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  • Industrial Distribution Six Months Into Covid

    Posted by Dan from Madison on August 22nd, 2020 (All posts by )

    Back when the pandemic shutdowns started (let’s say late March, early April) I had to seriously think about what I was going to do with and for my small business. For those not familiar, I own an HVAC distributor, and that industry is a subset of industrial distribution. The media circus had driven everyone to the point of exhaustion with all of the dire reports and things were bleak. The local governments in my areas took draconian measures and this wasn’t helping. So, as I usually do when facing a big problem, into a quiet room I went to just sit and think for a bit. Below the fold are some results.

    The good news – HVAC is by any measure an “essential” industry, so we could stay open. Problem was that most home owners were terrified and weren’t letting technicians in to do standard Spring maintenance, and most businesses were closed, so that was also a problem. Plenty of time to think.

    My competitors did exactly what I expected them to do – cancel loading orders for Spring, lay off staff, etc. I took the exact opposite direction and loaded more inventory than usual and kept all of my employees, albeit on reduced hours. We always have things to do like inventory, and can train online in the slow times.

    Now Summer is just about done (at least here in the northern USA) and I am able to reflect on what we did right, what we did wrong, and also give you some information on what seems to be the new normal.

    What we did right – bringing in all that inventory, first and foremost. Our competitors quickly ran out of inventory during the first heatwave and we seriously capitalized on this. It is always refreshing when the conversations start out with “do you have” rather than “how much is”. The investment really paid off and we were able to talk to a lot of customers who we were previously locked out of. This will help us immensely in the future. We also communicated regularly with our employees to let them know that we were spending a lot of time reading the regulations for our markets as far as covid was concerned (we were) and that we wanted to keep our place of business safe.

    Another thing that I feel we did right was not take any of the governments money. There were (and still are) a flurry of programs available such as the Paycheck Protection Program, delaying paying payroll taxes and other things. We actually applied and received approval for a PPP but I decided at the last minute to forego that. We had operating capital and an easily accessible line of credit so we really didn’t need the loan. Yes, there was a lot of FOMO there because large portions of these loans will be forgiven, but there are costs associated with pushing all of that paperwork around correctly, and the programs for the most part were structured poorly as indicated by the myriad changes done to the programs over time. Some companies will benefit, but I’m glad that the government isn’t my business partner. Audits are also quite painful and I have no worries on that end.

    What we did wrong – Even though we sat in a quiet room and thought about a lot of things, we still probably could have capitalized on this initial panic even more by buying more inventory than we did. We didn’t anticipate a few things in this area (below) and if we would have thought about it a bit more probably could have avoided some problems. Also, I think we worried a bit too much about all of the legislation that we were reading coming from all of the different governmental entities. We should have realized that the municipalities and media wouldn’t really care about industrial distribution and they focused on businesses that most people understand and use like restaurants and coffee shops and stuff like that. The stories on the news were “oh my god we can only get takeout now” not “industrial distributors are doing their best to comply with the mask ordinances”. Not that this is an excuse for not keeping up to date, but I think we were a bit over concerned.

    Things we didn’t expect – I fully expected major component availability problems when China closed, but it really didn’t happen. Here is what did happen. Factories in the USA started closing and/or having covid related production slowdowns (everyone is six feet apart on the assembly lines now rather than next to each other) and finished goods were affected (and still are). All of those distributors who cancelled their Spring loading orders placed enormous orders when the heat began after Memorial Day and the factories emptied out and to this day have never been able to catch up. Every manufacturer of HVAC equipment in the USA is affected (there are only 7) and every distributor is on some type of allocation. We are doing OK due to keeping all of our stocking orders intact but still had some product outages. Manufacturers have ceased production of B and C movers and are concentrating on bread and butter items, have lots of sickouts due to covid, and they simply can’t get out of the hole dug by this hot Summer. Right now we are doing all we can to get furnaces moving our way for Fall and Winter but it is brutal. All of the favors are being called in by everyone. As an additional penalty, we will be forced into carrying much more Summer based equipment through Winter than usual as we are worried about availability going into Spring 2021. I spoke recently with a friend who works for a roofing distributor. He told me that their manufacturers have suspended all special orders for shingles and that lead time for standard product is 12-16 weeks. All industries are affected.

