Today, 93% of America’s new homes are built of wood-frame construction. If fully enacted, the implemented and pending tariffs will reduce lumber supply and trigger an increase in lumber price, resulting in a one–two punch for the wood-frame construction industry.
As we once again brace for a volatile cycle, we can look back at other significant lumber cycles of the 21st century and see what we might be able to learn from them: the 2006 boom cycle, the 2009 bust cycle (Great Recession), and 2021 Covid-driven cycle.
Observation #1: The 2021 cycle (Covid) was supply driven, while the 2006 boom and 2009 bust cycles were demand driven. Commodity traders across markets/exchanges know it is changes in supply, not demand, that dictate most price movements. Even a small imbalance in supply produces outsized movement in price.
Observation #2: When markets ‘go postal’, extending vendor reach improves outcomes. Volatile markets reward quick and accurate price discovery. During Covid, it paid to shop.
Summary Findings, 21st Century Building Cycles
Periodically, BuyMetrics measures the effect shopping via our service has on the Cost-of-Goods (CoG lumber) of large clients using our technology. The full report is available on BuyMetrics’ website at https://www.buymetrics.com/papers/CaseStudy.OutsizedCoGSavings2021.pdf and the following are some highlights.
Price Spread: During the 2006 boom and 2009 bust cycles, the average spread between an awarded purchase order (lumber PO) and next-best vendor offer was 1.9%–2.2%. During Covid, the gap between the best offer and next-best offer doubled to 4.06%.
Reach: During the 2009 bust cycle, lumber buyers shopped on average 7.5 vendors per PO awarded. During 2021 Covid, lumber buyers (using BuyMetrics) shopped on average 20.6 vendors per awarded PO, tripling (3X) their vendor contact as they reached to cover urgent need for wood. Expanding reach, particularly in volatile markets, improves the odds of: (1) successfully sourcing supply-constrained material, and (2) purchasing from the vendor with lowest cost/best value.
Low Win/Low Share Suppliers: In all three cycles, the percent of purchase orders (POs) awarded to low win/low share suppliers remained relatively constant at about one-third of client purchases (29%–36%). In fast-moving, volatile markets, deals need to get done before they vanish. When markets run, reach is too often sacrificed for speed. CMs (shopping via traditional methods) missed the value secondary suppliers contribute to the mix.
Lost Opportunity Cost: During Covid, consistently shopping more primary and secondary vendors produced twice (2X) the overall CoG lumber savings achieved during the demand-driven cycles, 4.06% vs 1.9%–2.2%. In 2021, secondary suppliers added $390,000 in lumber savings to the bottom line for every $10 million in lumber purchased.
If implemented, tariffs will trigger a supply-driven cycle. Buckle up.
Valerie Hansen is the Founder and Chairman of BuyMetrics Inc. She is a 47-year industry veteran and the former owner/CEO of Custom Components Company, Racine, WI (sold 2008). From 2000–2019, she earned 21 U.S. patents for inventions in the technical areas of finance and data management. Privately serving industry-leading CMs since 2000, the BuyMetrics® commodity procurement platform automates and informs the purchase of lumber and other volatile commodities.