Vertical Integration is an economic term that refers to a company that is involved in multiple aspects of building or creating a product. The term loosely originates out of the Chicago Stockyards of the late 1800's, where owners, looking to cut costs and control quality, began their involvement in all aspects of their industry, from feed lots, to raising, to grazing, to meat processing, to railcar shipping.

Today, Vertical Integration is something of an anomaly in business. The computer you bought the other day could have had the screen built in Mexico, the circuit board outside of Bejing, and the keyboard in Brazil. In some cases, outsourcing, or subcontracting makes wise financial sense. In others, it does not.

The same applies to custom home building, and has to do with an amalgamation of economies of scale and current market trends/standards.

In the Triangle housing market, hardwood floors are the industry standard in today's custom home, and the market is saturated with installers willing to install them. Installers have streamlined their materials and labor prices down to a quantifiable science, and are very competitive.

Ask your builder to have stone flooring tile installed, and the situation changes in terms of what subcontractors charge. The scenario is compounded by the fact that suppliers don't sell a lot of limestone or travertine; hence, they do not have access to volume discounts that our Florida neighbors regularly take advantage of.

Both suppliers and installers know that this would be a special feature in a high end home, and they automatically charge more, in part because they don't have much competition. Added to which, some have little experience with stone flooring, as it must be installed differently that ceramic tile. They're already making good money doing what they've always done with their market. There is no real incentive to learn a different aspect of their trade, because they're already doing well as it is.

So, we do a comparative market analysis with the Triangle and another market that uses tile as its principal floor covering, such as Port St. Lucie, Florida. We find that they're installing tile at almost 1/3 of the cost we pay in North Carolina, and they're still earning a percentage profit commensurate with subcontract work. This becomes Mangum Design-Build's new benchmark for efficiency and pricing. We send our own artisans to train with the Florida crews for a time, learning the differences in placement techniques, and maximizing our square foot per hour, per man, per day. We learn from the best, and we bring this back home.

That solves the challenge with installation. Now we concentrate on materials prices.

Since there are no deals to be made in North Carolina, we had no choice but to import our own stone tile. We make connections and create business relationships with overseas quarries and distributors. And our tile arrives in various ports, from Italy, or Jerusalem, or Argentina.

Remember that quality costs money. We don't mind paying for quality, but we refused to be gouged over it. Our job is to find the balance between good quality and reasonable costs for our clients, and take this very seriously.

Why don't other builders choose to operate as a vertically integrated business?

The answer is both simple, and complex.

1.It's hard work. It's a lot of hard work. You have to consistently ensure that you're keeping your employees busy. You've got up front training costs, and heavy initial capital investments in equipment. It's not possible to ease into this orientation of business. If you decide to do this, it has to be a complete and total dedication of your assets and resources. For many builders, it's just easier to build a regular home with standard features and not get into the fray of value added services.

a.If you do it right, you have the opportunity to offer stone flooring for what another builder would charge to install hardwoods.

2.It requires infrastructure that most builders do not have. The Mangum family of companies represents 10 wholly owned separate businesses in the Carolinas, and another 10 investor-based development LLC's stretching from Raleigh to the Bahamas. That being said, we can afford to invest the proper capital and realize a return on that investment by lowering building costs due to economies of scale.

3.Vertical Integration allows you to pay your employees more, which, in the mindset of a builder who is already trying to cut costs, is counterintuitive in its initial assumption. For our guys who are laying tile, installing soffit, and pouring concrete, we can afford to pay them more each year because we're already saving 30% by doing the work internally. Here are the numbers: Let's say we are able to install tile in a house for a labor rate of 5000, and the market rate is 10,000. We can afford to pay them another 1000, and still save our clients 4000. And that is just for tile. If we're able to do this across 10 different aspects of construction on each house, that savings adds up. And as a bonus, we're able to take care of our employees. And it is so very important to take care of the people that take care of us.