Tuesday, March 29, 2016

Why Modular Home Factories Fail

Since the housing crash of 2008, many modular home factories all over the US have closed their doors. Yet, there a quite a few that have weathered the storm and have not only survived but have grown larger.

Modular housing, like other industries, is a business. With any business, there are successes and failures. There are numerous reasons behind a manufacturer failing, including neglect, inexperience, and economics (financial). Economic (financial) reasons account for approximately 80 percent of all failures.

Here are the most common reasons modular home factories fail:

No Business Plan
Without a well structured business plan, it's hard to develop a direction for success. Many modular factories were started by experienced management staff that knew they could run a better organization than the one they worked for.

They found investors that shared their enthusiasm for modular housing and soon they were discussing everything from the design of the production line to how to steal builders away from their current factories. This is not unique to the modular housing and is how many industries have grown.

The problem that is evident in modular housing is a lack of a basic Business Plan. Yes, there is a plan prepared for attracting investors but shortly after the money comes in, the plan is put aside because something comes up that was unexpected. The Business Plan has to be part of the factory’s success. It must be a living, breathing thing that the owners and management work with every day, changing it when needed and adhering to it when things become chaotic.

If a factory doesn’t have a strategic business plan, it’s time to get the management team, along with key staff, together and prepare one.

Lack of adequate capital
Many times modular home factories start off under-funded. Then after a short while, money runs short and things that were needed to increase sales to meet projections begin to be neglected. Training suffers, quality suffers, morale suffers and finally the factory shutters its doors.

By not being clear at the beginning with a financial direction, it’s easy to forget about things such as inventory and receivables. Work with a good CPA or accountant to create a pro forma. By projecting cash flow for years 1 and 2, the owners will learn how much capital they will need on hand in order to survive.

Not managing cash flow
Countless times modular home factories fail because they don’t understand working capital. A company may buy a large piece of equipment because they think it will fulfill a need, but if the return on investment is not fast enough, this one piece of equipment that was “the answer” may affect that company’s ability to “keep the lights on” and “keep their employees paid”. Or the factory management may begin pandering to a new income base they believed would bring in millions of dollars only to find out that the margins were not enough to continue operations.

They failed to make sure they had enough short term assets to cover short term debt.

Lack of a good marketing program to attract new builders
If a modular home factory doesn’t get new builders, revenue will begin drying up.  It would be almost impossible to find a single Marketing Plan in our industry. Most factories use the old “Buy from us and we’ll give you the lowest price” approach to marketing, going after other factories’ builders instead of trying to convert site builders. There are a couple of factories that do have effective marketing plans but you could count them on one hand.

Most factories have never sat down and defined a persona of what their new builders should look like and then create a plan to attract them.

Not having a diverse builder base
If a modular home factory puts 80% of its efforts into satisfying three or four home builders, it's time to diversify. We’ve all seen what happens when a factory’s biggest builder switches to another factory. Images of chickens running around screaming “the sky is falling” comes to mind.

Sometimes a factory will seek out commercial developers to increase sales. This is becoming more prevalent today and many factories have successfully integrated these large scale projects into their production line without a major impact on their builder base.

Modular home factories only have to look back to 2008 to understand that diversity is one of the keys to continuing to stay in business.

Failure to understand the industry and the target customer
Today there can be no lone cowboys riding off into the sunset knowing that they did a great job. If a factory is not working with others to make the entire modular housing industry more coherent and responsive to today’s market, it might as well put an expiration date above its door and let the countdown begin.

Joining the marketing efforts of the MHBA should be a priority of every modular home factory in the US. Trying to run independently from the rest of the industry is so yesterday and yesterday wasn’t so hot. If factory management wants to be a cowboy, smoke Marlboros and ride the range alone, so be it but it won’t be long before they are put out to pasture.

If you are a builder, take a long hard look at your factory and ask yourself if they are poised for a successful future and if you are part of the factory management team, ask yourself if you have an effective Business and Marketing Plan in place.

On April 20th, there will be a Modular Boot Camp in Toms River, NJ. If you are builder or a factory serving this market, this would be a great place to network with others to help keep our industry growing.

1 comment:

Steve L said...

You are spot on with this commentary.
I might add land developer partnerships is sorely needed. If a factory builds the homes where will they put them?
Vertical integration like the big builders is one aspect not being explored. It appears the modular builders are just one piece of the development puzzle. A Peddler of his wares. To create a collective (Developer, GC and Modular Factory) to work together to create a community. It would start to destroy the image and perception but it would have a risk associated with it.