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Don’t Forget! You Saw it in the
Adverti$$er
November 2023 #15292 Page #72
ROI: Turn Your Largest COST (Lumber) into a Profit Driver By Valerie Hansen Founder and Chairman, BuyMetrics Inc.
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umber is mission-critical to every component manufacturer (CM). On average, it represents two-thirds of your cost-of-goods (CoG), roughly half of the value of your product (Revenue – Pretax Profit). So, what are the market dynamics that surround the purchase of lumber? And how/why can CMs exert market power?
The forces shaping the North American lumber market The North American lumber market’s core drivers are: fragmented wood fiber basins, high transportation costs to move fiber from forest to market, high fixed manufacturing costs (high fixed costs create a strong motivation to drop prices to fill excess capacity), competition for fiber supply for non-construction uses, difficulty and cost of holding/storing sawn lumber, and short-term price-inelastic demand. The market is characterized by frequent 30% lumber market price swings. The market is “noisy.” On a given day, even when prices are stable, the spread between comparable offers from comparable vendors averages 2–4%, and when the market is moving, it can be 15+%. On a given day, a mill or wholesaler is under no obligation to sell its products/inventory, but rather seeks to optimize yield from its current (and variable) log supply/inventory based on current market prices. The SBCA’s Construction Industry Workflow Initiative (2019) developed a comprehensive overview of the supply channel and lumber procurement dynamics that discusses this further: How dependent are you on your lumber supplier?
Lumber’s outsized impact on CM profitability Last spring, BuyMetrics modeled the impact a 1% change (+/–) in the cost of lumber has on CM profitability for the SBCA’s Innovation Committee. For data, we used the SBCA 2019 Pro-Forma Financial Data (pre-pandemic data). The only variable changed was lumber cost. The methodology/ results are online and shown in the image. What we found was each 1% decrease in lumber cost produced a 10.36% increase in pretax profit. A 4% decrease produced a 41.46% increase in profit. And, the opposite was also true, every 1% increase in lumber cost drove a 10% decrease in profit.
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