Consultants Sound Off On Biggest Challenges

January 23, 2006
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What are some of the biggest challenges facing manufacturers, distributors, and contractors - all members of traditional HVAC distribution - as 2006 unfolds?

These are questions addressed by the newest addition to The NEWS lineup of contributors: key HVAC wholesale/distributors across the United States and Canada.

Our distributors touched on a number of different topics. While it would be logical to assume that the buzz would be 13 SEER and its impact on the trade, that's not all these distributors have on their minds. But it's a good place to start

EFFICIENCIES, AVAILABILITIES

Distributors Joe Rettig, David Williams, and Mike Michel are paying a lot of attention to 13 SEER. Williams, of Gateway Supply Co., foresees a problem of supply and demand, especially if distributors have to keep enough inventory of older 10 and 12 SEER units for contractors who are in the middle of large, new construction projects.

"Customers expect you to carry the older units until their current projects and/or neighborhoods are completed," he said. "This accomplishes a couple of things for the dealer. First, it maintains given quotes for ongoing projects. More importantly, it allows them to offer the same look of the units to each home. As we all know, if homeowners see different-looking units, they wonder what the other guy got that he did not.

"This difficulty has been compounded by the extremely hot summer most of us had, wherein any surplus inventory was exhausted, making the last few months of this year a real challenge," Williams said. "We have been working side by side with our dealers to ensure that all of their needs are met."

Rettig, of Habegger Corp., also sees a potential for product shortages as manufacturers keep up with the demand for high-efficiency equipment, especially coming on the heels of record-setting heat and record-setting HVAC equipment shipments in 2005.

"HVAC dealers are accustomed to a high level of inventory service from distributors, with immediate availability of products," he said. "With manufacturers changing their HVAC product offerings for 2006, this could present supply issues for both present and future products."

Michel, of R.E. Michel Co. Inc., put a different spin on the 13 SEER impact. He is concerned that manufacturers won't have the products when they say they'll have them, despite forecasts to the contrary. "Although we have forecasted our needs to cover the transition to new product production, certain manufacturing has not been able to supply those forecasts," Michel said. "It is proving both difficult and frustrating.

"We represent several major brands and frankly - this isn't a knock, but rather experience speaking - we will be quite pleasantly surprised if most come close to their various announced availability dates. Yes, we have hedged to offset schedule failures, but a major production problem could throw that out the window."

Such a problem arose last year, after hurricanes devastated the Gulf Coast and the demand for replacement HVAC equipment shot through the roof. Distributors are well aware that such a disaster can throw the entire supply chain into turmoil.

"Katrina has reduced the nation's ability to produce necessary raw materials," noted Rettig. "This is affecting both the supply of HVAC accessory products along with pricing issues. Items used in HVAC installations are now harder to obtain; those that can be obtained are available at a much higher price than we have ever experienced before.

"This makes it very difficult for distributors to offer contractors pricing protection on project quotes. This is a real problem for HVAC contractors. Items such as plastic pipe and galvanized sheet metal are becoming difficult to obtain."

SELLING COMFORT AND EFFICIENCY

Distributors are also thinking about how their customers sell comfort and efficiency to the end user. Are contractors doing their best to sell comfort and efficiency? Do they know how to sell upgrades? Doug Young of Behler-Young Co. isn't so sure.

"Many home and building owners do not understand the level of comfort that may be available from their indoor comfort system," he said. "Our industry, from all levels of the supply chain, needs to help improve the overall awareness of property owners to the availability of much improved comfort systems. Only when the people paying the ultimate bills are aware of the potential improvements, will they seek better solutions.

"Some residential HVAC contractors lack the capability to design and install the system properly, or lack the capability to articulate the value of an improved system. The solution here is more training of contractor personnel in technical design-installation capabilities and sales skills."

Young doesn't place all of the blame for not selling the best comfort systems on contractors. He also points the finger at homebuilders who cut costs at the expense of homebuyers.

"Many builders do not allow homeowners to become aware of system enhancement opportunities," Young said.

"Many residential builders do not offer system upgrade opportunities, or are not willing to allow HVAC contractors to talk to the ultimate home buyer to offer those upgrade opportunities.

"This circumstance, coupled with the fact that many residential builders use a ‘lowest price at all costs' purchasing strategy, along with just a one-year warranty commitment, continues to put new homes in the market that have less-than-adequate HVAC systems. These builders may be missing the biggest opportunity for improving their own profit picture."

Michael Senter of ABCO Refrigeration Supply Corp. believes that distributors need to establish a value-driven service to their dealers that goes beyond pricing. While many HVAC contractors shop around for low prices, he believes the distributors offering the best value will ultimately be the preferred choice.

