The Changing Hvacr Distribution Channel

January 26, 2001
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With the official start of the new millennium, businesses affected by the hvacr distribution channel are continuing to see changes in the traditional relationships between manufacturer and wholesaler, wholesaler and contractor, and manufacturer and contractor. What was once a cut-and-dried process of moving merchandise along a distribution channel has evolved into a convoluted trail with different paths, detours, and occasional roadblocks.

The News set out to seek answers to the question: How has the hvacr distribution channel changed? We consulted some of the top minds in the wholesale business and asked for their opinions. What we got were frank and honest answers about an industry that is undergoing a much-needed facelift while trying to stay in touch with its customers.

It is interesting to note that although the experts agreed on the direction to take the distribution channel, they have different opinions on what has impacted it the most.



The Biggest Change

“The most significant change has to do with the flow of power in the channel,” said Larry Rector of the Climate Control Co. “History shows that the flow of goods started with the manufacturer and flowed through the distributor, to the contractor and ultimately to the consumer.

“In the last few years we have seen a change in the genesis of the flow transfer from manufacturer to the consumer. Manufacturers, distributors, and contractors are all looking down the channel for direction rather than up the channel, where products and information came from in the past.

“This means the manufacturer will look further down the channel to sell their products, meaning that some will be sold with distributor involvement.”

Rector believes that there is a lot of redundancy in the distribution channel, and if one of its foremost goals is to reduce costs, distributors may have a weak argument for remaining in the channel.

Rector went on to list another important change in the distribution channel.

“In the past, the primary function of a distributor was ‘utility oriented’ — providing local inventory, handling warranties, providing credit, etc.,” he said. “Today with technological advances in communications, time and distance is not as important of a factor in conducting business like it was five years ago.

“Using new tools for commerce makes it easier for manufacturers to sell directly to any of the channel members, thereby passing over one or more of their traditional partners, especially the distributor.”

Andrew Larson of the Gustave A. Larson Co. also asserts that the information flow in the channel travels upstream as well as downstream now.

“Ten years ago our manufacturers were focused primarily on the oem’s,” he said. “Many manufacturers felt that wholesale distributors were a necessary evil to sell replacement parts in the aftermarket.

“As the information flow has traveled down the distribution channel and lately up the channel as well, manufacturers have started to change their attitudes toward wholesale distribution. Over the past five years, manufacturers have become more customer focused, and this has helped bring the channel forward.”

John Sedgwick of Applied Learning Associates Midwest said, “The biggest change is the whole maturing of the market. Manufacturers can now produce more than what the market needs. We are in an ‘over-served’ condition.

“Profit pressures and shrinking gross margins have led to the consolidation of component manufacturers, which is pretty complete. Oem’s have dwindled from hundreds to only a half-dozen or so. As a result, there are many more wholesalers than are needed now. For example, Grainger wasn’t even a factor 20 years ago and now they are big. Companies like Johnstone Supply have grown very big.”

Russ Broeckelmann of the Northamerican Heating, Refrig-eration & Airconditioning Whole-salers Association (NHRAW) believes that the biggest changes to the distribution channel involve consolidation.

“Consolidation of contractors and wholesalers and the vertical integration of manufacturers like Lennox have had a big impact,” he said. “It’s come down to local wholesalers who can choose to fight the bigger companies or join with them.”



The Forces at Work

“Quick access to information fueled by technology,” is Larson’s reply when asked what forces have had the greatest impact on the distribution channel. “Over the past 10 years, the proliferation of computers has allowed the distribution channel to move forward like no other period in history.

“Manufacturers have been able to improve their quality and accuracy as a result of improved technology and computers. Wholesale distributors have been able to improve the efficiency of their distribution operations through the use of computers, bar coding, etc.

“Contractors have been able to bring their small businesses into this decade through the use of computers, by being able to implement systems in their business, and run their businesses much more efficiently.”

Sedgwick said the “continuing maturation of the wholesale industry” provides the single biggest impact.

“The emergence of different distributors, like consolidators and people with a national presence who have a large Internet presence and a large warehouse network, is the sign of a maturing market. Wholesalers are also becoming lower value-added companies. They are adding value by adding systems, not by adding people.”

Rector added that the availability of instant information has had a tremendous impact on the distribution channel.

“Consumers can read manufacturers’ technical bulletins and product reviews on the Internet,” he said. “Orders can be placed using a click of the mouse and inventory can be replaced automatically.

“It has been said, ‘Information is power.’ In the past, each member of the distribution channel seemed to have a certain amount of information unique to their position. Today information is ubiquitous — no one has a lock on it. Therefore, no one member is able to control the channel, or even protect their segment of it without understanding their new role in partnership with others.”



Changing Relationships

Broeckelmann said the relationships along the channel have to be based upon trust, just like tradition dictates — but not for all the same reasons.

“The relationships are getting better and tighter,” he said. “You have to trust your partners because they now have more information about you than they ever have had.

“Wholesalers are striving to protect their relationships with customers. In many cases, wholesalers are using e-commerce to go out after new customers and preserve their existing relationships.

