It's been a a couple of years since I've written about the building products supply chain. Since my last blog a couple of emerging models have gained traction that are worth discussing. One, I am sure you are familiar with but the other may not be as well known or well discussed.
On-line sales and "zero-step" supply are the two emerging supply chain models I will discuss in this blog. Neither of these models are new but both are changing the dynamics of the building products supply chain/marketplace.
On-Line Sales
The emergence of on-line sales doesn't warrant the definition of a new supply chain channel. It's just a new front end for one of the existing supply chain channels (including zero step - see discussion below). And it's a game changer. On-line sales are permeating our everyday lives. Mall stores, age old retailers and specialty retailers are closing and being replaced by on-line sellers. On-line purchasing is being embraced, especially by younger shoppers and can sometimes be easier than making a phone call. And while malls and other shopping centers still appear busy, it seems they are being used as "touch and feel" aides for the on-line sales machine. Try it on/out at the mall and order it on-line. This is a trend that suppliers with product showrooms need to watch carefully.
The good news for those not embracing the on-line selling methodology just yet is that the immediacy of end user/contractor product demands along with after sales support requirements combined with a lack of planning and/or changes to job specs keeps the local (off-line) supplier top of mind - for now. And chances are there will be a need for local suppliers for a long time. But without an on-line presence, building products supplier sales will regress especially for special orders and other long-lead time products.
Zero-Step Supply Chain Model
The zero-step channel has gained significant ground in building products supply. Zero-step has always existed but has received very little press. This selling methodology has been a secret of building products manufacturers for many years. Manufacturers are stepping up their use of zero-step distribution but they are reluctant to talk about it since most of their product still goes through (and will continue to go through) the 1 or 2-step model. Openly discussing the zero-step model is a bone of contention with the manufacturer's main customers.
To define the zero-step model you will recall from my previous posts that the number of stops between manufacturer and end user (i.e. contractor) defines the channel. So when material goes from manufacturer to distributor (1) to dealer (2) to contractor - the product has gone through a 2-step distribution model. The 1-step model cuts out the distributor and the zero-step model cuts out both the distributor and the dealer such that material flows directly from the manufacturer to the contractor with zero intermediate steps.
The reason why the zero-step model is growing is due to the continuously improving economy. With an improving economy, contractors are consolidating and growing which sets them up for volume purchases from their suppliers and eventually the manufacturer. Very few manufacturers will NOT sell directly to a contractor if basic conditions for the purchase are met. Some of those conditions are: truckload or other required minimum purchases, an annual quota, delivery to a warehouse, agreement to payment terms, etc. The bottom line is that the manufacturer retains most of the power in their relationships with building product supply chain players so they have the ultimate call on how many distribution steps are necessary for their products.
The insulation industry has been stepping up their use of the zero-step model over the past few years as have other building products manufacturers. Indeed the newest entrant to insulation industry, the manufacturers of (drum) spray polyurethane foam, are using zero-step as the default selling methodology and prime channel choice. And to the amazement of some, the custom door industry, lead by Masonite, is testing the zero step model with their new acquisition Advisar.
Summary
All players in the building products marketplace must be aware of and address these supply chain changes. While almost every building products supply chain company can do something to become relevant with on-line sales there's not much an intermediary can do about zero-step distribution - or can they?
Tuesday, September 5, 2017
Sunday, February 10, 2013
Distribution Partners for New Building Products
Every so often I am asked the question - “Who is the best
partner to launch a new residential building product with?” Most of the people that ask this question are startups that bringing a new (i.e disruptive) product to the building products industry or are an established company in
another industry looking to use their core competencies to solve a latent problem
in building products.
Usually the inquirers have done some preliminary research
and have a good understanding of how the building products supply chain works. But they are not certain as to which supply chain partner offers the best chance for
success. There are many options
available – Wholesaler (2-step distributor), Specialty Distributor (1-step
supplier) and Big Box retailers are all viable options. But when it comes down to the sizable effort
of bringing a new product to market, it’s the 2-step distributor that is best
suited to develop and grow a new product.
Consider just a few of the 2-steppers core strengths:
2-Stepper Strengths:
1.
Industry Connections: The
2-steppers have been around for a long time.
They have brought countless number of new products to the industry and
have great industry connections, both upstream and downstream in the supply
chain. Their top notch procurement teams
and well informed sales forces educate vendors and customers on industry trends
and market shifts to which they are uniquely aware.
2. In-house Expertise: Most 2-steppers have
done new product development in their past and are experts in recognizing
products that solve latent needs. Many
of the mainstream products used in home construction today stem from efforts of
the 2-steppers (vinyl siding, OSB, engineered lumber, etc). They have the skill and wherewithal to create
markets for any product they deem worthy.
