LGI Homes: Building In Sets & Process-Based Culture

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Let's dig a little more into the LGI way, focusing specifically on purchasing. We can broaden out from there. When we talk about the LGI way, let's discuss how the company seeks to drive advantage through the purchasing function compared to other similarly sized or larger builders. I'm specifically asking because I want to take scale out of the equation, as it's the most obvious factor. If you're buying hundreds of HVAC systems in a market, you're going to get a better deal than if you're buying five. So, let's discuss how the LGI way drives advantages, focusing specifically on purchasing.

Here, predictability equals profitability, as an inventory. Take scale out of it, take economies of scale out of it. Being able to predictably plan the house, spec the house, set scopes of work, give trade partners proper expectations, build an effective schedule, sequence correctly, have the land team prepare the lots to allow the others to move quickly, set the towns and municipalities up for success, and set the inspectors up for success. Ultimately, in the question you're asking, it's about making sure you can get suppliers. Your job as purchasing managers is to ensure the right things show up in the right place at the right time, in the right quantities, for the right price. If you can do that predictably, you'll profit every single time.

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I don't mean company-wide, like predicting absorption for the year, multiplying by the number of communities, and then by 12 to estimate home sales at a certain gross margin. I'm talking more about negotiating with an individual subcontractor. How much cheaper or quicker does building a home the LGI way help compared to a competitor's method?

That's a fantastic question. LGI's construction team builds out a schedule. Let's say, for simplicity, they can build a house in 100 days. They build in sets, meaning if they release six houses, they might be built in two sets of three. Three houses will be on one schedule, and the other three on the next, usually staggered by one or two weeks. When they say they can build a house in 100 days, they can actually build three houses in that timeframe because they follow the same schedule. For their trade partners, this means very few, if any, dry runs. Crews don't have to be moved around unnecessarily, so they enjoy working for LGI, or whoever they're subcontracted by. They consistently pay, but they're not the highest margin.

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