On/off tariffs, the pending hike in countervailing duties, and Section 232 National Security Investigation (which designates lumber as a “strategic good” on par with automobiles, steel, and aluminum) stalk the wood frame construction industry. Collectively and individually, these actions threaten to constrain lumber supply – producing open-ended price volatility. Last month’s article, “Component Industry’s Latest Nightmare: Tariffs,” discusses the importance of spreading out your supply-side risk. This article will talk about applying lean principles to procurement.
Leveraging technology to achieve more in uncertain times is a vital strategy for businesses. So, what do lumber buyers do? The essence is this:
The function of the lumber buyer is to minimize net delivered cost – plus inventory carrying expense – while maintaining the inventory required for production.
Procurement is a core business process. What sets the purchase of near-pure commodities like lumber and steel apart from other building materials/services is “price discovery.” Every sell-side offer in the softwood lumber channel is made “subject to prior-sale.” The buyer has the burden to discover product availability and price anew for each purchase. It’s an environment where market dynamics clearly favor the fast and informed.
Today, technology is changing how purchasing gets done. For decades, workflow automations (whether in plant or office) were hard-coded in software – users were “trained.” The BIG change is now the buyer gets to train the software, to configure their own workflow automations, execute their own logic. That’s a BIG deal for creativity, speed, and effectiveness, for a vibrant entrepreneurial future.
Lean Principles: Whether you’re looking to leverage mechanical power or information power, it’s a matter of optimizing operations (run results) or value add (change results).
Run Results: Today, buyers gather product and price data faster, crunch numbers faster, evaluate competing offers faster. The application of technology gives them the time and information they need to make smarter decisions, driving outcomes. Speed and accuracy matter even more in volatile, fast-moving markets – exactly when most lumber is purchased. Obviously, using technology doesn’t change the forces of supply/demand – using it won’t eliminate price volatility or the potential for supply disruption. What the smart use of technology offers buyers is the ability to identify a brief window of time to act (or not) and the up-to-the-minute information they need to make the most of it.
Change Results: Digitizing your lumber supply chain, and capturing fact-based data, brings new visibility to the procurement process, and new transparency to the lumber market. Across markets, transparency shifts the information advantage long held by the seller toward the buyer. You now have exclusive, proprietary information not available anywhere else. This is timely insight to not only shape purchase tactics/strategy, but improve the whole of business performance. Purchasing is on the leading edge of market information. You can curate and share your fact-based shopping data and analytics with the humans (or software) responsible for setting bid/sell prices, forecasting cash management. Knowledge (the insight to shape outcomes) is a sustainable competitive advantage (Value Add).
The dramatic impact even a small change in lumber cost has on the bottom line occurs because an increase/decrease in purchase price (CoG–lumber) has no impact on material handling or in-plant production. When sell price (revenue) is held constant (as quoted), any +/- change in the CoG–lumber falls directly to the bottom line. To see how this works, see my November 2023 article, “ROI: Turn Your Largest COST (Lumber) into a Profit Driver.” Model lumber’s contribution to your bottom line – you’ll quickly grasp the magnitude of opportunity – and profit dollars at risk.
Roughly 28% of the lumber consumed in the U.S. is imported, primarily from Canada. We know even a small imbalance in supply produces an outsized movement in price. Measuring and managing the procurement of structural lumber has never been more important to your business. Technology brings new transparency to the venerable process.
When your buyer(s) have the tools to automate their non-value-add activity, they gain the time to focus on higher value services, making better decisions, driving outcomes:
- Expand sources of supply/coverage.
- Identify alternate products with required design values.
- Hone tactics; evaluate alternate go-to-market strategies.
- Ask “what if,” dig deep into the data. Zero in on predictors of change.
- Strengthen relationships with vendors that save you the most.
- Become the trusted source for timely and accurate market data, insight, and trends. (When cost of lumber – your supply chain – is known, bid/price accuracy improves.)
As an industry, we build faster, cut faster, design better – thanks to technology. With near-term uncertainty of lumber supply, and ever-increasing market volatility, the imperative to apply technology to the lumber procurement process has never been clearer.
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.