Construction’s Opportunity to Tilt the Supply Chain in Its Favor

Construction companies are pushing forward despite current uncertainty.
By Brett Polglaze
June 28, 2022

The construction industry, like many others, abhors uncertainty. Yet it’s exactly what manufacturers, contractors and developers have dealt with for the past two years, with no signs of clarity on the horizon. We all see the ongoing headlines of supply chain delays, increased housing prices, labor shortages, companies overhauling procurement and delivery strategies, etc. While these are certainly headwinds, the playing field remains level for the industry at large; companies are pushing forward despite the incomplete map of what lies ahead.

It’s not all doom and gloom. Many construction sectors are on firm ground. The multifamily housing sector did well in 2021. The warehouse and distribution sector also experienced noticeable growth over this past year. And onshoring efforts continue to drive activity for manufacturers.

Where bottom line battles are being won, and winners are emerging, are through strategic inventory strategies; ones that minimize risky exposure to overstocking items with short shelf lives and maximize the use of discounts and rebates (think tiered pricing, leveraging buying power, consolidating suppliers, etc.). A common practice we’re seeing from the manufacturers and construction companies we work with is an ability to focus on one or two key pieces of a supply chain and see how the dominoes fall from there.

For example: Oftentimes this begins with a hyperfocus on a tier one supplier where homebuilders are transitioning from ad hoc purchases or buying items in the single digits towards strategies that lock in cost savings if they exceed a certain number of parts ordered, but if demand weakens, they’re also not on the hook for buying and storing these parts.

In fact, we’re beginning to see construction companies embrace more of the mindsight that’s seen in the manufacturing world that’s driven by labor force pressures. Workforces are now behind the scenes building trusses and walls at central locations that are then dispersed across building sites. Taking it a step further, builders are even putting drywall on during these stages. They’re taking the concepts of repetitive manufacturing, which provides opportunities for scaling up, and creating less downtime with existing staff.

Through tech advancements and economies of scale, smaller organizations are embracing the same commodity-based pricing strategies the large players have been enjoying for some time now. With the price of wood, metals and paint expected to increase again this year, it’s a major win for anyone who can afford to pay a couple of points now to hedge against anticipated price hikes.

While it’s impossible to predict the future, we do see that housing starts and housing demand are confirmed through the end of the year. Based on committed contractual agreements, we forecast the price of commodities to at a minimum remain the same, and most likely increase another 6-10%. In addition to more expensive commodities and raw materials, the labor shortage plays a major role in increased prices across the board as well.

Historically speaking, increasing inventories would be a leading indicator to decreasing customer demand and potential economic turmoil. That is not the case today, with pre-pandemic levels of consumer spending along with high customer back orders and low stock, producers are doubling down and building up inventory levels even higher. One key question is how long until economic consumption returns to the status quo?

There is no crystal ball for this question and now is a good time to develop risk mitigation strategies to remain nimble in inventory buildup, particularly in high-cost goods, those with expiration dates and any niche products that have very specific uses. Tried-and-true strategies of risk mitigation still work, but careful examination of material cost exposure is also prudent right now. Locking in customer contracts for longer periods of time, getting customers to share in the risk of expired or specialty material obsolesces, and diversifying the suppliers of high-cost goods are solid first steps to protecting bottom lines.

It does not appear to be time to start slowing inventory buildup. But by keeping a keen eye on consumer demand and inventory patterns, along with proactive risk mitigation strategy on key components, the construction industry can shore up against future economic swings.

The construction industry will see a continuation of many trends that emerged in 2021. However, there is reason for optimism as the coming year holds much promise for those with savvy inventory strategies.

by Brett Polglaze

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