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| THE HIDDEN COST OF BUYING CARPET “DIRECT” | |||
| Some end-users ask to buy direct rather than through a floor contractor. They believe that the cost of carpet is lower with a direct purchase. While the customer may sometimes find a lower price for carpet by buying direct, he generally will not get the carpet at a lower cost. As a result of a national survey, we know that there is a hidden cost involved in buying direct. This cost ranges from $3.55 to $7.21 per square yard. Attachment 1 shows the components of this cost. Some components are based on the material price, some on a management time per square yard basis, and some on simple cost per square yard. | |||
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Waste Reduction Installation Costs Management Time Insurance Contingencies Handling, Redelivery & Warehousing Product Choices Life Extension Other Services Total Value Notes |
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| WASTE REDUCTION
When a qualified Flooring Contractor is involved, the quantity of material ordered is more realistic than when an installation firm or the end-user makes the determination. An independent installer is more likely to make the installation job easier by padding his material estimate. Our analysis indicates that this estimate will often be two or three percent higher than the net amount required, plus waste. INSTALLATION COSTS Surveys of installation prices have shown that the charge for installation by a subcontracted installer is up to $1.25 per square yard higher than when performed as part of a “turn key” package. There are two reasons for this: A dealer who contracts for labor from an installation firm or has “in-house labor” gets a better price than an end-user can get for a one-time job. A dealer/installer who gets a job for installation only will charge substantially more to compensate for the loss of margin on the materials. Additionally, the best installers are typically working for the larger flooring contractors. MANAGEMENT TIME A carpet installation project requires a large amount of management time – even when everything goes right. Naturally, when everything doesn’t go right it takes even longer! Major jobs require 6 to 12 man-hours from experienced dealer personnel per thousand square yards of carpet installed. This time is spent in arranging deliveries, planning the installation, scheduling the elevators or cranes, verifying material arrival, overseeing the job site deliveries and actual installation, and inspecting the final work. (See NOTE 2 below) INSURANCE Qualified Flooring Contractors provide two kinds of insurance. The first is against theft, damage, loss, etc. of carpet from the time it leaves the mill until the time it is delivered. While this is not an exceptional burden to the dealer who carries the policy Constantly, the end-user’s premiums, if he were to purchase the insurance himself, would be considerably higher as for all one-time policies. CONTINGENCIES The second kind of insurance is in the services that qualified Flooring Contractors provide, especially when unforeseen circumstances arise. If the carpet is lost, stolen, Or mis-delivered, a qualified Flooring Contractor handles the insurance claim, reorders the goods from the mill, and expedites shipment. If there are problems with product appearance or performance during or after the installation, a qualified Flooring Contractor works with the mill to resolve the problems. In short, we have a vested interest in maintaining a high level of customer satisfaction. A bad installation Or unresolved problem means a dissatisfied customer, which hurts us much more than it does a distant manufacturer who sold a relatively small quantity of carpet to an end-user on a one-time-basis. While problems don’t always occur, they may occupy a large amount of management time. To properly evaluate the financial impact of such problems, the time required is averaged over projects with no problems and projects with problems. The values of contingencies are in the same manner of those for Management Time. HANDLING, REDELIVERY AND WAREHOUSING One cost included in a qualified Flooring Contractor’s price, but not in a direct sale is the handling and redelivery of the product. In all cases, this involves unloading, receiving (accounting for), storing, and redelivery to the job site. With carpet tile it covers breaking pallets down to cartons and taking the cartons from the loading dock to the actual point of use. In case of roll goods, it includes unloading 500-700 pound rolls, cutting, and transporting them to the point of installation. Additionally, all boxes, pallets, roll tubes, and packing must be disposed of. These costs range from $.40 to $.60 per square yard. Very few construction jobs proceed on schedule. This results in a need to store carpet, made and delivered for the original schedule, until the building is ready. Warehousing, including “in and out” charges, range from $.08 to $.09 per square yard per month. PRODUCT CHOICES The correct product choice is potentially the most important cost saving factor of all. An analysis of hundreds of Life Cycle Cost analyses has shown that while price is an Important factor, it is usually overshadowed by the factors of maintenance costs and expected lifetime of the product. A qualified Flooring Contractor is in a position to help minimize maintenance costs and extend the time between carpet replacement by careful product selection, taking into consideration the effects of product construction, coloration and pattern. The value of this contribution may range as high as a 50% increase in product lifetime. A very conservative figure would be a 2-4% value add. LIFE EXTENSION Once the proper product choice has been made, a qualified Flooring Contractor can provide recommendations and services to best maintain the optimum appearance level over the life of the carpet. The majority of carpet is replaced because its appearance level has deteriorated, not