3. Break Bulk: Without question, their biggest value-add in
the marketplace is their ability to take large quantities of product and break
them down into smaller, job-sized lots.
When you are ready to go to market, the most cost efficient way to ship your
product is in large quantities (trucks/railcars). The 2-steppers are set up to facilitate these
sized shipments.
4.
Market Proximity: Most 2-steppers
are in major big building market areas and some of the leaders in 2-step distribution have
multiple facilities in multiple markets.
This allows the manufacturer to place products closer to the market where they will eventually
be sold. This reduces or eliminates deal
breaking lead-times and freight charges from distant, centralized storage locations
for job-sized lots.
Other Options
One-Stepper: So why can’t the specialty distributor jump
in and champion new product’s market development? Two reasons - time and risk. The 1-steppers have done an incredible job of
growing their business model by providing their customers with a narrow but
deep product offering. Most of their sales
and marketing efforts promote established products and solve problems with
existing and proven solutions. New
products in the 1-stepper realm are improvements upon existing products that
are tried and true. Their appetite for
(real) new product risk is small.
Big Box Retailers: Unless you’ve got an “in” with one of the Big
Boxes it’s unlikely that you will break through and get your product on their
shelves. You could spend an incredible
amount of time and effort only to have the gatekeepers at the Big Boxes defer
you. Truth is the Big Boxes like to engage
with products that have been introduced in the marketplace and are starting to
gain traction. The Big Boxes take such
products to the next level of success.
They won’t spend priceless shelf space on introducing unproven products
- the opportunity cost is too great.
Others: Direct to contractor and on-line sales
options are non-starters. Contractors can’t
buy in sufficient quantities to make it cost effective and are notoriously risk
averse regarding new products. The on-line
sales option is still developing for building materials. Contractors, the real customers for a new
building product, tend to be relationship people. They just haven’t warmed up to internet
buying because when unanticipated problems occur on job-sites it’s best to have
a good relationship with a local supply house to solve the issue.
So the 2-stepper is in a unique space to take the risks
associated with new product introductions and market development. But don’t expect the 2-stepper to do all of
the heavy lifting! If the manufacturer
and one of the hundreds of 2-step distributors located in the US market can
iron out the details of a program, it will be incumbent on the manufacturer to focus
their marketing efforts on creating demand for their product while the
2-stepper utilizes their sales force to work on the push-through sales effort
with their existing customer base. This
2 pronged effort will be critical to developing awareness of the new product in
the industry and its acceptance in the marketplace.
Sunday, November 11, 2012
Why 2-Steppers Exist in Building Products Distribution
Why Does 2-Step Distribution
Still Exist in Building Materials?
By Rod MacKenzie
The title of this article is one of the more frequent
questions I field when I review the building materials supply chain with a
client. It’s understandable - while
other industries have shortened their supply chain, the structure of the
building products supply chain has remained remarkably intact despite all
attempts to shrink it. So why does this
anachronism of a distribution model still exist? The answer is one part history, one part
product attributes and one part business logic.
Building Materials
Supply Chain History
Long ago, the building materials supply chain had been
hamstrung due to inefficient means of transportation. Building products, which tend to be awkward
and bulky, were manufactured and sold in a very small geographic area. But railroad expansion, interstate highway
construction and a deregulated trucking industry all played roles in improving
shipping efficiencies and allowing manufacturers to reach a wider geographic
audience.
Equally important to reaching a wider audience was the
development of the “middle stage” or “2-step” wholesaler. These entities have played a vital role in growing
the reach of the building materials manufacturers by taking large quantities
(shiploads, barge loads, railcar and truckloads) of material and breaking them
down into smaller quantities for resale in the marketplace. In addition, their proximity to the market is
critical as most manufacturers are in rural areas near sources of raw materials
(i.e. near the trees) and must ship efficiently (i.e. full truckload or railcar
load) to keep costs low.
Previous to the 1980s, the 2-steppers were the perfect
medium – they took product from a multitude of manufacturing partners and
distributed a broad array of products to a multitude of dealers/retailers. They were the proverbial hourglass of
distribution – many to one to many.
Their position as market maker couldn’t be challenged as their customer
base - the dealers/pro-yards, hardware stores, contractors and home builders
were extremely fragmented and unable to congeal enough buying power to purchase
material direct from a manufacturer.
But in the early 1980s, several new industry players emerged
to balance the power in the supply chain.
First, the arrival of the mega home improvement center put many of the
2-steppers core customers, the local dealers (that dabbled in home improvement
products) out of business. As the “big
boxes” grew, they created a new customer segment (the DIYer) and built their
own 2-step distribution network to feed their ever growing number of stores. Ever since, the 2-stepper has only been a bit
player in assisting the big boxes with their supply chain needs.
