• The Parts Supply Business: The OEM Way

    June 1, 2007
    The long-standing clich of your best customers are the ones you already have has become such a common utterance because it's true. As marketing experts

    The long-standing cliché of “your best customers are the ones you already have” has become such a common utterance because it's true. As marketing experts always tell us, we spend so much effort and money on new marketing ventures when the road to riches lies right in front of us.

    You can't help but think about applying this well-known approach to original equipment manufacturers in the HVACR business.

    We wondered, as have many of you in all likelihood, just what is the state of the OEM parts business for those industry brand names with which we identify?

    While we could have written a “traditional” roundup story (where everyone is interviewed individually), we decided on a question-specific approach that would be the fairest to everyone. We ensured this by asking the same questions of everyone.

    It seems, at times, as though the parts business of OEM in HVACR is a stepchild, at least when it comes to the media attention paid to it. Certainly the parts business of OEMs in the automobile industry has gotten much press attention recently. Indeed, some see the shift of power from the OEMs to their suppliers. And the size of the market is simply staggering. For example, just the automotive electronics segment will jump seven percent this year to $75.3 billion, according to the Freedonia Group research company.

    I suspect that no one has an accurate figure of all the earnings in the OEM parts business in the HVACR industry, but it must be huge.

    In a recent conversation with Frank R. Mack, a partner with the Detroit-based Conway, Mackenzie & Donleavy consulting firm, he noted that no matter what arrangement a wholesaler might have with his current OEM, he should constantly monitor the relationship to ensure that both parties benefit from it. If the relationship becomes creaky, it's time to renegotiate.

    It is apparent that the heads of the parts business that we've examined have a firm grip on the importance of the relationship end of the business and how it impacts their strategic view. Indeed, it's clear to me that they intend to keep it well-oiled.

    “Recognizing that 30 to 35 percent of a contractor/dealer's purchases are parts and supplies, it is essential that we focus on those products that are within our core competency and supply them to our distributors and factory branches at competitive market prices,” says Frank Kern, director, Source 1, Unitary Products, Johnson Controls Inc.“By focusing on the ‘sweet spot' of specific product groups — those products that represent the largest revenue opportunity — we can help our customers capture a larger, more sustainable base of business.“We rely on our customers to help us understand what market pricing is. From there, we make decisions about our sell prices … or, in the extreme, whether we should be in those businesses at all.”

    The same laser focus on distributors is also true for Rheem.

    “When we introduced PROSTOCK in 2001, our vision was to provide an innovative and attractive way for our independent distributors to grow their businesses. Contractors said they wanted fast, friendly, one-stop shopping in a modern store setting; stores that they could count on to have what they needed every time at competitive prices. We listened and gave them everything they wanted and a lot more,” said Corporate Director Replacement Parts Don Harter. “As we look back on the success and growth PROSTOCK stores have enjoyed, we can truly say it has been a ‘win-win-win' business partnership. PROSTOCK stores have helped Rheem and Ruud Distributors grow their businesses by providing world-class products, programs and services in cutting-edge parts centers that are 100 percent designed around delighting every contractor every time they choose to visit a PROSTOCK parts center. There's nothing better than a business model that delivers value and satisfaction at every level of the supply channel. In a word, that's PROSTOCK.”

    That special distributor relationship is both appreciated and understood at Nordyne. “To accomplish our goals, we will have to provide value to our customers above and beyond a competitive price,” says Ozden Karakurt, director of Partners Choice Aftermarket Parts, Nordyne. “It is our goal to live up to our name and truly partner with our customers in various aspects of their business. It's not just enough to be ‘easy to do business with.' We want to take that a step further and develop long-term, sustainable advantages in doing business with Partners Choice that makes it easier for them to conduct their business on a day-to-day basis.”

    In this Q&A, we'll examine the parts business for Nordyne, Rheem and York. We'll follow with other well-known companies in future issues.

    What do you call your replacement parts business?

    Nordyne: Partners Choice.

    Rheem: Rheem Replacement Parts Group (RPG).

    York: Source 1®.

    What is your strategy for your replacement parts business?

    Nordyne: Per our mission statement, we want to make doing business easier for our distributor customers. We will do this by constantly expanding our product offering to become a primary source for all HVACR parts and supplies. Also, we will work to cooperatively market our products to our distributors' customers to promote their respective businesses. Also, we will strive to provide comprehensive, easy-to-access information in an online format for ready access.

