Industrial Distribution Supply Chain Update

I began these updates back when the Chinese Commie Crud (tm Sgt. Mom) started and it’s time for another one. I’ll put it below the fold to spare those who aren’t interested.

For those who don’t know, I own a HVAC distributor, and HVAC is a subset of industrial distribution.

Inventories are still at or near record levels for most items. We don’t trust anyone yet. Vendors and others keep speaking of some sort of slowdown coming in the next few months, but we aren’t seeing any of that yet, so it is pedal to the metal.

We are winding down certain categories as we start to approach Fall, due to some new energy requirements for HVAC coming soon. By the way, if you are considering a new central air conditioner or heat pump for your domicile, this is the year to do it as next year everything will be around 25% more to hit the new requirements. Don’t shoot the messenger.

So in that area, the flowers are sort of going to arrange themselves. We are lucky to have sell through privileges in the northern tier, but the southern tier of states has to wind their positions down probably starting now or get stuck. Or they are going to have to clear out that dead inventory to the northern guys next year.

Outside of that, there are still some major headaches. Anything with a chip is still a problem. Some items are more affected than others, but replacement parts like printed circuit boards are difficult. Another thing still difficult are finished goods from Asia, specifically ductless mini split units. At this point we have just given up on certain vendors and have moved business around. We can’t wait forever and things move fast. Our customers aren’t going to wait. Options are limited, but they are out there for guys like me who bulldog it and don’t mind calling everyone. I think some companies are just going to fail eventually. If they can’t get chips, they can’t make anything.

So in general, our major investments in inventory are paying off and the manufacturers are shipping “not awful” which is better than 12 months ago. LTL freight is still a nightmare and of course we have labor issues like every other business, but in general, things are OK.

I’m sure that if I could transport my pre-covid self into today and see how I attack my work day that it would look like lunacy, but compared to 12 months ago its like a vacation. Funny how you get used to adversity and get steeled to certain things when you have been run through the mill.

21 thoughts on “Industrial Distribution Supply Chain Update”

  1. Our kitchen range is old and we have been planning to replace it with a gas range. I had a plumber out the other day to get an estimate on running a gas pipe to the kitchen. I mentioned that we had waited to shop for a range until we had the estimate on the gas source. He mentioned that ranges might be scarce. Something else to worry about.

  2. I just buy a few chips from time to time for repairs, usually the old, small scale sorts like TTL and CMOS logic. These designs are 40+ years old and long out of patent, generally the silicone equivalent of generic aspirin. Texas Instruments still produces a lot of these parts as well as cutting edge stuff. Looking through distributor stocks, it looks like it’s these cheap (generally less than a buck each) chips that are on back order. $20-$30 chips seem available, at least in 100’s and 1,000’s.

    I imagine it’s these small chips where full production has been moved off shore. Even chips fabed domestically will probably make stops in at least two or three countries before they are fully tested and packaged for use. The good news here is that they generally move by air, avoiding the worst of the shipping bottlenecks.

    Of course, manufacturers don’t consume chips, they consume circuit boards, each with dozens to hundreds of chips. a $1,000 circuit board missing a $0.30 chip isn’t going to do anyone any good.

    Contrary to many people’s statements and impressions, Chinese integrated circuit production is about 20-30- years behind the state of the art. Circuit board fabrication is another thing altogether. Circuit board fabrication is very big and modern in China and heavily concentrated in East Asia generally. All of the sea shipping routes in that part of the world tend to run through China, so even something made in Malaysia or Singapore will likely be caught up in the covid hysteria chaos gripping China.

  3. Thanks for the update, Dan. Good to know that you are surviving.

    You made a comment implying new regulations for HVAC are being introduced by The Powers That Be: “next year everything will be around 25% more to hit the new requirements.”

    If it does not cause you too much pain, it would be interesting to hear more about what is planned — and why. I had not heard anything about new regulations being imposed.

  4. @Gavin – we are moving from SEER ratings to SEER2. It has to do with how the equipment is rated and tested (that is the super short answer). All of the equipment had to be redesigned and re-tested to meet the new SEER2 standards which start Jan 1, 2023. This is the complete industry, not just any certain OEM. To hit the new standards, equipment has to be bigger (can’t argue with physics), using up more metal in the condensers, and it also increases freight costs – fewer units on a truck. It also sucks to be our warehouse guys since we have the same space to fit the same amount of larger units. But we will figure out something.

