HVACR Demand Creation, Distributor - Manufacturer Relations
A central pillar of EVERY customer-driven enterprise rests on several simple premises: What does a company have to offer and what does the customer want to buy?At the risk of oversimplifying, one can create the product, wind up the marketing monster and create the demand. That’s one theory. The other, of course, is to recognize or discover a demand (that might not be obvious) and fulfill the need. Watch the customers flock.
You could probably line up both sides of the discussion with experts explaining which way works in the “real world.” Unlike science, where a double-blind study is the (often) arbiter of what is effective and what fails, in the business world, final analysis is often judged on the current state of belief.
The only real failure, regardless of which stand you take, is failing to try and gain a better understanding of what you do in business and how to improve your execution of it.
That’s what The HARDI Foundation has accomplished with their first book, Myths & Misperceptions. It’s a first real-world, honest appraisal of distributor-manufacturer relations through the prism of demand creation.
The origins of Myths & Misperceptions found its birth through a series of events that began with a transformation of the HARDI Foundation in 2011. Ideas percolated as members grappled with the direction of the foundation and whether it could have a greater impact on the industry. Its board began to coalesce in a direction that suggested a research study that members couldn’t (or shouldn’t) ignore would be the next step if the foundation was to flourish with a more robust industry presence. During its annual conference, a HARDI Distributor Town Hall Meeting (the first of its kind) in Maui, Hawaii, in 2011, solidified the topic given the attention it received at that meeting: distributor-manufacturer relations. Once the topic became obvious, two important questions were left: Who would pay for the study, and what organization would conduct the research? For a small foundation that essentially gave away scholarships, the idea of spending six-figures on a potential research project was stunning. If the HARDI Foundation could pull it off, however, it would suddenly raise its impact and profile in the distribution world.
As is frequently the case in the HVACR-HARDI orbit, industry partners — both manufacturers and distributors — were willing to invest in the project. The HARDI Foundation put out bids to several well-known candidates and eventually awarded it to Indian River Consulting group whose managing partner is Michael Marks (www.ircg.com). Marks has spent more than 30 years in the distribution business. Many regard him as a “big thinker,” someone with an eye for the strategic view coupled with a talent for public speaking, where he has repeatedly demonstrated both an entertaining and direct style of conveying his thoughts. He also has a connection to HARDI. He played a lead role in the consolidation of the North American Heating, Refrigeration & Air-Conditioning Wholesalers and the Air-conditioning and Refrigeration Wholesalers International that resulted in the HARDI organization in 2003.
After that Distributor Town Meeting, a consensus quickly formed that “demand creation” was the vexing question in distributor-manufacturer relations. Marks recalls that if there was near unanimity on the question, the interpretations to the answers would have a different response.
“Everybody agreed that demand creation was the giant question,” says Marks. “The reason it was a question [of high interest] is that the distributors had a really clear picture [of demand creation] and thought they were right, and the manufacturer’s picture was very different, and they thought they were right. So you had these two opposing views that were in conflict, and both sides held them with conviction. Everybody knew that something was wrong somewhere.”
To illustrate a sense of the difference, Marks used an example that he “stole” from his partner on the project, Steve Deist: “The reason people want to go to marriage counseling is to improve their spouse,” says Marks. The implication, of course, is the other side would finally understand the nature of demand creation, thereby laying the presumed framework for improved cooperation.
“The reason the manufacturers and distributors both funded this is that they were convinced the research would prove the other guys wrong and themselves right,” says Marks. “You could not talk about a more perfect setup. The manufacturers were absolutely convinced and the distributors were absolutely convinced that the other side was wrong. That’s why they put up the money to get some proof, and then what happened was real research.”
The research project began in July 2013, and Marks and Deist introduced the initial findings at HARDI’s 2013 annual conference and additional insights were released at the 2014 annual conference. The results of the study formed the basis of Myths & Misperceptions, How Markets Are Really Made in HVACR. The 80-page book explains the issue of demand creation in a comfortable style that is neither ponderous nor overly complicated. Anyone interested in HVACR supply chain issues, from executive or counter person, can digest its content at one sitting. It might be an easy read, but its conclusions were far from simple.
Richard Cook, former HARDI president, current chairman of the HARDI Foundation and president and COO of Houston-based Johnson Supply, described it as a “landmark study.”