    Rheem: We are dedicated to simplifying the process through which we assist our independent Rheem and Ruud distributor partners in going to market. RPG provides merchandising support, store image consulting, supply chain technology and speed throughout the channel. These all translate to an enhanced retail shopping experience for contractors. RPG, especially through our PROSTOCK® network of professional parts centers, helps manage the Time-Volume-Cost equation to maximize ROI.

    York: Our strategy is to be a world-class provider of proprietary parts for the equipment brands we represent (Source 1®, York, Coleman, Luxaire and Fraser-Johnston), while meeting our customers' requirements for aftermarket parts and supplies at competitive “market prices.” We also offer the brands and breadth of products that make us a “one-stop” supplier.

    How do you work with distribution in expanding your replacement parts business, and how does your distributor relationship(s) fit within your strategic plan?

    Nordyne: We partner with our distributors in that we provide quality product, work to expand product breadth and provide marketing materials that assist distributors in building their parts business and moving product. Our marketing initiatives involve print, electronic and in-store programs.

    Rheem: RPG works with distributors in growing their revenue, profitability and market share by:

    1. Assisting distributors in entering or growing their aftermarket business through the PROSTOCK store program. Rheem provides participating distributors all the planning tools and resources necessary to establish and grow a regional parts outlet. Resources provided include demographic analysis, site selection, building design, retail store layout planning, merchandising assistance and product planning.
    2. Providing efficient and cost-effective product inventory planning and inventory management: Our new 185,000-square-foot state-of-the-art distribution center in Randleman, NC, is 100 percent dedicated to aftermarket product support. Using state-of-the-art logistics systems, we can process orders and replenish distributor inventories within a couple of days or even overnight if necessary.
    3. Offering innovative new product programs. We work closely with a distributor advisory group and our RPG team of parts professionals to continuously search for and review new products that make sense to them and contractors. Our newly introduced Home Generator Systems product line launched this past January is a good example of the results of this process. This manufacturer/distributor team process provides us with knowledgeable HVACR professionals monitoring the latest in new product opportunities.

    RPG utilizes a national network of field-located district parts managers who provide regular, two-way communications through listening and responding. They keep our distributor partners up-to-date on our activities and, just as importantly, provide management with updates on needs and requirements throughout the distribution channel.

    In addition, regular meetings are held with select distributor leaders who provide their time and energy toward reviewing our strategies and plans with recommendations and suggestions. These consistent communications help us stay on top of what is happening in the field and enable us to quickly respond to market changes or emerging opportunities.

    York: We offer monthly specials on certain products with discounted pricing as well as a free gift with purchase to contractors. We also conduct a Heating & Cooling Preseason Stocking program on replacement and aftermarket parts. The preseason program gives extended payment terms and gifts with purchases to our distributors. All product promos and product launches, as well as any new parts added to our inventory, have marketing collateral pieces (signage) tied to them. The signage supports our Ideal Store Concept that is installed in more than 150 stores nationwide and in Canada. Source 1® has also developed freight/shipping policies that allow our customers to “bundle” proprietary and aftermarket product orders. The goal is to allow distributors to turn their inventories more often by restocking through Source 1® and reducing the overall number of suppliers a distributor needs to purchase from, thereby reducing purchasing and Accounts Payable activities.

    Is your OEM parts business open to just your distributors or can “anyone” participate? In short, what are the barriers, if any, to participation?

    Nordyne: Currently, Partners Choice sells its nonproprietary (or universal parts) to all customers. Only distributors of our equipment can purchase our proprietary parts.

    Rheem: Our OEM parts business is only available to the vast network of independent Rheem and Ruud distributors, but all of our wholesale parts centers are there to serve all contractors of all brands.

    York: We only sell our OEM parts to our distributors that have a signed Distributor Participation Agreement with Unitary Products — Johnson Controls Inc.

    What is the breadth of your product line? Do you intend your offering to serve only as replacements for your own equipment line or do you intend to expand it to include other products? If you expand the product line, what niche areas are you considering? For example, would you consider line sets or chemicals?

    Nordyne: Our breadth is constantly growing and we are aggressively pursuing new product lines every day. These include universal parts for all applications as well as service and installation accessories to help the contractor complete the job. We will consider all product growth opportunities but are prioritizing core service parts and core installation accessories as our main areas of focus.

