Drummond Warns Good Times for CMs May be Ending

Industry News ,

Originally Published by: ProSales Magazine by Todd Drummond — March 28, 2022
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What a ride it has been for the vast majority of the component manufacturing (CM) for wood trusses and wall panels in North America during the past few years. The demand for new homes outpaced the supply capacity of most homebuilders and those who supply them. This record-breaking rate of building supply needs created the perfect storm for many CMs, which created long lead times and virtually a no price limit market, resulting in historic record-breaking net profits. (See my January article, “Record-Breaking EBITA Exceeded Mid-Twenties for Many Component Manufacturing for 2021.”) Sadly, these good times are coming to an end soon. The following three emergent (negative) trends may very well bring an end to this record profitability everyone has been experiencing. What more can your company do to protect and improve net profits beyond capital investments?

Everyone, and I do mean everyone, is expanding their manufacturing capacities. Last month’s article, “Millions of Dollars for New Equipment and Building Investments are Being Wasted,” explains how many are making costly investment errors. Despite the costly errors by many CMs, the fact remains that all the new equipment and manufacturing facilities expansion will add far more manufacturing capacity to the markets. One should expect all this new equipment coming online to have the effect of shortening the lead times, and therefore competitive pricing, of new orders by late summer. By the time August/September comes, it will allow the CMs to get their new equipment installed, staffed, and most of the bugs worked out to have a meaningful impact to help their manufacturing capacity expansions.

Additional pressure on competitive pricing should grow steadily throughout 2023 with the addition of increasingly more new equipment and facilities expansions coming online. Today, most new orders for new equipment are at least one year from a promised delivery date. All the delayed equipment installs will keep arriving and being added to the CM locations as fast as the equipment dealers can produce and deliver the new equipment. As the continued manufacturing capacity is added to the market, what effect do you think it will have on the demand and supply pricing model?

Truss and wall panel component manufacturing is not the only capacity expansion happening. Additional lumber mills and other types of much-needed commodities are also expanding manufacturing capacity to meet the needs of their customers. Do a web search about expanding lumber mills, and you will find the same pattern in every region of North America, all stating they are ramping up to meet the increased demands. Do you think the record pricing of lumber will be maintained at these high rates forever? Will the price/cost of commodities finally drop despite historic inflation? It is anyone’s guess, but judging by the additional capacity, history has shown that competitive pricing is more likely. Everyone knows that most components are based on a cost markup method, so what do you think the inflated margins based on high lumber pricing will do once the commodities prices fall?

So, how will you respond to those three trends? One of the most significant issues of having record sales and profits is that money hides many sins. Speaking as a lean manufacturing operations guru, I cannot emphasize enough that the term “good enough” is costing many companies millions of lost additional sales and profits. Too often, “good enough” is the standard default. Companies are willing to spend millions on new equipment and buildings, but when it comes to process and make intangible improvements, spending a fraction of the capital investment on outsiders’ advisement for process improvement is too far a leap for too many.

Is your company’s budget only for new equipment, but no formal training for your employees? All too often, we think we see the situation clearly regarding a major expense for equipment while minimizing the risk. Yet I am told much too often, “Todd, we invested in such-and-such and did not get the bump in production we were led to believe would happen. Could you help us get the productivity that we were promised?”

Like it or not, the price wars are more than likely returning. With all the changes within your company, do you feel there is no room for improvement beyond capital investments? Maybe it is time to spend a fraction of your investment budget on refined lean manufacturing training for all areas of your company, not just the manufacturing, that has a straight payback measured in months with years of continued profit improvement.