Joe Strittmatter realized in April that trouble was ahead. The chatter and the trends all said that finding supplies and materials for his business, Strittmatter Plumbing, Heating and Air Conditioning in Denton, Texas, would grow more and more challenging.
So he spent a few weeks buying and stockpiling as many HVAC systems and as much inventory as he could, looking to face fewer difficulties.
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“I spent each day driving to six of seven supply houses,” he said in a recent interview with ServiceTitan.
Dustin Neff did not have that luxury. Neff is the General Manager and the third generation Neff to work at Triple A Air Conditioning and Heating in Flower Mound, Texas.
Little companies like his, without a large showroom or warehouse, sell a unit, order it and install it. But now Neff is hearing from suppliers and lots of HVAC manufacturers that he has to wait for units, which leaves homeowners wondering.
“It’s definitely nerve wracking,” Neff said. “Small businesses will hurt more than some of the big guys who are able to drop $1 million on all this equipment and supplies. We can’t do that. We have one system on order for two weeks, and we’re still waiting for it.”
‘It’s a significant issue’
The anecdotal evidence is part of an unsettling reality: The fallout from the Covid-19 pandemic has created a damaged and inadequate supply chain, in the trades and elsewhere. Call it Covid’s delayed impact. Supplies are either not available or few in number, and there are shortages of many different types of materials. Shortages in turn have increased prices, and typically those prices are passed along to consumers.
“It is a significant issue, and it doesn’t surprise me at all,” said David Closs, PhD, a professor for 40 years in the Broad College of Business at Michigan State and an expert in Supply Chain Management. “It’s probably not going to be corrected for a while.”
Tim Fisher calls the situation “unprecedented.” Fisher, the Team Leader of Market Intelligence at HARDI (Heating, Air Conditioning & Refrigeration Distributors International in Columbus, Ohio) said all businesses will feel the pinch.
“It is absolutely everywhere,” Fisher said. “It's funny, too, because just leaving work last night and driving home, I was listening to the radio and there was a report about this business. I think it was basically a wine distributor talking about the same problems, the same challenges. And I think that’s just for the racks or whatever that you might store wine bottles on.
“A brand and industry that you might not even be thinking about and they are severely affected. Any company right now is dealing with this.”
The break in the large supply networks hits at a key time of year for many in the trades. Neff said that like most in the HVAC industry the bulk of his business comes in May, June, July and August.
“(The equipment shortage) makes it tough,” Neff said. “Now we can’t get ductwork. Suppliers are telling us there are shortages and a 12-to-15 week lead time on being back in full stock. Some may come in, but not at full stock.
“It’s going all the way down to collars and metal. Sheet metal fittings for furnaces are starting to get low.”
What makes him most nervous? Coils for air conditioners.
“We’re going to continue to learn about these (shortages), and it will be far-reaching,” said Chris Hunter, ServiceTItan’s Director of Customer Relations. “And it’s not just equipment. It’s affecting ancillary supplies, vehicles. If you can’t have a vehicle to place a tech, how is a business going to grow?”
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One ‘particularly challenging’ shortage
The vehicle issue is a result of a shortage of computer chips, a compounding factor Closs said is “particularly challenging.” General Motors idled four North American plants for four months and has said its expected pretax profit this year will be reduced by between $1.5 and $2 billion. Ford said it could reduce second-quarter production by half.
Appliances, furnaces, water heaters and air conditioning units also use chips, and the downside for the trades, Closs said, is larger production companies like the auto industry will regain supply first.
“When they return, the chips will go to the bigger players,” said Closs, now the John H. McConnell Chair Emeritus at Michigan State.
Fisher said demand for in-home items like appliances and HVAC shot up during the pandemic because people were not spending money on travel.
“Those chip manufacturers, there's a fixed capacity to produce,” Fisher said. “It takes years to build the fabs necessary to make these things and they can't scale it fast.”
HVAC business reps and owners can rattle off a laundry list of shortages they have encountered in the big supply networks. Condensers, furnaces and coils are hard to find in Tennessee. In the Pacific Northwest, it’s coils, flex duct, line sets, outdoor units and “you name it.” Air handlers in the Mid-Atlantic states. Units themselves and flex in Phoenix. Coils in Oklahoma and Texas. Water heaters in Wisconsin. One owner in the Hudson River Valley simply said everything. Same in Virginia and Las Vegas.
