In an industry ripe for disruption, LP Building Solutions is taking the lead and showing the building products sector how it’s done.
The North American building products industry is changing quickly. The combination of rapid gains in technology, digitization, and the drive for product innovation along with a skilled labor talent crunch could set many industry stalwarts back on their heels. Consider this February 2019 insight from McKinsey:
“Although ongoing pressures present many risks to industry incumbents, they also represent transformative opportunities to create value. A rapidly changing environment will demand new responses and ways of thinking. Leaders in the building-products industry that have traditionally excelled at operational and technical disciplines, such as engineering, will need to reframe their approaches to the industry — and themselves — and become nimble strategists.”
Having rolled out a strategic initiative that is shifting them out of the commodity space and into delivering value-added, high performance branded solutions, LP Building Solutions (NYSE:LPX) is demonstrating the essential agility required to thrive in this hyper-pressurized environment.
“The timing (for this) was right because we needed to alter our course and take control of our future as a company — needed to redefine who we were going to be as a company,” explained Mike Sims, the company’s SVP of Business Development and Corporate Marketing.
In 2014, LP, then commonly known as Louisiana-Pacific, abandoned a proposed acquisition of Ainsworth Lumber that would have given the firm a greater foothold in regional oriented strand board (OSB) markets in the Pacific Northwest and Midwest. The decision proved fortuitous.
Sims continued, “Without this option we needed a new strategy to grow. As we were reflecting on our past, we realized that we had become complacent around accepting the fate of the commodity markets. With this realization, we made a conscious decision to become a top-tier total shareholder return performing company.
“It was from this starting point that we set our vision to be ‘a leading building solutions company’ that serves large profitable and growing markets where we can create and sustain competitive advantage through a distinctive customer value proposition.”
The new approach frees the Nashville-based firm from the innovation smothering constraints of market conditions and helps offset the notorious volatility of OSB pricing. As Sims reported, “On the commercial side, we are looking to move as much of our commodity OSB to our structural solutions mix of branded products. We are ahead of our target to hit 50 percent of our total OSB production being in our structural solutions product mix this year.
“All of these products are either priced completely or at least some percentage of the total that is disconnected from (wood products industry analysts) Random Lengths. This has taken about 10 percent of the normal commodity pricing volatility out of the equation.
“On the operational side we have instituted a new metric called overall equipment effectiveness (OEE) that measures our operational improvement by measuring A-grade quality product throughput improvement. We have seen great results from both the commercial and operational accountability to improve our OSB business through the cycle as part of our overarching transformation.”
Branded Products Take the Lead
As LP reshapes its overall business portfolio they’ve added several new products, including a new smooth strand version of their successful engineered wood siding, a weather-resistive barrier system as part of the structural solutions portfolio, and other high-performance products that bring the LP brand into new categories.
“We have instilled what we call our value agenda to ensure that there is accountability across the businesses and corporately to increase the pipeline both organically and with highly thought through acquisitions that fit our company strategy,” Sims said. “This will be the first year ever that our branded products will outperform the balance of our offering on both the top line revenue and bottom-line profits, so that is quite an overall product transformation.”
Those new products include LP WeatherLogic® Air & Water Barrier and the LP Elements™ Performance Fencing product line. The WeatherLogic sheathing system had been under development for a number of years until LP’s directional change drove it off the drawing board and into builders’ hands. “We set the target for our launch a year ago at the NAHB International Builders’ Show, and it forced the accountability to get it done. We also made sure that it was getting done without cutting corners in the process,” Sims revealed.
At the same time, another line moved from R&D into the commercial market: LP® SmartSide® Smooth Trim & Siding. This new product within the siding portfolio adds a high-demand aesthetic option while still providing the significant competitive advantage of a 50-year limited warranty offered across the portfolio. “Our siding business was now accountable for producing an aggressive growth target, and this forced the execution of development of our new smooth product as part of our value agenda,” he noted.
“The LP Elements fencing introduction was executed by our Corporate Growth and Innovation Department. It incorporates a fabricating and finishing process that resides outside of our company today and brings a new product to the fencing industry — something that hadn’t been done since the mid-1990s. While this product line is outside of our current traditional distribution channels, it is targeted to a very large market. All these products are branded and differentiated, and they provide a very large addressable market opportunity to drive profitable growth.”
