Volume 10, Issue 1 - January 2009

We Will Survive
Suppliers are Making Changes and Hope to Emerge Stronger than Ever
by Tara Taffera

The news of door and window manufacturer plant or company closures have dominated the news lately. But what about the suppliers that serve these companies? How do such closures affect them? And are they surviving? Many companies that supplied products to downsized manufacturers would be lying if they said such closures haven’t touched them. But the good news is many are taking this as an opportunity to get lean, pursue other opportunities and markets and serve their current customers better.

But they’re also being forced to tighten credit limits, etc. Some suppliers already had firm policies in place but others are just now having to tighten their practices. The industry is definitely changing.

“I’ve been in the industry for 25 years and before it would go up and down, but now people aren’t buying homes because they [have] lost their jobs,” says Mark Toth, window sales manager for H.B. Fuller. “There are other reasons why our industry is challenged beyond the traditional ones.”

Fix Housing First

The suppliers who serve door and window manufacturers aren’t the only ones suffering. From those that sell carpet to furniture to linens, all are affected. If people aren’t buying homes they aren’t buying furniture or other products to go in those homes.

The National Association of Homes Builders (NAHB) says it knows how to start to correct the mess that is the housing industry. Speaking to reporters on December 17, Jerry Howard, NAHB president and chief executive officer (CEO), spared no words when he summed up the current state of the housing market. “If any of you have doubts about how bad the market is the data released this week tells the story,” says Howard. “The housing market index remains at an all time low. Housing permits are at the lowest levels ever recorded—the lowest since World War II as determined by our analysts. Then couple that with foreclosures and shattered consumer confidence … All of this is not only contributing but is in our view the root cause of the recession.”

Phil Hoffman of Hoffman Custom Built Homes in La Place, La., and Patrick Abercrombie of Lowe’s Cabinet and Lighting Gallery in Cleveland, Tenn., also spoke about how this will affect all aspects of the building industry.

Hoffman, a third-generation builder, who once had six employees, including his son, whom he had to tell to go get another job, said the phones stopped ringing in the middle of 2006, which had a huge effect on his business. “We’ve gone through all of our family savings in the last 20 months,” says Hoffman. “Now it’s just my wife and I. I haven’t touched my retirement, but I don’t look at my statements as the last time I looked they were down 40 percent.”

“Building a house takes 80 to 100 people,” he says. “We just affect so many people.”

To fix this problem, the NAHB is spearheading Fix Housing First, one of the largest coalitions of housing advocates ever assembled in the United States, to push for a housing recovery plan to revive the economy.

Fix Housing First consists of more than 600 organizations, home building companies and manufacturers pressing for a major stimulus package to stem the decline in home values, stabilize financial markets and reignite consumer demand. To get the economy moving again, the coalition is urging Congress to support enhancements to the home buyer tax credit and provide below-market 30-year fixed-rate mortgages for home purchases.

The housing stimulus proponents are calling for significant enhancements to the current $7,500 tax credit for first-time home buyers, which Howard says had virtually no impact. Among the improvements: 
• All primary home purchases between April 9, 2008, and December 31, 2009, would be eligible; 
• The credit amount would be increased to 10 percent of the price of the home, capped at 3.5 percent of FHA loan limits, bringing the credit to a range of roughly between $10,000 and $22,000; 
• The current recapture provision would be eliminated. Repayment would only be required if the home was sold within three years; and 
• The credit would be available at the time of closing, making it easier to be used as a down payment. 

The second component of the stimulus plan would provide qualified home buyers with 30-year fixed-rate mortgages at 2.99 percent on contracts closed until June 30, 2009, and 3.99 percent on closings between June 30 and December 31, 2009.The American Architectural Manufacturers Association (AAMA) is one group that has joined the coalition.

“A majority of AAMA members have been adversely impacted by the dismal drop-off in both new construction and remodeling activity during the past two years,” says Rich Walker, AAMA president and CEO. “As the mortgage meltdown runs its course, a stimulus package is sorely needed to jumpstart both residential and commercial construction.”

