While HVACR manufacturers and distributors have traditionally relied upon one another for business success, those relationships appear to be fracturing.
According to a “Reimagining Distributor and Manufacturer Relationships” survey conducted by the National Association of Electrical Distributors (NAED), 91 percent of responding NAED companies said there is a real need for manufacturers and distributors to reimagine how they can better work together and more collaboratively. In Industrial Distribution’s 71st annual Survey of Distributor Operations, 77 percent of distributors stated the level of support they receive from their manufacturer suppliers has stayed the same or gotten worse over the last year. Research from the Industrial Performance Group further solidifies this point, reporting that 82 percent of manufacturers and 92 percent of distributors believe problems in their working relationships hurt sales and profits.
In addition to the friction between vendors and wholesalers, two-step distribution is further threatened by the advent of e-commerce, the growth of manufacturer-consumer direct sales, millennial purchasing habits, and more.
So, while the aforementioned statistics appear rather gloomy, how do the HVACR manufacturers and distributors working in the market today rate their current supply chain partnerships and the future of two-step distribution?
On a scale of one to 10, Jim Luce, owner, Luce, Schwab & Kase, Fairfield, New Jersey, rated his partnership with Mitsubishi, the company’s largest vendor, a nine out of 10.
“While we don’t always agree, our communication and planning is very good,” he said. “We have quarterly meetings that review our goals and track our progress. Our team works closely with the Mitsubishi team to achieve our goals.”
Jeff New, president, Mid City Supply Co. Inc., Elkhart, Indiana, rates his partnerships at an eight. Holding its end of the bargain, Mid City Supply offers manufacturers added time and place, marketing expertise, training, and exposure to local markets and customers. While New acknowledges his company has a lot to offer its partners, he admits there are things Mid City could improve upon.
“While we meet with our major manufacturer reps annually, I don’t feel that’s enough,” he said. “We need to meet with the management of our larger vendors and have meetings that are more substantial than those that occur at our buying group meeting.”
HVAC manufacturers generally feel their supply chain partnerships are fairly strong.
Kerry O’Brate, senior manager, North American aftermarket and distribution, Embraco, rates the strength of Embraco’s distribution partnerships at a seven.
“Our distribution partners offer us increased exposure of Embraco’s brand, solutions, and services,” he said. “Additionally, they offer last-mile coverage and new product exposure to contractors.”
Joe Molinaro, director of commercial/HVAC sales for Friedrich Air Conditioning Co., also scored the company’s distribution partnerships at a seven.
“Our partners possess tribal knowledge; they know their markets better than anyone,” he said. “Our partners have frequent and thorough touchpoints with their contractor customer base and can better serve and support contractors in their local areas, which is essential.”
Gene LaNois, head of professional industry partnerships, Google, speaking on behalf of Nest, said Nest’s partnerships vary depending on the distributor.
“Our distributors offer us immediate trade availability, an extended sales force, brand awareness, credit, co-marketing, daily access to thousands of contractors and dealers, and much more,” he said. “That said, it’s hard to put a number rating on these relationships, as we realistically have different levels of partnership. We have some distribution partnerships that are good and others that are extremely strong and deeply valued.”
Embraco offers its distributors local, high-quality product availability, easily accessible customer care, and knowledgeable and local technical support, said O’Brate. To continue to strengthen its side of the bargain, Embraco trains and deploys its sales teams and rep groups to reinforce its relationships with distributors and validate Embraco as a global brand with a localized presence.
“Service and technology update training is a fundamental component in gaining the trust of contractors, especially in regard to new technologies being used at the OEM level, such as new refrigerants, inverter technology, etc.,” O’Brate said. “Not only is Embraco a leader in natural refrigerants, but we also work closely with OEMs in new developments and promote training to contractors to encourage a seamless transition. This is an area we wish to continue to improve on to make sure we are not only a compressor manufacturer but a solutions provider and the go-to reference for all refrigeration contractors.”
When partnering with Nest, LaNois said distributors gain access to new technologies, incremental business and revenue, and a larger customer audience.
If he could change one thing in the supply chain, LaNois said he would ask distributors to be more proactive.
“Distributors need to help make the market,” he said. “It’s one thing if the business is up and running and mature, but when you need to develop a business, many distributors want to wait for the business to mature versus making it happen.”
Friedrich is a flat organization, and its top management is readily available and accessible, said Molinaro.
“This makes the company easy to do business with and gives us a more streamlined decision-making process,” he said. “Additionally, Friedrich is small enough to be flexible and nimble with a greater ability to react quickly to changing market forces and priorities. Conversely, the company is large enough to handle business on a very large scale.”
When it comes to strengthening the supply chain, Molinaro said both manufacturers and distributors should strive for transparency.
“Some distributors share almost no data, which makes it tough to provide much insight to help them grow, and others share varying amounts of data, from current distribution center inventories to local inventories,” he said. “Obviously, we would like to get to a transparent model, where we can see not only inventories but sales and sales opportunities on the local level. From our end, we would share inventory and production availability. Together, we would be able to better forecast and serve the end customer by having the product they want when and where they want it. That is really the next big step in reducing the burden of carrying lots of inventory to be ‘ready for anything.’”
In the future, O’Brate believes most manufacturers will not aim to bypass distributors, as they are the feet on the ground representing manufacturers at the local level.
“That said, new players will likely try to enter the market directly, as they are not established,” he said. “The eventual outcome will likely depend on contractor behavior and the value they perceive from distributors. If contractors continue to purchase from distributors, the scenario will likely stay as is; however, if they turn toward the online offerings by the new players entering the market, the future will lie somewhere in the middle.”
LaNois believes there will always be a place for two-step distribution in the HVAC industry.
“The setup may change a bit, pending certain products that are too easy for direct customer interaction, but, regardless, there will always be new and extended opportunities.”
While two-step distribution will continue to be very important, some direct distribution is a future reality, said Molinaro.
“Increased efficiency and new methods of transportation and shipping are a fact of life for all manufacturing industries, no matter what business you’re in,” he said. “How a product goes to market is important, but what’s even more essential is the value-add that a two-step distributor can provide that contractors recognize and value. Value-add falls into two areas: the equipment and technical support distributors offer as well as overall business support. That includes providing business operations training opportunities, marketing assistance, and other resources that help support a contractor’s business. That’s where good distributors can really set themselves apart and create loyalty.”
Luce believes two-step distribution will continue to thrive as long as wholesalers continue to add value and justify their place in the channel.
“There will undoubtedly be areas of divergence, where manufactures choose additional ways to augment sales; however, the unique relationship wholesalers enjoy with contractors will continue to be there, especially for the more technical products that demand training and know-how.”
That said, distributors must be willing to adjust to the changing market conditions and give manufacturers more of what they’re asking for, Luce added.
“Distributors must have the capacity and willingness to grow, the ability to execute in multiple segments — not in just in residential or commercial spaces — and the talent and knowledge in-house to be successful,” he said. “These abilities will not only help distributors succeed, but they’re what manufacturers are increasingly asking for and expect. Distributors who remain focused on these abilities and relationships have the greatest chance of success, as it is becoming increasingly difficult to serve many masters.”
New believes there will always be a place for distributors in the HVAC sales equation as long as they continue to add value and form industry relationships.
“As the ‘middlemen,’ we need to continue adding value and building industry relationships,” he said. “It’s all about partnerships. If we consider ourselves as partners in serving the needs of the end users, and do that well, we will flourish. If we don’t, some other entity will take our place. The marketplace is competitive, so adding value is more important now than ever.”