From Products to Solutions
The company is also improving productivity, run time, and quality at its mills, holding themselves accountable to their new OEE metrics and offering financial rewards from the top to the shop floor for meeting and beating benchmarks.
“Sharing in the rewards has been a game-changer,” Sims admitted. “It drives home ownership to the level that can have the biggest impact, and we are beginning to see the benefits of that. Our people are really thinking and acting like owners because they have real skin in the game. We have ideas and execution operationally like we have not seen in the past. In fact, we are exceeding what we thought was possible in a short period of time that we have had this instituted — and we’re finding even more potential than originally thought.”
That game-changing strategy is part of a cultural transformation that began in the corporate office and is now driving the overall reimagining of LP. A major piece of that culture change was an alignment of pay and incentives directly to the company’s financial improvement metrics. Employees are encouraged to think and act as owners, driven in part by an employee stock purchase program.
“Culture is both the key opportunity and can be the key constraint of any transformation,” Sims warned. “This type of cultural shift does create some discomfort and churn, especially with some long-tenured employees that didn’t buy into the accountability, although most really embraced it. Without a cultural transformation you can’t really transform the company, especially in the way that we set out to do it.”
The firm’s continuous improvement focus has long included the application of lean and Kaizen principles. Now, LP is implementing best practices with its supply chain to optimize efficiency and profitability. “The first thing that we did was move most of our corporate resources to line of sight of the business by moving to a line organizational structure. This was done to support the direct business accountability to our value agenda, but it also forced the redundancy out of these functions. We were able to deliver some initial saving through that exercise alone.
“We have also begun to better utilize new technology that bolts onto our new SAP enterprise platform, and this will drive most of our supply chain optimization going forward. We have identified $75 million in supply chain and Corporate SG&A savings over the next five years through the same cultural transformation in this group that we are applying in operations.”
Last May, LP invested $45 million in EntekraTM, an Irish design, engineering, and manufacturing startup that provides a fully integrated off-site framing solution for residential and commercial construction. The company, with stateside headquarters in Northern California, is a new entrant in the American building products market. The framing solution is designed to reduce construction time, waste, and dependency on skilled labor, resulting in faster build cycles and increased production volume for builders. As the homebuilding industry struggles to meet production demands, off-site solutions like Entekra can offer an innovative relief valve.
“This is our first big investment in a solution-based approach outside of our traditional products,” said Sims, noting that the biggest challenge to homebuilders is a critical shortage of skilled labor to frame homes. “While we had always looked at this relative to enhancements to our current products, we never thought beyond that level until we expanded our thinking to a broader solution approach.
“We had been studying this for a while but mostly as an observer. We envisioned ourselves as a potential supplier to new off-site construction. In Europe, off-site construction is more ingrained in the building process, so when we looked at off-site abroad, we couldn’t figure out why it wasn’t happening here in the U.S. at a similar scale.
“It dawned on us that it would require a manufacturing mindset to move the industry from on-site construction to factory built. With more than 45 years in the industry, LP could bring that level of expertise in both depth and breadth. Plus, given our relationships with large builders it seemed like a good fit to us. We decided to partner with a management team that had done this in the UK successfully, and we became the majority investor. ... We think this is the perfect partnership, and we are very excited about the large-scale growth that the Entekra model presents us as an investment.”
Companies don’t last for a half-century in cyclical industries without the foresight, agility, and process management required to anticipate market demands and execute smart programs to meet them. Sims summed up LP’s bold reinvention this way:
“We are looking to deliver for our customers, employees and shareholders as a company known as the leader in building solutions that creates top-tier value for our key stakeholders. We are looking to achieve a company culture that will hold ourselves accountable to delivering nothing less than top-tier performance by all measures, but most importantly by all financial metrics.”
No doubt about it. In an industry where durability and dependability are paramount, LP is built to last.
As a proven leader in high performance building solutions, LP Building Solutions manufactures uniquely engineered, innovative building products that meet the demands and needs of the building industry. Its extensive product portfolio includes durable and dependable exterior siding and trim systems, engineered wood framing and structural panels for single-family homes, multifamily projects, repair & remodel markets, light commercial facilities and outdoor buildings. LP also provides industry leading service and warranties to help customers build smarter, better and faster. Founded in 1973, LP is a global company headquartered in Nashville, Tennessee, and traded on the New York Stock exchange under LPX. For more information, visit LPCorp.com.