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Building Contingencies to Get a Sustainable Supply Chain for Your HVAC Business

5 MIN. READ

Across the United States, businesses' supply chains are stretched thin and are experiencing isolated disruptions. The worry is that these disruptions are becoming more frequent and widespread. This is especially true with HVAC commercial technicians, who need to build contingencies into their plans in order to create a sustainable supply chain to protect their business and customer base.

COVID-19 spawned a three-headed monster

Labor shortages

The United States lost approximately 10% of its workforce in 2020, and while the employment rate was recovering as of September 2021, it still was below the pre-COVID levels. Increasing levels of technology in manufacturing caused a labor shortage before COVID, but the pandemic made it worse. In particular, the production of microchips, crucial to HVAC controls, declined drastically.

Globally, employment shrank by the equivalent of over 255 million jobs. The impact was felt heavily in China, a key producer of equipment and supplies used in the HVAC business. Overall, industrial production still lags behind demand.

Commodity price inflation

A surprisingly rapid economic recovery coupled with shortages due to decreased production caused copper, steel and plastics to surge by 100-300% depending on the commodity. Since the materials are heavily used in HVAC equipment like compressors, air handlers, copper tubing, and other parts and supplies, the surges translated into higher prices and shortages for those items. The shortages are expected to continue in the mid-to-long term.

Transportation breakdowns

The shipping industry, which moves the vast majority of the world's goods, contracted in the aggregate by a total of almost 50% in the first half of 2020. The Port of Long Beach, California is a classic example. It could be until mid-2022 before this sector recovers.

Trucking was hard hit as well, but it appears to be recovering. However, a lack of goods flowing through ports does not help.

HVAC technicians have options to combat shortages and create a sustainable supply chain

First, you need full visibility into your key purchasing needs. If you do not have it already, get full transparency on what you buy, from whom, at what price and how often. You also need to know how well, or how poorly, your suppliers perform over time. Without this knowledge, your negotiating position is weak. Your suppliers know more about your buying patterns than you do. However, armed with that information, you have a number of options to pursue.

Second, it is vital to have close communication with your suppliers in these challenging times. Keeping the lines open and honest will help you avoid surprises and work through mutual problems.

With that being said, let us dive into some strategic options for HVAC businesses below.

1. Consider shifting some of the risks to your suppliers on key supplies and equipment

Relying on a single source can be risky. If you have had a long-term, productive relationship with a particular supplier, you may be averse to switching. If you have fact-based reasons for your loyalty, you may not have to do so.

First, understand which parts and equipment are crucial to your business. Know required quantities and delivery dates based on current and expected jobs booked in order to build a sustainable supply chain.

Then engage in an upfront conversation with your supplier. Let them know your concerns, and listen to what they have to offer to assuage them.

If, indeed, it has been a long and productive relationship, they may be willing to pre-buy and warehouse a set quantity (to be negotiated) of key pieces of equipment and parts for you. In return, you might agree to a reasonable storage charge. However, you need to be careful to keep the quantity reasonable.

It is important to note that this strategy is more likely to work with supplies and parts that are more like commodities – belts, filters, etc. – because the investment is not so high for the supplier to keep those in inventory as it would be for heavy equipment. In addition, the commodities may be easier for them to offload if things turn sour.

It may also be easier to find more available options so long as the specification is the same.

The supplier may want some guarantee as to the minimum quantity you will use, but you should negotiate while remembering that these items are in high demand, and thus the supplier’s risk is somewhat mitigated. Another caveat could be a longer-term supply agreement, but be careful to have acceptable termination rights if the deal goes south. Politely reserve the right to periodically inspect inventory.

2. Pre-purchase inventory

If that option is not workable for you to create a sustainable supply chain, you may have to commit the capital to buy necessary supplies and equipment in advance. To do this well, you need to know your projected usage so you do not over-commit financially. Also, try to know in advance where you might be able to offload inventory if your jobs get canceled or delayed. Negotiate using your volume for the best availability and pricing.

It is also crucial to know upfront your risk-taking capability to invest capital in this strategy.

3. Diversify suppliers

If your relationship with your supplier has not been good in the past, you may take this as an opportunity to go to market with your purchasing volume if it is substantial. You may want to divide your business up with two or more suppliers. Make them “preferred” suppliers, with an estimated (not guaranteed) level of business for each. Your rationale to them would be that in current times, you need to hedge your purchasing risk, and in theory, they should understand that.

Remember to have a reasonable termination clause too. This is a tricky business, but if you have substantial volume and a good reputation, you may be able to pull it off.

Be careful not to burn bridges with your current suppliers though. Keep communication straightforward and honest. Include them in the bid, but if there are deficiencies, make a plan to resolve them as a part of their bid response. If they are convincing, you may want to keep them on.

4. Use technology to automate and digitize your purchasing processes

This is important no matter which of the three options you choose since it enables each. Manual processes, even driven by Excel spreadsheets, are slow and prone to error. Without technology, it is a struggle to achieve the spend and buying pattern transparency you need in order to select and manage your suppliers and subcontractors in a sustainable supply chain.

There are a number of purchasing software solutions available in the market to choose from. The essential appeal is that they automate and centralize the procurement process. In addition, they provide ready access and visibility into spend data, which is the first priority to build a sustainable supply chain. In short, these solutions enable a data-driven approach to your buying.

Taken together, these features give you visibility into the best price and availability across multiple suppliers, all in one tool so you can create a sustainable supply chain.

In today's era of shortages, delays and disruptions, HVAC technicians need to find ways to optimize their processes and come out on top. By taking a proactive approach to supply chain management, you can retain more control over your business.

 

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