The frustrating path of 2020 makes the act of forgetting challenging times – and treating business struggles as consequences of an anomalous year – enormously appealing. However, to forget the challenges of the year and the lessons learned would be a mistake. Businesses that survive difficult times and actively learn from their trials are better for it, and generally well positioned to grow with the market. As part of our 2020 industry research – the findings of which are now available for pre-order on our website – the Market Intelligence team has identified which, in our estimation, are the 3 most pertinent lessons for the industry and the ones we hope all of our members carry into the new year.
1. Product availability remains wholesale distribution’s #1 value proposition.
HARDI conducted surveys of wholesale distribution’s suppliers and customers during 2020, and through those surveys one unambiguous truth emerged: maintaining sufficient product availability is the key for wholesale distribution to remain the HVACR industry’s channel of choice. Distributors that struggle to keep their shelves stocked and have the right product available when a contractor needs it are at a heightened risk of critical selling events – the moment when contractors choose to buy the materials they need for a job from a different distributor or channel. 26 percent of contractors completing the HARDI survey in 2020 stated that the effects of COVID-19 – primarily the shortage of HVACR equipment – led them to purchase from a different distributor or channel. Fortunately, most contractors were understanding of the challenges distributors and their suppliers were facing in keeping sufficient levels of product in stock, and 58 percent said that wholesale distribution outperformed all other channels in the area of product availability.
2. Effective inventory and supply chain management are critical to the future of distribution.
Contractor demand dropped considerably this spring as the economy fell into a temporary coma. Equipment that had been ordered continued to arrive at distributor warehouses, and as the boxes accumulated so did the uncertainty. Uncertainty led many distributors to either delay their orders or cancel them outright. Unfortunately, when demand spiked in the late spring manufacturers were overwhelmed by a surge of new distributor orders, and COVID safety protocols inhibited their ability to scale production fast enough to meet demand. Mismatched supply and demand created widespread product shortages, and on average distributor revenues were clipped by 5 percent because of their inability to meet demand.
Could product shortages have been avoided altogether? Probably not – COVID-19 has disrupted supply chains worldwide and attempting to forecast the outbreak of a world-altering pandemic is a fool’s errand. However better demand forecasting, higher levels of safety stock, and greater communication between contractors, distributors, and manufacturers might have reduced some of the pain the industry has experienced. Additionally, with other B2B channels for HVACR products emerging, wholesale distributors will need to better manage their supply chains and inventory levels in the future to stay competitive. To that end, HARDI encourages all of its distributor members to utilize the Supply Chain Scorecard as a first step in improving the dialogue between distributors and their suppliers.
3. Demand is (mostly) inelastic.
Demand forecasting techniques are based almost entirely on trends and relationships visible in historical data. Although these techniques are generally useful, they have the unfortunate tendency of leading us astray when the world is confronted by economic scenarios with no modern precedent. When the sky looked like it was falling this spring, and all of our models suggested a massive decline in demand for HVACR products, there is one historical precedent that the most sagacious among us recognized – demand for HVACR products is pretty stable. While people tend to cut back on their spending when the economy sours, they still spend on the products they view as a necessity (like heating and cooling equipment). This is not to say that economic factors don’t matter – they clearly do, as the pain the industry felt during the Great Recession and currently in the commercial sector makes plain. But, relative to other industries, demand for HVACR products is inelastic – a point worth remembering in the years to come.
This post is a summary of the Market Intelligence team’s presentation at the 2020 HARDI Summit. A recording of this and other Summit presentations are available on-demand to all attendees, and can be purchased by non-attendees here.
The full State of the Channel Report can be purchased here. Login for member pricing.