Indian River’s conclusion was an eye-opener, whether or not you agreed with them. Marks says the initial premise of demand creation was heavily inconsistent.
“The biggest conclusion was that the fundamental premise of demand creation was flawed,” Marks says. “It was flawed because people thought products were sold, and what they fail to understand in this [HVACR] business, it is that products are bought. That’s the giant takeaway. And everybody thinks if I get sales guys better training, better collateral [materials], then go interrupt another customer and tell them how great this stuff is, that they’re going to have this religious epiphany and change their supplier and buy my product. There’s so many salespeople in this industry, and everybody’s spent all this money on sales and CRM and training and speakers.”
Marks drives home the point that reliability and availability of product are what really sell and that contractors don’t want “drama” in their lives, another way of implying that doing anything else can upset the existing dynamic between a wholesaler and the contractor. “They choose the distributor they have because they deliver and keep their products up with the supplies they need,” says Marks. “People talk about features and benefits on products, and ‘My motor’s better than the other guy’s motor,’” he says. “They [contractors] don’t care because the fact of the matter is a guy goes to a counter, and he can’t get the motor he wants, and all of a sudden he’s lost his butt in terms of labor costs for that service call, and it doesn’t matter what the motor costs.”
Marks returns to the theme that success of the sales relationship rests on how the contractor makes money, who fulfills his needs and when he might be interested in examining a new product. What contractors want, once they find something that works, are very specific circumstances where they’re interested in a new product. We identified all of those, but we also identified how risk averse these people [wholesalers] are, that they’re never going to jeopardize the customer to try some new product [just to] make another couple bucks on something. According to Marks, the key element is the integrity factor with a contractor who earns the majority of his income from referrals. That leads contractors to be judicious about choosing a distributor that can fulfill their equipment and supply needs. “Once they find that out, they’re pretty much going to buy what the guy [wholesaler] sells.”
Marks speaks bluntly about salespeople and counter people, describing the latter as “critical” to a wholesaler’s success. “Think about how much money is wasted on all that [sales and promotion] that’s not going to work. They should be spending money trying to help counter guys. They [counter staff] aren’t stupid. They keep thinking, ‘Well, they’re stupid. If they were smart, they’d be selling my stuff because they could make more money.’ They don’t understand that those counter guys are managing relationship equity with that contractor, and that contractor trusts them. Teach them how to take the adventure out of recommending something new instead of talking about how you’re going to get some stupid spiff or something.”
Marks acknowledges that there is a bias toward the potential impact of sales and marketing. He doesn’t contend that it doesn’t work but questions the proportionality that some manufacturers place on it. His further emphasis is on the idea of the “no drama” reliable contractor rests in part on the loyalty factor in the contractor-distributor relationships. The loyalty factor buttresses Marks’ contention that it plays an almost overpowering role in how long a contractor remains with a supplier. While he supplies a chart based on the contractor’s industry segment, it ranges from a low of eight years to a whopping 19 years. [see chart, p. 8.] Simply put, to cause a contractor to change suppliers (and thus become a new revenue stream) requires what Marks describes as a “critical selling event” (CSE). The definition of a CSE is “an incident that causes a customer to consider switching a supplier or product that is not triggered by deliberate sales activity.” Marks list 10 examples of CSEs that include a contractor taking on a new project that he’s never handled before, thus requiring equipment he’s unfamiliar with, or the contractor might have recurrent problems with installation from a wholesaler’s product line.
Marks concedes that the results of the study, explained at two HARDI conferences in 2013 and 2014 and culminating in the book earlier this year, shocked some people.
He suspects that the conclusions weighed less on distributors than manufacturers. Marks believes that there was less discomfort to distributors because they spend much more time understanding how to enlarge their market and how to respond when a CSE occurs, either for gaining new business or protecting one’s own business. Marks says that according to the feedback he received, “salespeople get this 100 percent. If you’re a territory manager and you work for a distributor, they look at it and go, Look, somebody finally broke down what it is that we do, and this is how the business works. Every bit of feedback that we’ve gotten has been, ‘Thank you so much, because I can use this to help my boss understand what I do for a living.’”
