple thousand of skus. The traditional style of home center is a smaller footprint retail store with a smaller number of skus. The home center retail store’s main business is serving the repair and remodeling trades and “do-it-yourself” homeowners. Although the stores are not setup to service contractors and home builders, they do get “fill in” business from these end users when needed supply is not available at lumberyards or specialty distributors.

Core Value Add: Wide variety of building products with many outlets.

Examples: The Home Depot, Menards, Sutherland’s

End Users
Contractors
This is where the rubber meets the road in home building. There are on average between 35 and 40 trades needed to complete a home. Most contractors specialize in certain home building segments. They buy construction products from (mainly) lumberyards and specialty distributors and install the products at the job site. They are mostly local, independent entities that seek to partner with local home builders and rely on customer satisfaction and word of mouth to maintain their business momentum.

Core Value Add: Procurement and installation of building products at lowest cost possible. 

Examples: Flooring contractors, framers, wallboard installers

Home Builders
Most home builders don't build homes! This may sound strange but the top tier of builders in the US are not the ones that physically build homes. They turn the job of building their homes over to a host of contractors.  In fact, there are approximately 37 trades needed to complete a home build - framers, plumbers, electricians, painters, etc.  No builder can possibly hire and maintain a staff of this magnitude. Instead the home builders focus on land development, home design and coordinating independent contractor crews that do the actual building.  The builders offer contractors certain parts of the home build at a set price.  The contractors then buy their product needs from pro-yards and/or specialty distributors.  Some builders demand certain branded products be purchased/used in their home builds as a result of a rebate program negotiated with a product manufacturer.

Core Value Add: Building homes to meet consumer demand; facilitator of new product development and driver of new product acceptance in the marketplace Examples: Big - Beazer Homes, NVR, Toll Brothers Small – Local area home builders

Summary:
From end to end, there are many firms that are involved with the distribution of building products. Building materials segment players are well defined and their roles and value-add are clear. While the supply chain is not terribly complicated, product flows can be confusing. There are many channels that products can take to get to market. This leads to some confusion but there are historical, product attribute and business logic reason why some products flow in certain channels.

End Notes:
- Attempts to consolidate various segments of the industry have taken place in the past few years. Most of the consolidation in the last 20 years has been occurring in the retail segment. Look for consolidation activity to resume once the US economy is stable and a housing recovery is underway.
- The building products industry is very hard to measure. The independent nature of the entities and their willingness to expand into non-residential markets plagues the measuring process.