Strittmatter and Neff offered some insight into the situation in Dallas-Fort Worth:
One major company can’t produce new systems because it can’t get the boards to make them.
Another said it is having trouble getting the cardboard to package their units. There’s not enough, and what is out there is being snatched up by Amazon.
A manufacturer of AC units has waited more than a month for 37 condensers, and has no idea when they may arrive.
A plumbing rep who took a walk-through of a company that makes PVC recently saw no PVC stacked and ready to be shipped; three years ago, that company had the equivalent of five football fields of PVC stacked outside. Strittmatter said that the company has stopped manufacturing any pipe over 6 inches.
The international raw materials shortage has limited the availability of rolled copper. A buyer told Strittmatter about another unwelcome surprise: A company had a boat with copper sitting offshore for four weeks because there wasn’t enough manpower at docks or truck drivers to get the copper to the markets.
Stockpiling is a solution, but that takes buying power and space.
“This economy is creating haves and have nots,” Strittmatter said. “It's picking winners and losers. People like us that went and stocked up—and I’m still buying everything that I can—may have an advantage. Once it comes time and nobody else can buy because there are no supplies, I’ll start using mine and I’ll get the lion’s share of the work.”
Strittmatter said he knows a fellow trade owner who has a warehouse full of equipment worth hundreds of thousands of dollars. Some distributors have actually offered to buy back supplies they sold to businesses. The worst could be ahead for smaller companies who could not or did not stockpile.
“In three or four weeks, we could be looking at a lot of trouble,” Strittmatter said.
Fisher understands the desire to stock up, and the sense of fear in the business community. But he pleads for patience.
“Distributors are well aware of this problem,” he said. “Manufacturers are well aware of this problem and they have been doing everything they can to try to keep the product moving just to make sure that the contractors, they're able to do what they need to complete the job. … Right now, part of the problem, at least with getting the raw materials, is that you have all of these different industries coming back online at the same time.”
‘The problem will get bigger ’
At the same time, Fisher recognizes the challenge and agrees with Closs and Hunter, who suggest looking for alternative suppliers as a way to follow every path to keep the business working, and maybe save it from failure.
“The problem will get bigger due to the fear,” Hunter said.
The effect on business is not just in new products. Warranty work will be affected, as HVAC companies and others in the trades may not be able to get the parts for repairs. If people wait for new units, Neff said he may have to resort to using parts or units he has removed to carry customers through.
“We’re really good at fixing things when we need to be,” he said, “but if we don’t get what we need it’ll be tough.”
The cause is tough to pin down. Closs said companies simply cannot get workers back to their jobs—and not simply because of the extra unemployment benefit provided by the federal government. Closs said the fear of Covid remains real.
“There is a reluctance of people from the plants to go back to work,” he said. “That’s the reason we’re having a problem here in the United States. But in Asia it’s a much bigger problem because of the lack of vaccine capacity and credibility in the vaccination process.”
‘A whole lot of uncertainty’
Closs has written about the risks of sourcing so much of the supply chain to China and other Asian countries.
“When you start running supply chains this long distance, you get a whole lot of uncertainty,” he said. “I don’t think people really understood how much uncertainty and potential problems were there.”
It took a pandemic, and the resulting global raw materials shortage, to bring those problems to the forefront.
Despite it all, Strittmatter said increased demand has his business up 97 percent year-over-year. But he said he recently purchased the last Ford F-150 truck on the lot in the Dallas-Fort Worth area.
“I could have grown more if I had the vehicles and access to other supplies,” he said.
Triple A is not hitting its budget goals, Neff said. Typically the summer would be where it would make up that shortfall. This year, he’s not sure.
Strittmatter discussed the worst-case scenario.
“Short-term it might not affect us all too badly, but long-term we could see big companies that weren’t prepared that will probably fold, or at least diminish in size,” he said. “Smaller places, they possibly could go out of business if they have a lot of overhead.”
Neff, too, is worried.
“We’ll just have to see what happens,” he said.
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