On the manufacturing side, his anecdotal analysis is mixed. Some larger manufacturers, who Marks declined to identify, “completely discounted it.” They pointed to size, market share and brand power that would immunize them from the report’s conclusions. Other manufacturers, a handful, said to him: “You know, this could be a game-changer.”
When asked how the results of the research compared to channels in other industries with which Marks is familiar, he said: “We work in plumbing, electrical, in construction materials, so we’re pretty much across the board. Two things stick [from this study] in other industries, and one big thing doesn’t. The two things that stick is this idea of a contractor who’s choosing a distributor and other staying there until there’s a critical selling event. That critical selling event, that process happens in every industry. The second thing that’s true is that good distributor salespeople protect those relationships. They build those relationships with their customers, and product flows through [them]. They’re not selling product, the relationship is the economic charm, and that contractor chooses that distributor because of their reliability to source the supplies. That’s the sense [they have], so it’s that rule of protection. What is different in HVAC, what is dramatically different, is the legacy of those relationships and the length. I’ve never seen anything like it in my life.”
As the interview with Distribution Center magazine drew to a conclusion, the inevitable two-part question arose. If he were a CEO of a distributorship, what would he do with Myths & Misperceptions and its findings? The same question would apply to a manufacturer.
For distributors, Marks says the first step would be to realign the field sales territories. “I would incentivize and I would change my incentives so that I would be paying people for effective CSE interruption, instead of paying them a percentage of gross margin. A-players still need to make A-money, so I’d be rewarding protection.”
The other step would be to restructure territory, which would permit a larger group of customers with “low touch” sensitivity. This would allow the salesperson to intercept a CSE because they would be a more familiar face. Marks also insists that counter people should get pay commensurate with their influence and ability. Lastly, he would have professionally designed surveys conducted on customer service and not low-cost, questionable digital programs such as SurveyMonkey.
For manufacturers? “I would re-valuate all my investments in sales and marketing, especially anything that has to do with interruption selling about how wonderful my product is,” says Marks. “I would terminate all the district locations that do not stock my product. If I do not have a prime stocking position, I would not let them order product from me anymore because all they do is drive the margin down.” Marks would also lower the minimum order and the cycle order time. “I’d take all the drama out of [the ordering] process and put it into supplies,” he says.
When it comes to the HVACR wholesale business, Richard Cook is a man of many hats. He is president and COO of Houston-based Johnson Supply. Sometimes he dons the hat as chairman of the HARDI Foundation. Less often, he wears the hat as a former president of HARDI. It was his position with the HARDI Foundation that ultimately propelled him into a role that would help shape a major research project culminating in Myths & Misperceptions.
Cook recalls that HARDI held its first-ever Distributor Town Hall meeting at the annual conference in Maui, Hawaii, in 2011. The panelists consisted of himself, Bud Mingledorff, CEO of Norcross, Ga.-based Mingledorff’s Inc. and Talbot Gee, HARDI CEO. They expected numerous issues to arise. Cook confesses that he expected 10 different topics and was unsure of how to address them. “We’ll just wing it and meet the questions as they arise,” he said.
Then, surprisingly, one issue dominated: distributor and manufacturer relations. During the one-and-a-half hour session [it was a distributor-only meeting], the relationship between manufacturers and distributors was called into question “again and again.”
Cook says distributors were looking for answers that would confront and illuminate the issue. “We decided that it would be of great interest to everybody in the supply chain to explore whether distributors create demand,” says Cook. “How is demand created? What does that mean, and what does it mean to manufacturers, and what does it mean to distributors?”
That fledgling town meeting had an impact on Cook and the others and ultimately morphed into the research study and book by Michael Marks and Steve Diest.1
Cook, of course, has two distinct reactions to the results of the study and the subsequent publication of Myths & Misperceptions. Wearing the HARDI Foundation chairman hat, he says, “From the perspective of the chairman of the foundation, I was pleased at the findings that the research seemed to [generate] ... It got a lot of talk and a lot of reaction when the topic was presented for the first time at the HARDI national meeting [in 2013].
“It was really the talk of the meeting, at least from my perspective. Obviously, I was asking a lot of questions, but I heard a lot of water-cooler talk in the halls. As the year went on, I’d ask a lot of people, ‘What do you think about that?’ I very seldom got a, ‘What are you talking about?’ I always got a, ‘Oh yeah, that was very interesting.’ [Ed. Note: Richard Cook became HARDI Foundation Chairman at the Dec. 2013 annual conference, replacing Bill Shaw.]