"The total economic value of our contributions to contractors must be worth far more than the difference in price between us and the low-priced leader on any particular product," Senter said.

"We can establish this value in many concrete and measurable ways: timely, accurate deliveries; application engineering services; technical service when equipment problems occur; deep, readily available inventories; and immediate customer service to augment our customers' internal operations.

"We also must serve as a primary source of industry information, whether it means addressing technical, regulatory, or legal concerns, such as the technical requirements of using R-410A, or the application requirements of installing 13 SEER residential equipment. Without the value of our high levels of service, independent or traditional wholesalers risk irrelevance."

HIGH-TECH CHANGES

The changing face of communications and technology is also on the mind of distributors. The need to seamlessly plug in new systems without disrupting the supply channel is vital to staying profitable and ahead of the competition.

Tom Boutette, of Boutette & Barnett Trade Distribution Inc., laments the changes his own company has gone through. "The PCs I bought four years ago are now too slow," he noted.

"Even with a dedicated IT person and an independent service provider giving advice, management has to understand what new technology can do and the costs involved with keeping systems current and relevant to help produce positive bottom-line results.

"Going down the wrong path in development of an IT plan can cost a lot of money in a very short time, and you can find yourself at a dead end very quickly."

Perhaps even bigger than changes to computer technology have been changes brought about by Internet technology. Doing business over the Internet has turned the distribution channel upside down and it has become imperative for distributors to adapt to the changes.

"While our industry has been relatively slow or gradual in its application of the Internet to our daily transactions, I expect this pace to quicken dramatically," said Senter.

"I believe wholesalers will be challenged like never before to establish and maintain relevance over the Web with our customers. We'll need to emulate the accuracy and timeliness of UPS or FedEx in terms of logistics and distribution. We'll also have to emulate the immediacy and ease of Amazon in our offering of products.

"Those are steep and difficult goals, but our relevancy will soon depend on our adaptation to and utilization of the Web."

Technology also comes in a different form: adapting to a changing regulatory world. Local, regional, and national regulatory bodies have been actively keeping up with technological changes. Businesses should be expected to as well.

Boutette said all distribution channel members need to stay informed. "Government agencies and regulations are a major concern when running a small business and trying to remain in compliance with the law," he said.

"Our health and safety person spends a tremendous amount of time developing safety programs, following up on health and safety minutes, reviewing safety inspections, forklift safety checks, first aid kits, staff training, etc. The Ministry of Labour is only one of many government agencies that have power and the right to hold any business accountable on a moment's notice.

"I never thought I would take to reading the Canada Gazette on a regular basis."

Changing regulations also have affected the refrigerant industry. Williams said distributors must educate themselves on the impact of the phaseout of R-22 and changeover to R-410A.

"The impending refrigerant change is coming on faster than a speeding bullet," he noted. "We have dealers today that have yet to touch an R-410A system and with just a little over four years remaining for the manufacture of R-22 units, it is past time dealers familiarize themselves with the properties of the new refrigerant.

"We have coastal markets, which are primarily heat pump markets, where an air handler will outlive a condensing unit two and three fold. With this reality, it is prudent for dealers to start installing R-410A units today to protect their unsuspecting home-owners from what's just around the corner. Although we have trained most of our dealers on R-410A, only a handful actually have chosen to sell the product.

"Our challenge is to find ways to get dealers acclimated to the new refrigerant as soon as possible, so they are not caught in the whirlwind when the axe drops on R-22 units."

WORKERS AND RELATIONSHIPS

Distributors, like contractors, face a constant battle to attract and retain qualified workers. Boutette knows that very well. "People today tend to move around more to different jobs than 20 years ago," he said.

"People seem to be more willing to change jobs if they think they see an opportunity. There doesn't seem to be as much loyalty.

"It is a challenge for businesses to continually show internal opportunities, conduct timely training and consistent and positive job evaluations to motivate staff. Salary is not the only factor they are considering. The balance of home, quality of life, and work time and pressures, are very important when considering employee loyalty programs."

And what about strong relationships with end users? According to Senter, there must be a trust between manufacturers and their distributors-dealers when it comes to who owns the customer and who has the right to sell to them.

"We are challenged by the complexity of dealing with our key manufacturers as competitors," he said.

"Our contractor customers view the major manufacturers both as sources of supply as well as competitors. Not only are major manufacturers competing with contractors and wholesalers through big-box direct sales to consumers, but also manufacturers as major commercial contractors compete in the installation and service marketplace.

"We need to identify how our interests and the contractors' interests intersect in this chess game with the manufacturers. I believe this trend will continue as manufacturers fight to maximize margins as well as volume.

"Our creativity and far sightedness will be tested."

Publication date: 01/23/2006

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