The Residential Construction Industry: Home Builders Operations and Supply Chain Management

The Residential Construction Industry:  Home Builders Operations and Supply Chain Management The U.S homebuilding industry historically has been very fragmented. Small businesses have dominated the industry, and given the high degree of cyclicality, high business failure rates have been the norm. The industry also has a reputation of not being very technologically sophisticated; generally lagging innovations in other industries by several years. Also, basic construction techniques have changed very little over the past 50 to 75. Given the lack of innovation or enhancement in construction methods, home building has seen very little improvement in productivity.

However, over the past two decades the industry has undergone significant changes with a wave of consolidation. Fueled by Wall Street capital to finance large land purchases, the top ten homebuilding companies accounted for almost a quarter of all new home sales at the height of the building boom in 2005, up from under 10% in the early 1990s. This consolidation was expected to provide larger builders with competitive advantages in terms of lower costs of inputs (labor, materials, financing), lower overhead rates, greater ability to control favorable land parcels, and ultimately higher gross margins and net income relative to their smaller competitors.

However, very little research had been conducted to assess if consolidation has produced the expected results. A group of three of original HCTAR members teamed up with researchers from Harvard’s Joint Center for Housing Studies to form a research team to focus on this industry using the general research approach HCTAR had developed to study the fiber-textile-apparel-retail channel.

The research team assembled a team of large national homebuilders, building product manufacturers and distributors drawn from the membership of the Joint Center’s Advisory Board to serve as an advisory panel for this study. This group helped the research team to develop research questions, draft questionnaires that were sent to major distributors as well as national and regional home builders, and personally encouraged their peers to participate in the study by completing the detailed questionnaires on their business operations. As with our previous research on the textile and apparel industry, site visits to suppliers and builders members of our advisory panel by the research team were a part of the questionnaire design.

At present, the research team has completed a draft of a book examining the impact of consolidation on homebuilder performance. However, the condition of the U.S. housing is currently very different from when we commenced research on this topic. This dramatic downturn has fundamentally changed the industry and the way it does business. Given these changes, the final portion of the book discusses the prospects for the industry and what homebuilders can learn from other industries that have successfully adopted many of the information technology, supply chain, production, and management practices that have been slow to arrive to this industry. You will find the abstract and table of contents of the draft book here.

For further information and research on housing and the residential construction industry in the United States, please visit the Joint Center for Housing Studies of Harvard University.

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