“Then in the second presentation [HARDI annual conference 2014], I thought Michael [Marks] did a good job. Again, a lot of talk and a lot of interest, and then the book sales have been robust enough that we seem to have gotten a topic that a lot of people are interested in and seemed to appreciate research instead of emotional conversation only.
“I don’t think many manufacturers have used Michael’s [conclusions] as far as I know. None of them have come to me and said, ‘OK, based on Michael’s research, this is how many distributors we think should be in this market.’”
Cook emphasizes that simply because manufacturers did not discuss it with him doesn’t mean they might not have considered the findings or even possibly implemented some of the suggestions. “I think it was a good first start for us on what I’ll call a major research project.”
Cook describes himself as a “data hound” and says there were segments in the book he would have liked to see additional research especially in the mechanical and refrigeration contractor areas. He is not critical of Marks’ approach, emphasizing that time and funding dictate the length and depth of any research project. But he concedes that those subjects might be a solid “second step” if there is an extension of the project.
But no matter how deeply involved he is in HARDI, Cook still has a major responsibility in managing a distribution company. What was Cook’s view wearing his distributor hat?
“Getting new business and minimizing attrition are two of the biggest challenges we have,” says Cook. I suspect every distributor has that. You often wonder, why can’t we move the needle more? I took some comfort in the fact that this [study] reinforces how hard it is to move the needle [for increased sales].
“I will say that as with [any] research, one size doesn’t fit all, but the findings are very intuitive for people that have been in the business a long time, and I agree. ... In fact, we have already changed some things about how do we pick up earlier that critical service event, that critical sales event. Because too often you lose a customer and you’re not sure why, and by the time you recognize it, you’ve lost them. The horse is out of the gate, he’s gone. Typically, we find out it was a preventable thing.
“As a distributor I’d like to see a bigger sampling or perhaps a phase two or phase three of this still picking at this same subject, but with a broader view ... again, for the money and for the time, Mike could only do what he could do, but I’d still like to see a larger data sample to see if these findings hold up.”
A final thought? “It generated lots of interest and it turned out to be a surprise, which I guess good research does. Both the manufacturing and the distributor side were made a little uncomfortable by the research, so I guess that’s good research too. It’s almost like a good compromise and if it’s a good compromise, nobody’s happy.”
When asked if he read Myths & Misperceptions, Philip Windham recalls reading the entire book on a plane flight. “It was an easy read,” says Windham, vice president, sales for Nortek Global HVAC (formerly Nordyne).
But given Windham’s experience in the HVACR industry, he had more than a passing interest in the book’s conclusions.
Windham had spent time working for a distributor and as an independent rep before joining O’Fallon, Mo.-based Nortek Global HVAC more than a decade ago. He also served as HARDI’s vice chair of the Sub Duct committee (under the HVAC Systems and Equipment committee) for five years and joined the HARDI Foundation this year.
While Windham was not a member of the foundation when the discussion around the book began, Nortek Global HVAC was a financial supporter of the study.
Windham acknowledges that the study’s findings helped him and his staff compare how they conduct business with others in the industry. Myths & Misperceptions was of obvious interest to us, and that’s why we supported it,” says Windham, recalling his reaction to the book.
Windham says manufacturers are always asking the eternal question of how to increase market share. “What triggers a distributor’s need, or desire, to move a significant portion of their business is important.”
He then raised a basic but critical question: “How much time are we spending as a manufacturer on what we believe is valuable but what [possibly] the distributor couldn’t care less about?”
Like many HARDI members, Windham’s first exposure to the results of the study was at the HARDI annual conference in 2013 when Indian River provided the first presentation. The first reaction? “Wow, that seems difficult to swallow, just because we spend so much time on constantly pursuing business, switching or adding a line or working with distributors’ salespeople to go on calls,” Windham says. “If only 2 percent are doing it, what are we doing?” asks Windham, referring to the report’s assertion that “Only 2 percent changed because a sales rep convinced them to change.”