because it has worn out. This means a qualified Flooring Contractor can help extend the life of the carpet through proper maintenance. An extra year’s life for a carpet expected to last 10 years represents a 10% increase in the value of the carpet. A six-month extension on a 12-year expectancy is a 4% increase. OTHER SERVICES A qualified Flooring Contractor provides many other services which add to the total value. For example, buying direct means direct billing requiring the establishment of an account, increasing administrative costs. In many states the taxes on a job depend upon how it is (or isn’t) itemized. A qualified Flooring Contractor provides the flexibility to take advantage of the lowest tax alternative since we will be billing the whole job, not just part of it. Qualified Flooring Contractor personnel know the key people at the mills, so they know who to contact for what. They know how to best use the manufacturers support services, such as Marketing Services, Production Scheduling, and transportation; these services can range from 0.5% to 2.5%. TOTAL VALUE In the final analysis, buying direct may actually cost up to $7.21 per square yard over and above the direct mill price. Obviously, these cost numbers depend on many variables such as product selection, size of job, services provided, and intended end-use. The key point, however, is that the costs exist and they can be significant. While every job may not incur all of these costs, analysis indicates that the majority will have at least $3.55 per square yard of extra hidden costs. Thus a price quote of $20.00 per square yard (direct) means a true cost of from $23.55 to $27.21; whereas a quote of $22.00 per square yard from a dealer means $22.00 per square yard. Taking these costs into consideration, the most financially prudent purchase decision is to buy through a reputable qualified Flooring Contractor. NOTE 1 The costs below are figured on an average job-size basis. Actually, the time required varies with the job size; a larger job requires more time, but fewer man-hours per square yard. Estimates for a low and high number of hours for a 1000 square yard job and for a 10,000 square yard job were averaged. Each estimate of man hours is multiplied by two to account for the experience difference to be expected between qualified Flooring Contractor personnel and end-user personnel, then multiplied by $35, which represents the management time costs (including overhead) at a large corporation. Costs Basis* % Price Man Hours $/SY Costs Waste Reduction 2-3% $.40- .60 Installation .64- 1.13 $.64- 1.13 Management Time 12-24 $.42- .83 Insurance 5-1% $.10- .20 Contingencies 6-13 $.21- .45 Handling, Etc. .48- .69 $.48- .69 Product Choices 2-4% $.40- .80 Life Extension .4-10% $.80- 2.00 Other .5-2.5% $.10- .50 Total Costs $3.55- 7.21 *(Based on $20.00 s/y on 1,000 sy) NOTE 2 THE FLOORING CONTRACTOR ADVANTAGE AT WORK AFTER THE PRODUCT IS SELECTED 1. Determine required quantities – taking into consideration location of seams and/or overall layout and any requirement for attic stock. 2. Place order, making sure pricing is correct and delivery is acceptable to get job completed on schedule. 3. Track order to insure that it proceeds on schedule. 4. Inspect job conditions, such as floor surface, to insure that there are no Surprises. Make whatever repairs or preparations are need to floor. Insure that moisture, “cut back” etc. are not present. 5. Arrange for shipping on the most economical, reliable carrier who specializes in transporting carpet. 6. Insure the product while in transit as it belongs to the purchaser when it is loaded on the truck(s). 7. Receive, unload, account for, and store the material in a secure insured space. 8. Make sure that appropriate adhesive is available in the quantity necessary to do the project. 9. Insure that qualified installers and adequate manpower are available to perform the installation. 10. Insure that all security arrangements have been handled to obtain access to the work area for delivery and installation. 11. Arrange for vertical/hoisting transportation of materials. 12. Control quantity of material released to job site relative to productivity of installers so as not to leave material sitting around job site. 13. Insure that appropriate transition pieces and procedures are used between flooring finishes. 14. Remove all refuse, boxes, used carpet, etc., from the job site and dispose of it. 15. Insure that all required OSHA postings are in place and all fire and safety Codes are complied with. 16. Make sure that all workers on the job are properly insured for liability as well as workers compensation. 17. Inspect work in progress to insure compliance with installation instructions and procedures as well as quality control. 18. Once the project is complete, file all manufacturer’s and installer’s warranties for “warranty management” phase of project. 19. Monitor the performance of material and installation after return of space to intended use. To gain a better understanding of the other side of the argument, we also brainstormed on why an end-user might want to buy direct. That process generated the following list: 1. Don’t want to pay dealers profit. 2. End-user feels he/she has more clout. 3. End-user already has people on staff to provide all the functions that a dealer does – why pay him? 4. Can put the mill’s name on the line by holding them responsible for everything. 5. Buy all other furnishing direct – why not carpet? 6. Fewer people involved. 7. Feel that they know as much about carpet as the dealer. 8. Ego. 9. Schedule flexibility without dealer penalty. 10. Eliminate hidden cost. 11. Product availability. 12. Dealer does not have financial resources to handle problems. 13. The “other guy” is selling direct. 14. Feeling of dealing on a “Corporate to Corporate” level. 15. Personal or corporate relationship. FOR MORE INFORMATION OR TO ANSWER ADDTIONAL QUESTIONS, CONTACT US: info@cir-resource.com |
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