This message is for the new component manufacturers (CM) who have recently and will shortly be entering the component manufacturing industry for wood trusses or wall panels. First, welcome to the industry – it is very rewarding, but I must caution you about this new endeavor. It is not for the faint of heart, and it has complexities that are not so apparent. Here are some cautionary points concerning market conditions, vendor advisements, benchmarks, pricing, and process considerations to keep in mind as you move forward.
Did you know that the average net profit for a CM owned by LBMs is 5 to 10 points lower than that of independents? Yet, one former LBM CEO of 17 lumberyards with two CM plants stated that his two CM plants made up only 10% of their sales but then contributed about 30% of his net profits. He wished he had given the CM division far more focus and resources. The CM area or location is a manufacturing operation, not a retail yard. Please do not attempt to manage it as a typical LMB division. It takes a different mindset to manage day-to-day operations effectively. For more about this, see Truss and Wall Component Manufacturing for a Lumberyard – Pros and Cons.
Timing is everything, and even though now is not the best time to enter this industry, you must play the hand you are dealt. The coming years will present all CM operations with market conditions typical of this industry’s natural ups and downs. And currently, we are facing a downward trend that creates significant pressure on the profit margins of all CM operations, regardless if they are a new or existing operator.
Interest rates are going up to slow the economy. This rate hike will negatively affect every housing market, reducing the demand for new homes. Expect new and existing competition to fight harder to take from your sales. For more about this, see Don’t Be Blind to Simple Truths for the 2023 Build Season.
Lumber prices are dropping, and the peak pricing of the past few years is not coming back anytime soon. Cost markup is the most common method of pricing trusses and wall panels. As the cost of materials drops, this will significantly negatively affect your margins.
Every CM operation has spent tens of thousands, if not millions, to expand its manufacturing operation. All of this newly expanded manufacturing capacity will need to be filled to cover their capital expenses. Lead times for new orders will drop, and margins will fall dramatically from their peaks of the past two years. This leads me to talk about automation not being the cure-all many of you were promised by your equipment vendor.
The advisement many of you have been given by some equipment vendors may not have been the best for your situation. TDC has witnessed too many new and existing operations with vendor recommendation configurations with built-in manufacturing constraints that severely limit their total output and ability to expand as their manufacturing needs grow. These poor advisements can affect some or all of the different areas, such as material flow, equipment orientation, equipment recommendations, and building design, producing major constraint issues. The standard cure-all advisement is all too often about more automation to overcome the new CM’s manufacturing troubles, such as increasing labor costs. Yes, this significant labor shortage will continue for the coming decade, however, automation is not always the labor savoir that so many vendors claim it to be. For more about this, please see Labor Shortages Worse Than Most Understand and Automation is Not Going to Be the Cure-All Solution and Millions of Dollars for New Equipment and Building Investments are Being Wasted.
Yes, the wood components (wood trusses) are made of lumber, and typically lumber is priced and measured using board foot (BF). You will also find that BF is the most talked about and accepted unit of measurement in the CM industry. However, you will be at a competitive disadvantage if BF is used for scheduling, production efficiency measurement, and pricing for wood roof trusses. We can always learn things from industry leaders, whether we work with them directly or appreciate what they have accomplished. A perfect example comes from A-1 Industries and its commitment to using industrial engineering practices and work minutes. Although TDC has not performed consulting services for A-1 Industries, nor are they endorsing my services, their story reinforces a message that I cannot repeat enough – you must use reliable methods for basic unit measurement for pricing, scheduling, and shop efficiencies. For more about this, please see How One Wood Truss Industry Leader Uses Industrial Engineering Practices of Work Minutes to Excel.
This is a statistic that is not well-known by many. Industrial engineers are all taught the following.
New manufacturing facility’s expected rate of efficiencies
- 1st year ~ 60% of standard (+/- 10%)
- 2nd year ~ 85% of standard (+/- 10%)
- 3rd year ~ company reaches normal efficiencies
No matter the automation your company has invested in or the experienced personnel you have employed, the vast majority of new operations fall into the same efficiency rate pattern. So many CMs are spending millions on new equipment and other capital investments, yet they are unwilling to spend a fraction of that investment on process improvement. Your new operation will waste tens of thousands, if not millions, on poor and outdated practices as you struggle to achieve the promised margins and profits you intended to make. Remember, the CM division is a manufacturing facility, not an LBM division. This means one should embrace proper lean manufacturing and industrial engineering best practices. Maybe, just maybe, your company should make a small investment in process improvement training embracing lean manufacturing industrial engineering practices.
TDC’s tailored solutions are for the client’s specific needs. Go beyond the typical software and equipment vendor recommendations for your operations and do what many have dared to do. Embrace the Drummond Method, and your company can experience cost savings, and net profit gains that usually take months or years can be accomplished in weeks or months, resulting in an average of 3 to 6-point net profit gains for CMs. All areas are addressed, not just the manufacturing. Please do not take my word for TDC’s services, though. Read the public testimonials many current and past clients with decades of expertise and experience have been willing to give: https://todd-drummond.com/testimonials/.
Website: www.todd-drummond.com • Phone (USA): 603-748-1051
E-mail: todd@todd-drummond.com • Copyrights © 2023