“If partners don’t protect their relationships, companies like Home Depot will make an end run around the distribution channel and go directly after the wholesaler’s customers.”

Sedgwick sees a breakdown in some of the traditional relationships.

“Manufacturers and wholesalers who try to do things separately are seeing their relationships deteriorate,” he said. “But manufacturers and wholesalers can partner with each other and enjoy mutual benefits.

“They have formed strategic alliances which have grown into new business for each partner.”

Larson agreed that some relationships have gotten a lot closer.

“Over the past 10 years, relationships between manufacturers and wholesalers have seemed to get closer,” he said. “A lot of this has been the result of closer communication through business communication, shared information, etc.

“However, in the past few years, the relationships have regressed a bit. This has primarily been the result of confusion in the market, such as contractor consolidation, utilities entering our business, vertical integration, etc. These market dynamics have caused some manufacturers to employ questionable tactics and short-term strategic decisions that may have larger ramifications on the historical relationships and channel dynamics well into the future. But overall, I believe these relationships will continue to get closer by the use of such things as bar coding and e-commerce.”

Rector believes with the shift of power to the customer, channel partners may have a hard time acknowledging their new roles, causing them to do things that have strained relationships.

“Each member is trying to take advantage of the situation by developing ways to bypass one or two of the other members. Today we have equipment manufacturers buying contractors and distributors having websites offering to sell directly to consumers. These situations have strained relationships and created an atmosphere of distrust.

“It is also acknowledged by all members that there is a redundancy in the channel. When it comes to agreeing about which party will do what, there is disagreement not only in identifying the redundant functions, but also in who will eliminate the redundancy and rely on the other.

“Tomorrow our customers will tell us who will do what, because they will not be willing to pay for redundancy and will buy from those that have agreed to work together to eliminate it.”



Preserving the Traditional Channel

“Manufacturers and wholesalers must start to trust each other and share information,” said Larson. “We act like one channel and share the information. Despite all of the changes to the channel, the model has held up well and is surprisingly healthy. It will remain healthy as long as we share information up and down the channel and move towards efficiency.

“Wholesalers are uniquely positioned to participate in this new economy. With our role in the channel between manufacturer and contractor, we have the best opportunity to be the infomediary between these participants. If we can capitalize on this, we can ensure the traditional channel model will continue well into the future.”

“We can’t sit in the same catbird seat and assume that we will still own our customers,” added Broecklemann. “Virtual warehouses run by dot-coms a thousand miles away are no threat to us — redundancy in costs is.

“The final user cost of products moving through our distribution channel can be reduced by 20% and we need to implement incentives to achieve that. Right now we are giving businesses a 20% incentive to build a parallel chain and run around us.

“The Home Depots of the world are going to give us a run for our money. If we can meet them head-on and use the electronic capabilities that are available to us, we can compete.

“Wholesalers have to keep their traditional relationships, but we have to learn to be more efficient, by using such things as manufacturer-managed inventory systems, which cut down on distributors’ inventories and raises their return on investments.

“These types of relationships turn manufacturers and wholesalers into equally responsible partners.”

Rector said partners must change with the times, too.

“They must recognize that the channel is changing and get busy having meaningful discussions with other channel members — to implement changes to keep the channel intact,” he said. “We cannot leave distribution of goods and services to those outside of our channel.

“We need to solve our own problems and take advantage of the opportunities that exist.

“I see a consolidation at all levels in the distribution channel, leaving those that can understand their role, build trusting relationships with other channel members, and then implement the strategies that will lead to success.”



Sidebar: The Internet's Impact

Has the Internet and the advent of e-commerce had a significant impact on the distribution channel? The answer you get depends on who you ask.

“The impact could be devastating to those that are not involved,” said Larry Rector of Climate Control Co. “For those already involved in B2B (business-to-business) e-commerce, it will just be the way to do business.

“Our company is already involved in an automatic replenishment program with one of our suppliers. We have been talking to other suppliers about providing similar programs. We’ve seen the benefits with one supplier and will recognize the cumulative effect if all of our major suppliers are online with us.

“B2B e-commerce offers us the opportunity to take out many of the functional redundancies and provide better and faster information, products, and services.”

Andrew Larson of Gustave A. Larson Co. offered a similar perspective.

“B2B e-commerce will play a significant role in our channel in the future,” he added. “However, it most likely will not come from the B2B Internet portals.

“The Internet is the backbone of B2B e-commerce and the key ingredient is increasing the speed of information and access to that information. This is what will enable the current channel participants to interact more closely, share information that has never been shared before, and truly optimize the supply chain.”

“I don’t think the Internet has had a dramatic impact yet,” said John Sedgwick of Applied Learning Associates Midwest. “But those who figure out how to utilize it best will get the business.”

“The impact of e-commerce is big but it is just gradually becoming a concern for some distributors,” said Russ Broecklemann, chairman of a new NHRAW committee, Supply Chain Technologies. “We will explore all of the new technologies impacting the distribution channel and e-commerce is one of them.”

Publication date: 01/29/2001

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