Saturday, November 9, 2019

Why A Modular Factory Could Fail

Over the past couple of years the media has championed modular construction as the new rising star of both housing and commercial construction. The 3% market share of new housing has begun to rise in many areas of the country but with that growth along comes problems.

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 accounting 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.

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.

Gary Fleisher is a housing veteran, editor/writer of
Modular Home Builder blog and industry speaker/consultant.


Anonymous said...

You may have a well defined business plan but you fail to understand or adapt to your service market competition or fail to show why your offerings are a better value for the consumer. Failure to assist your builder base in defining a plan for the builder's success with your product from production to after delivery service.

philginge said...

Completely ignores the huge lack of competence at the top of the industry

Rochelle Hill said...

I have been involved as a designer with 4 different modular closures. Let's face the music here, modular is still fighting site built and now prefab panels. While nothing can match the level of completion and speed on site of modular construction, nothing is worse when it goes bad. Modular cuts on site construction time drastically and gets an owner a turn key profitability quicker, but the amount of design, materials and shipping that go into a mod is much more than traditional site built. The challenge I've seen is getting clients to understand that the addition costs are recoverable in the drastically reduced turn around time.

My next observation is, one off projects that don't have repeatability and having your own product. Repeatability is where modular lives, it's how we reduce design costs and increase speed and accuracy inside the factory. If we look at the modular companies who have been in business for any length of time they all pretty much stick to a product line that is repeatable. Maybe they do some customs but a standard product line is how they survive. Please respect that this is my opinion based on my experience in the industry here in the NW. I love modular but stability has been a challenge.