As the economy grapples with supply chain disruptions, four manufacturing organizations are working to make sure various sectors of the economy, including HVAC, are able to get the support they need to serve their customers.
A coalition of four major manufacturing associations — the Air-Conditioning, Heating, and Refrigeration Institute (AHRI), the Association of Home Appliance Manufacturers (AHAM), the North American Association of Food Equipment Manufacturers (NAFEM), and the National Electrical Manufacturers Association (NEMA) — are urging action by the Biden administration to address supply chain challenges outlined in a newly released white paper.
Supply Chain Issues
The paper follows a series of meetings among coalition members and Capitol Hill and administration staff centered around issues important to the coalition’s member companies, such as the Section 301 China tariffs, Section 232 steel and aluminum tariffs, supply chain concerns, labor shortages, increased costs for shipping containers and increased shipping times, and semiconductor shortages.
“Trade distortions and the COVID-19 pandemic have resulted in shortages of essential components, the effects of which have exposed the severe and worsening deficiencies in the U.S. logistics network and have led to delays and costly inflation at every stage of the manufacturing supply chain,” stated the white paper. “These issues are made worse with ongoing labor shortages, and added together, they disrupt domestic production, result in temporary shutdowns, reduced sales, increased consumer costs, and delayed delivery of critical products. All of this combines to stall the U.S. economy.”
The paper acknowledges that many supply chain issues will require long-term solutions, but the coalition also requested immediate relief from policymakers through tariff removal and fair allocation of semiconductors to all industries. The coalition of organizations noted that ocean freight rates have more than tripled in the past year and are further elevated by other associated costs, such as detention, congestion fees, surcharges, a lack of available pier and storage space, and substantial increases in transit times.
Cause and Effect
The COVID-19 pandemic led to plant shutdowns and slowdowns, including difficulties for manufacturers to attract new employees even with competitive pay and benefits. Workforce vaccination also remains a constant challenge, which makes it difficult for employees to work together in close proximity. Other obstacles include travel restrictions, social distancing needs, and rapid shifts in the market for certain goods as a result of the pandemic, which has strained the demand for the materials and components needed for those in-demand goods.
“For example, consumers are relying more than ever on room air cleaners and updated HVAC systems, among other air treatment products, to ensure a healthy home during the pandemic,” states the paper.
And the pandemic is not the only issue causing these problems. Certain uncontrollable events and natural disasters have occurred, such as floods in Germany, wildfires in California, a deep freeze in Texas, and the blockage of the Suez Canal.
This perfect storm has caused the members of the coalition’s organizations to cope in a number of ways: Temporary or intermittent plant shutdowns, price increases, delayed delivery, delayed sales, limited shipments, and increased order sizes on components.
“The result is that the crucial products our members make are either not available or, if they are available, are more expensive and subject to significant delays,” states the paper. “This comes at a time when demand for many of our members’ products, including home appliances and HVAC equipment, is, as reported above, at a record high.”
As a response to the supply chain challenges, the coalition urged policy makers to remove the Section 232 tariffs on steel and aluminum imports, at least for American allies. Or, at the minimum, revising the product exclusion process so exclusions are transparent and available to all downstream manufacturers of the material.
They also asked to remove the Section 301 tariffs on Chinese imports, or at least to renew the previously granted expired exclusions. Lastly, the coalition asked the administration to make sure that the semiconductor supply is fair and transparently distributed across the industry, avoiding favoritism for any one sector of the economy.
Issues Trickle Down to HVAC Contractors
As manufacturers deal with the logistical challenges of disruptions in the supply chain, contractors are needing to deal with their own issues caused by problems upstream.
Butch Welsch, president, Welsch Heating and Cooling Co., said that steel prices remain high and there is no end in sight. His company has needed to work closely with vendors to ensure it can receive purchased goods in a timely manner, sometimes needing to purchase additional quantities to ensure they have them when needed.
“This has put a strain on our cash flow, but we have had numerous conversations with our banking partner to have them ready in case we need them,” said Welsch. “We monitor our selling price to customers monthly and make the necessary adjustments. Everyone on our staff has worked very hard this year to provide the service our customers have come to expect from our company.”
Steve Simmons is the co-owner of Air Comfort Heating & Cooling. Similar to Welsch, he said that Air Comfort also has tight, cooperative relationships with vendors to make sure they are informed of any impending shortages, helping the company to order high demand items with less need to overstock.
“Rapidly increasing costs necessitate increased selling prices — there’s no way a contractor can nor should absorb them,” said Simmons. He warned that some poorly managed businesses are going to get hit hard here in a few months, not realizing the dramatic loss of gross margin dollars they will be facing.
“The need for real-time financial information has never been more evident,” he said. “For those not able to stock up ahead of the shortages, they will need to manage labor issues or risk increased unapplied labor dollars eating up dramatically reduced income from not being able to get systems to install.”
The current supply chain challenges have shown the need for contractors to be focused, as most are not able to swing by the supplier for pick-up or next day delivery on equipment. Tye Leishman, founder and president, Tempco Heating & Cooling Specialists, said the company has needed to watch supplier inventories closely. They’ve ordered parts and equipment weeks (sometimes months) ahead of time to ensure they can service their clients. “The advice I would give is get a deposit at the time of approval and order the equipment the same day to ensure no price increases,” said Leishman. “In regards to delayed shipments, communication is the key. Most clients are aware of the current global supply chain issues. We should always be reminding clients upon approval of the work, since there may still be unexpected delays and we will keep the client updated as timelines progress.”