The bulge in the supply chain eased in 2006 as distributors adeptly addressed the inventory bottleneck that resulted from the mandatory changes in SEER minimums. In the first quarter, shipments were up an average of 37.4 percent over 2005, according to the Heating, Airconditioning and Refrigeration Distributors International’s (HARDI’s) supplement to the monthly sales trend report. From there, the shipment numbers decreased 4.6 percent in the second quarter, 14.4 percent in the third quarter, and 25.4 percent in the fourth quarter. Overall, 2006 shipments were down 7.5 percent as compared to 2005.

“Based on local market conditions, manufacturer production schedules, and distributor marketing strategies, distributor equipment inventories by SEER level varied widely throughout the industry during the 13 SEER transition period,” said Donald Frendberg, executive vice president and COO, HARDI.

“As distributors’ overstocked inventories were depleted, it led to an anticipated decline in manufacturer shipments of 13+ SEER equipment, which did not have an appreciable effect on distributors.”

DISTRIBUTION BACKLOG

Multiple factors in 2006 explain the drastic number shifts that distributors experienced as the year progressed. Weather patterns influenced the numbers in many regions. The lack of high-end product availability early in the year, warehouse space difficulties, the slowing of the housing market and the economy, and price increases brought about by inflated costs of raw goods left HVAC distributors working hard to keep up with the changing supply chain atmosphere.

When the gas prices spiked so drastically in 2005, many consumers turned to higher-efficiency systems to compensate for the rate increase. This unexpected event, inspired primarily by major natural disasters in 2005, caught manufacturers off guard, leaving a gap in their ability to fulfill immediate equipment demands.

“It was difficult for many distributors to receive adequate supplies of 13 SEER equipment through the second quarter as manufacturers struggled to meet production needs,” noted Frendberg.

Space became a premium concern for distributors due to the increased size of the mandated new units. “Not only did we need more warehouse space,” said Joe Rettig, residential sales manager, The Habegger Corp., “but we also needed more truck space.”

The domino effect created by the size of the new units continued to inspire changes as the need for more truck space created the need for more trucks and more manpower to move and deliver the products.

“The larger units require more manpower to do the same job as before,” noted Rettig. “Distributor delivery efficiencies were reduced by the larger units because more deliveries are now necessary to do the job.”

The downturn in the housing market added an unexpected twist. According to Rettig, the slowdown caused distributors to spend more time on accounts receivable from their customers. It also made it harder to continue sales growth and to forecast and manage inventory.

“With the economic slowdown, contractors were more price focused rather than value focused, causing greater pressure in the distribution channel,” he said.

“In addition, in markets where the U.S. automotive industry has manufacturing facilities, there were a number of layoffs or plant closings that profoundly affected the residential new construction and add-on replacement market. There was an increase in repair rates instead of replacement rates.”

Price increases didn’t affect just the manufacturers in 2006. Raw materials and commodities pricing elevated the entire supply chain’s pricing structure.

“The rising costs of steel and copper affected both equipment and accessory pricing,” said Frendberg. “Implementing and communicating such pricing changes on an almost daily period was a daunting task, especially for those without the proper technology in place.”

According to Frendberg, the challenging economic structure of 2006 caused distributors, suppliers, and contractors a lot of frustration. “In the end, all survived and I believe they have even stronger relationships today,” he commented. “As they say, ‘Whatever doesn’t kill you makes you stronger.’”

FUTURE FORECAST

As distributors face 2007, multiple issues are continuing to compel supply chain adaptations. One issue to monitor closely is the overall economic market.

“I am concerned as to how long the housing market will stay flat,” said Rick Johnson, founder, CEO Strategist. “I am more concerned as to whether or not the housing market will begin another slide before it rebounds.”

The Habegger Corp. sees 2007 to be a challenging year, but a good year. The company predicts that the high-end buyer will be very active in the market.

“We feel that once the home builders deplete their excess inventory in 2007, they will once again start building at a normal pace,” predicted Rettig. “We anticipate this to happen in the second quarter of 2007. Assuming the economy remains strong and energy prices continue to rise, we see higher-end unit sales contin-uing to grow, also spurred by the government offering more tax credits for higher-efficiency products.”

The distribution apparatus of HVAC is shifting its center to focus on information and technology. According to Rettig, increased training and technical support will be key as territory managers migrate to the role of business consultants and problem solvers instead of box movers.

“Distribution is also going to have to enhance the quality and knowledge of its counter personnel,” noted Rettig. “Contractors want to deal with knowledge-based people who can solve their problems immediately.”

Increased information and knowledge, however, is not confined to personnel members. Knowing what is in the warehouse and where it is located, is imperative. Distributors and suppliers will be increasing their shared information in 2007 as the implementation of warehouse management systems becomes more commonplace.

“Technology continues to have significant impact on the distribution industry in the areas of software development, warehouse management systems, bar coding, radio frequency identification (RFID), electronic data interchange, product and pricing update tech-nology, electronic catalogues, and the development of an industry database,” observed Frendberg.

According to Rettig, distributor adoption of technology is not going to be a luxury, but a necessity. The constant changing of products by manufacturers should inspire more sophisticated inventory control of repair parts.

“Constant control board updates by manufacturers require constant updating of distributor inventories,” said Rettig. “A standardized bar coding system will be a necessity for the industry to improve its efficiencies.”

WORDS OF WISDOM

As the industry changes, distributors will most likely find it necessary to roll with the punches. “The HVAC industry is a dynamic one that has true growth potential. Those distributors who are able to adapt to the changing dynamics of business will thrive,” observed Rettig. “Those distributors who wish to continue to do business as it has been done in the past will be left behind.”

Publication date: 03/26/2007