Windham says his sense of the reaction that he heard from others indicated that they were either skeptical or unconvinced. The usual reason given for the doubt rested on the issue of statistics or, more specifically, the sampling size conducted for the study. “I think there’s a perception, whether as a distributor or manufacturer, that it didn’t take a critical sales event for something to happen, and a lot more business shifted in a given year” than what the book reported, he says. Informal feedback to him from others in the industry suggested that a broader study might have yielded different results.
One area that drew his particular attention was customer service. Windham says when the report came out, he shared it with his direct staff and several executives, and consensus appeared to be that “it reinforced the value we put on customer service. I think it [the report] heightened our sensitivity to it.”
It is unsurprising that everyone in the supply chain understands that the sales connection is vitally important regardless of how you define it. “Everyone’s aware that you’re one critical sales event from pushing someone in another direction,” he says.
But if you operate under the belief that a critical sales event is the primary reason for a contractor to change distributors, Windham acutely points out a significant dilemma. How do you know when or if it is occurring? “You have to be in the right place at the right time when one of these [critical] sales events happens to gain that distributor’s or contractor’s business,” he says.
Turning to the issue of tenure in the contractor-wholesaler relationship, Windham says the study confirmed what Nortek Global HVAC has known for years.
He acknowledges that tenure is long-lasting in the HVACR industry and treads carefully on the subject. Windham alludes to the fact that most people are creatures of habit, and if someone has been installing the same brand for a decade or more, there is some “tribal” knowledge that works to the advantage of both contractors and distributors creating a culture of “why change?” He insightfully points out, “Not everyone is in an aggressive growth mode like we are.”
The inference is that while it would appear that long-term tenure exists because of loyalty and customer relationships — something that Windham readily admits is a strong factor — one could also make the case that for some, not changing distributors is the path of least resistance.
While Windham still has some questions about the breadth and depth of the study, he also acknowledges that its value rests on attention-getting aspects of the book, spurring manufacturers to ask themselves fundamental questions that in theory they are already asking. In a sense, the study serves as a management and sales prompt to refocus and to ensure that everyone is practicing business basics, in this case, managing the relationship between manufacturer and distributor.
Indeed, Windham says the biggest takeaway for his team was to reassess the fundamentals of how they deliver value to the customer. “We asked, ‘How are we helping our distributors grow their business? Are we meeting their needs?’” It’s a good business policy to ask those questions and to conduct regular reassessments, he says.
Like Richard Cook, Windham acknowledges that a follow-up to Myths & Misperceptions might occur. It’s a topic the HARDI Foundation will undoubtedly ponder in the future.
However one interprets the book’s data, for himself and for Nortek Global HVAC, the strategic plan remains the same.
“We’re committed to independent distribution,” Windham says. “Roughly 95 percent of our business runs through their doors. It’s very important to us, and we’re dedicated to it. Our 96-year history has been with independent distribution. We are the company we are today because of their partnership and support. They’re an integral part of our past, present and, of course, our future.”
Who’s right? And how right is anyone? When we have long-held beliefs challenged, for numerous reasons it’s difficult to marshal a counter view. If you doubt me, when’s the last time you changed your political opinion? When it affects a business, where a decision might hurt the bottom line or curtail a rising career, caution is often a byproduct if not the result.
While Michael Marks is confident of Indian River’s research and conclusions in Myths & Misperceptions, he seems ambivalent about how others will view them. “If our research is flawed, and we’re wrong, then the arrogant guys that ignored us will be right,” he says. But Marks considers the research solid enough that any topnotch university could duplicate and describes his conclusions as a “blinding flash of the obvious.”
Again, who’s right? “Time will tell,” says Marks.
1Everyone I spoke with brought up the name of former HARDI president and former HARDI Foundation Chairman Bill Shaw, chairman of Dallas-based Standard Supply, who insisted that solid research was necessary if the foundation intended to take a lead role in the HVACR industry. Shaw, according to the sources with whom I spoke, not only kept pushing for the research, he cajoled distributors and manufacturers into becoming financial sponsors of the research, including Standard Supply.
Myths & Misperceptions is available at various online retailers for $98. Anyone interested in obtaining a copy of the book can receive a 50 percent discount ($49) by following the purchase link at hardinet.org/book and entering the promotional code AMLNKLEU.