Second, after the cleansing of weaker dealers in the
industry by the mega home improvement centers, a dealer consolidation led by ProBuild,
Stock Building Supply and others concentrated the purchasing power of a very fragmented
market. These new collectives finally
had the purchasing power to challenge the 2-stepper on pricing and arranged for
shipment of commodity products (the bread and butter items of the 2-steppers) directly
from manufacturers.
Lastly, the emergence of a new supply chain player, the
“specialty dealer” or 1-stepper – came to market with a new business
model. Instead of the wide but narrow
product offering of the 2-stepper, the 1-stepper came to market and focused on
specific product categories - a narrow but deep product offering that played
well with job-specific contractors.
All of these industry changes took business away from the
2-steppers and evened out the power in the supply chain. The changes even forced some major
manufacturers to divest their 2-step wholesaler operations (i.e. Georgia-Pacific
divestiture of what is now BlueLinx). These
changes didn’t render the 2-step distribution model obsolete - it simply
redistributed the power in the supply chain relationships. The 2-step distribution model in building
materials continues to this day based on its legacy customer base and its
continued value-add in the supply chain.
Product Attributes
Another factor contributing to the ongoing existence of
2-steppers is the attributes of the products they handle - think awkward, bulky
and expensive.
Awkward
Many of the products handled by 2-steppers are difficult for
material handlers. For example, engineered
lumber, (wood-I-beams, LVL lumber, etc) usually come off the manufacturing line
in 48’ lengths. But the 2-steppers have
specialized equipment, storage facilities and delivery equipment to handle
these type products. They also have
equipment for cutting these beams to desired length for the customer, if
needed.
Bulky
A railcar load of plywood or lumber takes up a good bit of
space (about 2.5 truckloads). A truckload
of vinyl siding and related accessories can take up a good bit of space as
well. The 2-steppers have facilities to
store these products (out of the weather if the product is not wrapped to
protect it from the elements) and maintain a standing inventory. In addition, due to their awkward and bulky
nature, no one has come up with a UPS/Federal Express shipping option for most
key building products - the 2-stepper is
it.
Inventory Cost
As noted above, the industry changes of the 1980s led to a
channel shift in how many building products went to market. The big box distribution centers, 1-steppers and
consolidated dealer yards all started taking deliveries of relatively low cost,
fast turning products directly from manufacturers. But the inventory items that were expensive
to buy (i.e. moulding $50,000+ per truckload) and had longer inventory turns
stayed with the 2-stepper. While the
2-stepper continues to stock and sell commodities (lumber, plywood and OSB), their
product offering is weighted more to specialty building products than ever
before.
Business Logic
Do you remember the basic physics lesson that “energy cannot
be created or destroyed”? Well the building
material supply chain steps/activities are sort of like that. As much as people try to simplify the supply
chain, either on a white board or in real-life, they find that supply chain
steps cannot be eliminated – they are simply transferred. Companies can be eliminated from the supply
chain, but the underlying activities of those companies must be handled by someone. As mentioned above, the big box retailers buy
as much product as they can direct from the manufacturers to avoid the 2-step
markup. When doing so, they can’t bring
all that material directly into their stores.
They must break bulk in large corporate owned facilities (their Region
Distribution Centers) and ship mixed truckloads of product on multi-stop runs
to their stores. Their bet is they can
do it better and cheaper than the 2-stepper albeit with the same number of activities. But to do so, they had to duplicate something
that already exists and perform the same activities that the 2-steppers have
been refining for the past 75+ years at a lower cost to replace them – all at a
very high capital cost. The same logic
applies to the 1-stepper and the dealer consolidators.
Also, the local dealer/lumberyard still exists. Contrary to popular belief the Big Boxes are
not everywhere! Many dealers are
fiercely independent but their order sizes are normally smaller than truckload
quantities (and during the recent recession even smaller). In fact, during this prolonged period of
residential building malaise, the 2-stepper has been leaned on more than ever
by the dealers to reduce their inventory investment without sacrificing order
fill levels.
Summary
So the 2-stepper is alive and well. In recent work on the building materials
supply chain, I was surprised to find almost 1,000 2-steppers in North America !
Although their power base has shrunk, they still play a key role in
servicing smaller dealers, storing and handling awkward and bulky products and
keeping stock of more expensive, but slow turning specialty products.
In addition to these key functions, I believe that the
2-steppers can play a pivotal role in assisting manufacturers launch new
products in the marketplace. They have
the reach and scale to develop markets for new products.
Thursday, September 27, 2012
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.
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.
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