But both Walker and Howard are quick to point out that this is a stimulus package and not a bailout. “Once the industry is back on its feet and lenders are utilizing valid lending criteria, a full and rapid recovery is expected,” says Walker. “With all due respect, bailing out the auto makers is only a small part,” says Howard. “If you put housing back in, you’ll stimulate those who sell carpets, televisions, etc.”

“If adopted, the Fix Housing First stimulus recommendations provide the catalyst to start the flow of money to builders and consumers. As the housing demand recovers, the attendant jump in new home starts will trickle down to the building products suppliers in a hurry. It will take some time to work through the idle and unfinished housing stock, but the short-term Fix Housing First incentives are aimed squarely at boosting both new and existing home sales,” adds Walker. Howard points out that Congress should be looking at stimulating housing as, “In a healthy economy, housing makes us the largest component of gross domestic product. So it makes sense that you would start with housing.”

And Howard says that taking such action will have an immediate impact.

“If this were put into place home prices would stabilize almost overnight and fewer people would be thrown into foreclosures,” he says.

The NAHB is encouraging the new Congress and incoming President Obama to take a hard look at this plan. “You may see something signed into law as soon as inauguration day,” says Howard. (At press time, the plan had not yet been approved.)

Although Howard says, if passed, the plan will have an immediate effect, he says it would take four to six months to work through the housing inventory. “But it would create 600,000 jobs in the first year,” he says.

How the Fenestration Industry is Faring

As all members of the building industry are being hurt by the housing market, this includes door and window manufacturers, and in turn, their suppliers. Many of the suppliers with whom we spoke agree that more closures will come and the worse may be yet come. Toth says that H.B. Fuller supplied a few of the companies that have shut their doors. He points out, though, that while many companies have closed down, several others have only closed individual plants. “All of those are still viable businesses, but are selling fewer products,” says Toth. “Even though a company says one location is closing, and that business will be absorbed by another plant, there is no doubt that they will be selling fewer windows and that affects everyone.”

Tightening Credit Limits

Some suppliers may be so eager to get a sale that they extend credit to those who don’t deserve it, but many warn against this. And most suppliers don’t seem to be falling into this trap. Mike Biffl, national sales manager for Sturtz Machinery, says a few customers have asked to extend payment options but, as a company Sturtz does not like to do so, no matter what the economic conditions, so they’re attempting to stick to that main philosophy. And that’s not because Sturtz hasn’t been affected by the closings. Republic Windows was a Sturtz customer as were other companies that have closed in recent months. Edgetech IG has been affected as well as it supplied several of the companies that closed.

“We’re looking at tightening credit limits and payment terms and we’re watching this closer than we have in the past,” says Larry Johnson, executive vice president of Edgetech IG. “We want to make sure that, if a bank pulls a line of credit, we are safe.”

Johnson adds that you never know when a bank will do this. “This could happen with a good customer who has always paid on time,” he says. Toth agrees, and says accepting all business may be tempting but “we are being forced by business sense and management to make the most difficult decision we’ve ever made in our careers. If we say this company is good for it and then they go belly-up your name is on the line. The risks are outweighing rewards.”

Matt Kottke, marketing support manager for Truth Hardware, says his company has also been affected by the plant closings. Many of the companies that closed recently, including Republic Windows were Truth customers. “The turmoil in the market has been felt by Truth,” says Kottke. “As one of the main hardware suppliers to the door and window industry, the likelihood of us being affected is great.”

“Because of those situations, suppliers like us are trying to limit risk with accounts,” says Kottke. “If there is an account with troubles we want to see them succeed but at the same time we want to manage our risk.”

Chris Cooper, senior sales engineer for Joseph Machinery, has supplied Republic Windows, as well as some others that closed with machines, but Cooper says Joseph wasn’t as affected by that as some other suppliers as the company has strict payment terms.

“We’ve always had a very tight structure on collections, in any economic times,” he says. “That has helped us minimize our debt. If a customer doesn’t pay we cut them off.”He adds that some companies may get reckless when extending payment terms.“

Some customers say to me, ‘My hardware guy extends me to 90 days.’ We can’t do that as our expenses are so huge up front. Before we build a machine, we incur our costs,” he says.