    We also didn’t expect LTL freight to be so brutal. The trucking companies have had massive sick outs and their quality of work is extremely poor and unreliable. Promises have been broken (which filters down to promises we make to our customers), and freight is getting lost and damaged and it is a major headache.

    Honestly, outside of the finished goods production (obviously, this is an extremely big deal) and freight mishaps, things have gone fairly well all things considered. Yes, there are certain product outages here and there, but in general it hasn’t been too terrible.

    It has been extremely time consuming trying to keep up with all of the rules and regulations coming from all of the different state, county, city and federal agencies – and many times those are in conflict and we have to “pick one” and go with it. We are trying all we can to not get sued by someone for something covid related and think we are doing a good job, but there are always things that you never know about. It is literally impossible to be in compliance with every law on a normal day, much less than with covid stuff overlapping all of that, but we are doing our best. We have spent countless hours poring over the legislation and codes that have been layered on top of the “normal” laws.

    In general, we are doing OK – it is very hard work, as anything worth having typically is. Volume is flat vs last year, but we had some favors from the weather and our Summer months made up for the doldrums of March through May. We are very fortunate but also have created some of our own luck.

    One other note that you can take with a grain of salt – I gave up alcohol for lent and felt so good and sharp afterward that I have stopped drinking forever. I’m not a very religious person, but the timing of that might have been someone upstairs doing me a favor. I have never needed to be as sharp as in the past several months as my hours have been very long and I have needed to think sharply and critically – previously, at times, I would have “one or two too many” and would wake up a bit fuzzy or tired/hugover. The extra sharpness and stamina I received from quitting drinking has done me so much good, especially now. I don’t miss it one bit.

     

    14 Responses to “Industrial Distribution Six Months Into Covid”

    1. Leif Smith Says:

      Thanks, Dan from Madison – your report from ground zero was interesting.

    2. Brian Says:

      Thank you very much.

      This is the sort of science we need to be looking at–showing what was done, how it worked, etc. Unfortunately our government and our media are complete garbage and continue to completely fail us.

      The most frustrating thing to me is how it is impossible to find anyone doing a compare and contrast of what different countries have done and are doing re: schools, more than 5 months after we completely shut ours down, and as most city districts are planning on remaining closed, even though as far as I know literally no other country is doing anything like that.

    3. CapitalistRoader Says:

      All home improvement/repair contractors here have been slammed with work. People are stuck at home and decided to get stuff done on their house. Lead times for HVAC/plumbing/electrical, even landscaping have gone way up. Demand outstripped supply. Plus new-construction kept going strong.

    4. David Foster Says:

      Brian….a summary of school-opening policies in various countries, and a little big about the results:

      https://globalhealth.washington.edu/sites/default/files/COVID-19%20Schools%20Summary%20%28updated%29.pdf

    5. Dan from Madison Says:

      Capitalist Roader – you are exactly right. Cancelled vacations freed up money plus if you are stuck at home working you want it nice and comfy. The work is backed up and we are concerned about furnace availability for the coming season. Most people can live without ac for a bit but in Winter pipes freeze. Our commercial markets are facing the same issues. Some of the lead times are insane right now.

    6. Dan from Madison Says:

      One other random thought – we feared in March that our AR would be a disaster by now and that we would have a lot of debt to write off from contractors going out of business. In reality, AR is the same as always from a historical perspective. A very pleasant surprise.

    7. Gavin Longmuir Says:

      Thanks, Dan — really interesting.