    Since the South doesn’t have sell-through on the old stuff (this is insane, by the way), they are getting dibs on the new stuff. We are right now going through specs and ordering for next year.

    So the consumer naturally eats all of this in the end.

    As for the why – that’s a question for the Dept of Energy. So your local Congress critter would be the person to ask. I know.

  5. We had a ductless mini-split system (Daikin) put in a little over a year ago. We are very happy with it. Just in time I guess.

  6. Dan — thanks for the heads-up. Carrier’s website has the following inscrutable message:

    >i>”The new SEER2 testing and rating system will raise all HVAC equipment’s external static pressure testing conditions by a factor of 5 to create a more realistic and accurate testing environment. These changes will affect all HVAC equipment ranging from air conditioning units and heat pumps to gas furnaces, evaporator coils, and single-packaged units.

    The purpose of new SEER2 efficiency standards is to provide HVAC professionals and HVAC consumers with more accurate insights into a system’s overall efficiency. From there, HVAC manufacturers will be empowered to create more energy-efficient systems and technologies. All air conditioning and heat pump systems must be renovated by January 1, 2023, even if they meet current SEER ratings.”

    This brings us back to the old question of System Boundaries. It takes energy to manufacture the additional metal to withstand a testing pressure that is 5 times higher. Even if the “Operating Cost” energy of the heavier system is lower, how long will it take to recover the higher “Capital Cost” energy invested in manufacturing the more substantial system — to say nothing of any “Capital Cost” energy of a stronger support structure to carry the heavier unit?

    Here in the South West, we still use swamp coolers for air conditioning, just like the original pioneers. We will simply have to be SEER-deficient. :)

  7. “From there, HVAC manufacturers will be empowered to create more energy-efficient systems and technologies.” I laughed – What does that even mean?

    They are raising the static pressure from .1 to .5 inches this is true, but the equipment doesn’t need to withstand anything new, it already does that. It just has to hit higher numbers. It doesn’t currently do that, and hence the new models. The whole industry is sort of chaotic right now tbh. But there is a lot of noise out there too.

    The paybacks on these new machines are getting extended out as they get more expensive. It still pays to replace ancient equipment, but when you add another 25% to the price, well…

    This is a walk in the park compared to 2025 when we move to mildly flammable refrigerants (A2L). All new training, tools, etc. No big deal, the consumer just pays for everything.

  8. ” when we move to mildly flammable refrigerants (A2L)”

    Why are the refrigerants being changed? Did a patent expire?

  9. What are you seeing on the transportation segment of the supply chain? Things move largely by Diesel trucks. Diesel fuel is both getting more expensive, and may be getting harder to find. In addition there is the DEF [Diesel Exhaust Fluid] anti-pollution additive that must be added to Diesels made in 2010 or later or they won’t run. And DEF is a byproduct of the petrochemical industry that is being shut down by the Federales. Taken together, that is going to eventually raise transportation costs greatly and eventually reduce the number of trucks on the road. Are you seeing signs of this happening.

    Subotai Bahadur

  10. @anom – this is all part of the AIM act, and the DOE is making these rules. The A2L refrigerants have a lower GWP (global warming potential) – that is the reason for the move. The larger commercial world has already started the move, and it is coming to residential and smaller commercial in 2025.

    @Subotai – I don’t deal in the mobile world sorry, only stationary. And I’m a climate control guy – I don’t really know supply chain in the automotive/trucking industry.

  11. When I looked at the label of a small freezer, I was surprised to see a warning that it contained a flammable refrigerant. When I looked it up, I believe it was actually either propane or butane or a mixture of the two. Propane was one of the earliest refrigerants used in home refrigerators and freezers. The state of the mechanical parts was such that fires were too common. Then the halocarbon refrigerants were introduced and the fires stopped. Most of these new refrigerators seem to use very small amounts of these flammable refrigerants, a home air conditioner will use considerably more.