H.B. Fuller is in a unique but precarious position now as another major sealant supplier, PRC, recently went out of business. Toth admits that’s a good thing for his company, as well as other sealant suppliers, but taking on new customers does come with risk.

“We don’t know many of these new customers so we have to be extra cautious,” says Toth. And while many door and window manufacturers may lower prices just to get the sale, they often expect suppliers to do the same.

“Some say to us, ‘Well, you’re more expensive.’ I say to them, ‘Well we want to stay in business. Do you want your supplier to be out of business again?’” says Toth.

“We’ve had unprecedented cost increases [in the industry as a whole] while unprecedented drop in demand,” he adds.

But it’s not all bad as many suppliers say people are paying on time. Johnson says that in regards to payment terms, the situation isn’t as bad as he thought it would be given the circumstances surrounding the industry.

“The average days of payment is actually less than it normally is,” he says. Kottke says the key to success in this current market is communication with accounts as to what they’re seeing and gathering as much info as possible. “Now more than ever people need to be aware of the market trends and watch sales and order activity [of customers]. That’s the best barometer,” he says.

Lean Market Provides Opportunities to Get Lean

Door and window manufacturers don’t need to worry, as suppliers, including those who make machinery and equipment, say they are still developing new products, including Joseph and Sturtz. “We have to stay aggressive in development of new products,” says Biffl. “We can’t sit back and hope things get better. We are still developing new products.”

And manufacturers are still purchasing machines, particularly automated equipment, according to Cooper.

“The customers who are making purchases are applying automation because doing so will in turn reduce their labor force,” he says. “So when the market comes back they [manufacturers] will emerge leaner than before.”

Cooper reminds manufacturers that automation is created on machines for a reason. He gave the example of one customer who wanted to eliminate one process and did so by moving to an automated process, which eliminated 10 people.

And while some manufacturers are working on becoming lean, suppliers are doing the same. Overall, they are taking advantage of the down time to make their businesses stronger. “We are watching spending, getting lean, focusing on faster turnaround times, and other processes,” said Johnson. “We’re look at all our companies and using this as an opportunity to get better at what we do.”

Cooper says at Joseph the company has scaled back on its workforce as it is not producing as many machines. “This has enabled us to get lean and more efficient,” says Cooper. It’s also allowing the company to diversify a bit. “Eighty percent of our business is in the door and window market, while 20 percent serves other markets such as aluminum,” says Cooper. “We’ve always been in these other markets but now we have the time to expand into these even more.”

People in all aspects of the fenestration industry can look at this as a good-news/bad-news situation.

“Now is the time to grow your business by looking at opportunities that you wouldn’t have had time to in the past,” says Johnson. “Companies should be getting better.”

For Edgetech, the company has always focused on assisting its customers with various needs whether it’s marketing, helping them find an equipment supplier, or conducting testing for customers. And suppliers say now more than ever, it’s important to get product to customers when they need it. “When an order comes in they need it right now,” says Kottke. “They don’t have two to three weeks. It’s not for building inventory.”

Johnson says making products to order also can help companies cut costs.

The Bright Side

If manufacturers and suppliers look hard enough they are bright spots to be found in this market. “We have some customers who are doing well,” says Biffl. “They’re trying to bring something new to the table. That there are manufacturers in the Midwest, [such as Soft-Lite] (see article on page 16), that are succeeding is good to see.”

“Our current customers have been down in sales but we’ve picked up new business this year to offset the downward trend,” says Johnson. He adds that the company’s international growth has also helped the company succeed given the state of the U.S. market.“

Companies that build quality products and have implemented good business practices will succeed,” says Johnson. “The market will come back,” adds Cooper. So whether you’re a manufacturer or a supplier, by applying some of these strategies—getting lean and focusing on new business segments, and strengthening your company—you’ll be ready when it does. 

Tara Taffera is the editor/publisher of DWM magazine. 

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