      From what you have experienced, it seems safe to predict that the physical goods ripples from the Lock Downs (not from the little virus) will last well into next year. Considering bankruptcies, interrupted supply chains, changes in customers & suppliers — those ripples may last for years. All this for something which we now know with scientific certainty had minimal impact on working-age people and even for old people was commensurate with the kind of bad flu season that the world has shrugged off many times before. Stupid politicians and fear-mongering media types have let us all down.

      Thinking about the things that did not happen — I predicted back at the beginning that the supply chain interruptions from China would be much larger and more devastating, as even the Political Class finally learned the extent to which they have made the US dependent on China for so much, right down to nuts & bolts. I was wrong. China seems to have resisted the urge to stick the knife in, and instead exports of real goods from China to the US are reportedly reaching frantic levels. I am still puzzling about why my expectation was wrong.

      Thinking about the things that did happen — work from home. The main kind of “work” that can happen from home is the overhead generation of new reams of regulations by government employees on full pay. As you have observed, those regulations are not necessarily helpful to those trying to keep the real economy going. We all might have been much better off if “Work from Home” had been recognized to be an unnecessary burden to the struggling real economy. A holiday from new regulation might have made the Lock Down experience much less damaging.

    8. Anonymous Says:

      What I value is to learn how a creative mind negotiates the challenges of life when allowed to own the results. We need to make that easier to do by getting those without their own skin in the game out of the way! God Bless the U.S.A.

      Death6

    9. Brian Says:

      David: Thanks for the link. It’d be nice to see that updated and with more on transmission stats. It seems clear that the phenomenon of closing schools at this point, either partially or completely, is not seen anywhere outside of the US.

    10. Mike K Says:

      This is the sort of science we need to be looking at–showing what was done, how it worked, etc. Unfortunately our government and our media are complete garbage and continue to completely fail us.

      I have had occasion to reflect on how grateful I am to have retired from the practice of Medicine when I did. My wife and I have both been consumers of health care this summer. She had what was probably Covid in June that was partially aborted by having taken HCQ for rheumatoid arthritis. I had lung surgery a month ago and am recovering. My hospital care was pretty good, hers was not that good and we will not use that hospital again. It is interesting to see the system from the patient POV. Much of what we experienced was not similar to what we did and expected 20 years ago.

      Obamacare made US Medicine, as my wife expressed it, “A military industrial complex.”

    11. MCS Says:

      I occupy an odd little corner of the oil business and deal with production, refining and finished products for a lot of different customers. About the only phase we haven’t been involved in recently is drilling. We also deal with a lot of aviation and aerospace. I don’t run things, just sit on the side observing with various emotions the doings of the great gods at corporate.

      We may have taken a small hit in production and I expect more to come because we deal with established production. Few if any sites have been taken out of production and so far, ongoing projects are being completed but probably very few new ones are going to be started for a while. A lot depends on the price of oil, duh.

      Outside the first two weeks of panic/uncertainty most of our other business has gotten back to near normal. We amount to a small, unavoidable cost to most of our customers and none of them are going out of business. The biggest hit is jet fuel and that is finally coming back.

      We’ve had a few sporadic shortages but nothing really troubling. Outside of a couple of new hires that were laid off and a reduction of overtime, nobody’s missed a paycheck although there were a few times when I wondered if personal phones weren’t going to wear out. My own projects are unchanged and I am still about as far behind as normal.

      I try to keep a good thought for all of the people that this has been a life changing event. It’s easy to feel a sort of survivor’s guilt and probably justified. A lot of the fallout won’t be apparent for a long time.

    12. Jonathan Says:

      Thanks for sharing.

    13. Tatyana Says:

      “We should have realized that the municipalities and media wouldn’t really care about industrial distribution and they focused on businesses that most people understand”
      Don’t give them ideas! It’s bad enough as it is.

      Re: inventory. If US manufacturers can’t catch up with demand and Chinese are out of the picture – are there other sources to get parts& product? Canada, Mexico? Or the import limited due to metric system outside of the US?

    14. Philip Sells Says:

      Hello. This was a very nice discussion of your adaptation process. Thanks!