    Even the refrigerators are a problem. Remember the Grenfell Tower fire? it was started when a refrigerator caught fire and it spread through the inflammable cladding installed on the outside of the building to conserve energy.
    When was the last time you heard of a a refrigerator catching fire here? You will.

    The flammable natural gas and propane used for fuel in our homes are piped at pressures below 1 PSI through pipes that are stationary and not subject to much mechanical vibration or stress. Refrigerant lines run at pressures of 100’s of PSI and are subject to both vibration and thermal cycling. This will not end well.

  12. @MCS – I believe that propane (R290) is limited to 6 ounces or less in any applications – it has been in refrigerators as you noted and things like window airs for several years with no real problems that I know of.

    The new A2L refrigerants such as R32 and R454b that will be introduced in 2025 into the residential comfort cooling world are barely flammable. That will definitely be part of our training when the time comes. R32 has been used for many years in other areas of the world with few issues.

  13. Dan,
    I hope you’re right. Six ounces of propane can still make a good fire. I’ll have to look at those “barely flammable” refrigerants to see what they mean by that. Gasses tend to burn easily because they mix so easily with air. With liquids, it’s generally what temperature does it release enough vapor to form a flammable mixture, liquids, as such, don’t burn.

    Gasses require a certain range of concentrations to burn, either higher or lower and no fire. For propane the limits are 2.15% and 9.6% which is in line with other hydrocarbons. I note that 6 ounces of propane released all at once has the possibility to make a fairly large volume of flammable atmosphere before it dissipates below it’s lower limit.

  14. @Dan From Madison

    I was thinking more if the factors I mentioned were making it harder/more expensive for you to get deliveries of what you need for your inventory/

    Subotai Bahadur

  15. @SB – outside of added expense for freight and fuel I haven’t seen anything too goofy. LTL has been a wreck for quite some time with poor quality of work and a lack of drivers, but that has been going on for years.

  16. }}} Contrary to many people’s statements and impressions, Chinese integrated circuit production is about 20-30- years behind the state of the art.

    One of multiple reasons they eye Taiwan so hungrily…

  17. Those facilities are ultra fragile, I would be surprised if they survived a war. The people that design the chips are scattered all over the world, TSMC doesn’t make their own chips.

    The reason that Chinese semi-conductors are so far behind the rest of the world is because several key pieces of equipment aren’t available to them at any price now. Invading Taiwan wouldn’t change that. Even if they captured those intact, they’d be useless without foreign techs and consumables. That’s the payback for decades of wholesale Chinese IP theft.

  18. Dan/SB – I’m seeing transportation data suggesting that the long distance freight market has been coming off the highs of the last few years starting in late March, and that the smaller companies, particularly solo owner/operators are getting squeezed badly between rising costs and falling rates. Lots of failures and consolidation, again mainly solo guys going back within a company or just abandoning the business. The obvious implication is that the economy is weakening.

    You might see some improvement on the LTL front over the summer. Might see demand fall off as well though. Will be looking forward to your next update.

  19. @phwest – everyone keeps telling me about the coming demand falloff, but I haven’t seen it yet. Yet. For sure that would ease pressure on the LTL industry.

  20. I don’t think independent truckers are a big part of LTL freight. All the drivers I see are working for freight companies.

    If you talk to independent truckers, one of their biggest headaches is getting loaded once and getting unloaded once, let alone half a dozen times, with hours and even days being wasted for little or no compensation. Not many are willing to accept loads with even two drops. The ones that will stay in business are getting pickier about the loads they take and aren’t accepting rates that barely pay for fuel. The ones foolish enough to take those loads will be just staying ahead of their payments and fuel bills until something breaks that they can’t afford to fix.

    The same shortages of parts and skilled labor that the rest of us are dealing with are keeping them stuck in shops for weeks.

    I expect things to get worse and much more expensive before they get better.

  21. Tangentally off topic:
    Speaking of bizarre refrigerants, my ’18 F150 bled out it’s freon a couple of months ago, and having done not just a few of these jobs and having all the tools, I figured I’d just take care or it. No such luck. Brand new freon type R1234yf (I kind you not, and it ain’t cheap), and yet another new size of tap fittings.
    Fortunatly, I also have a warranty with a $50 copay. Bonus item: the service guy told me that variety of freon is considered hazardous, and requires a special license to remove.

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