    Rheem: The Rheem Replacement Parts Group offers a complete line of aftermarket products required for HVACR installation and repair, and a full line of HVACR accessories and supplies. We sell and market a line of aftermarket products and accessories from chemicals to air cleaners under our PROTECH™ brand name. We search for product niche areas where the market size is too small for a large-scale finished-goods approach either because it is a new technology or it serves a niche market desired by our distributor customers. We also try to focus on those products that deliver a competitive advantage to our distributors and contractors, especially in growing markets such as indoor air quality and advanced controls. Innovative technology such as our IAQ-1 three-stage air-purification system gives Rheem and Ruud contractors a distinct competitive advantage.

    York: Source 1® strives to be a “one- stop” supplier to our distributors, offering proprietary and aftermarket parts and supplies to meet all requirements with our core competency. We identify aftermarket products in specific groups, such as installation-related, service-related, consumables, etc. We then identify those products that we can supply at competitive market prices with the brands and breadth of offering our customers tell us they require. We also identify those products that are beyond our competency to supply competitively, either from a pricing, freight or brand perspective, and elect not to offer those products.

    How is your replacement parts business different from your competitors'? In other words, what is your unique advantage(s)?

    Nordyne: The sources of competition are varied. We compete with existing domestic suppliers, other OEM aftermarket groups, master distributors not affiliated with an equipment manufacturer and buying groups on a daily basis. The key differentiator is our core value proposition, which is the ability to aggregate purchases into one channel, helping the distributor order in economical quantities at a competitive price, thereby helping him to achieve increased inventory turns and improved cash flow. This difference is more pronounced when competing with the domestic suppliers and buying groups. When competing with other entities that provide the same value, it will come down to breadth of product, service and progressive marketing programs to help make the difference.

    Rheem: We are focused on providing a contractor-preferred product offering and unparalleled logistics expertise. We recognize that there are few products that are not equally accessible to all manufacturers. But we work hard to stay connected with contractors and make those products and services readily available at distributor parts centers and PROSTOCK stores. We want contractors to know they can always find what they need when they come to one of our parts centers. We do this by keeping inventory pipelines full with quick and efficient, world-class logistics expertise focused on satisfying the immediate needs of every contractor who trusts us to meet his needs and expectations.

    York: Our approach to our parts business is one of partnership. We involve our customers in an “advisory council” format to continually try to understand their requirements from a product and services standpoint, and then we deliver. Or we share with them why we cannot deliver certain aftermarket parts or supplies. We are not autocratic in our approach because we understand that our customers have choices. Our job is to make that choice easy for our customers.

    What is your marketing plan or approach to expand your parts business, and what mechanism do you use to publicize this sector of the operation?

    Nordyne: Our plan is twofold. We plan to cooperatively market with our distributors through our “Choice Distributor” merchandising campaign. Also, to address our “Parts Only” customers or nonequipment distributors, we will be conducting a full-scale direct mail campaign to supplement the efforts of our sales personnel.

    Rheem: Rheem partners with independent distributors and understands they have a keen sense of their local business realities. We think it is important to view the future of the parts business through the eyes of distributors and contractors. We think that the really significant changes in the parts business are not so much in products or in the reshaping of distribution channels but in delivering customer service at unprecedented levels in this industry that are commonplace in others. As distributors grow through expansion or acquisition, the services they require from their suppliers also change. The manufacturer's participation needs to go well beyond the product line to areas such as sales, merchandising and promotion, marketing strategy, brand development, inventory control, cost management and logistics planning.

    Communication with our partners and customers is not an event for us, it is a continuous process that takes every form imaginable and involves the effective use of all the traditional communications vehicles as well as increasingly leveraging advanced Web-based communications systems and interactive media. We have found that listening and responding are critical to meeting our best customer-service goals, but more importantly, we have found that consistent and effective communication is an important competitive tool.

    York: Source 1® will continue to do the things we are doing exceptionally well. By using the generally accepted premise that 30 percent to 35 percent of a distributor's revenue stream comes from parts and supplies, we feel we have significant opportunities to grow our business. We continuously communicate with our customers regarding both new products and changes within existing product offerings that further enhance or position Source 1® as a “one-stop” supplier.

    Where can distributors find out more about your program? Is there a dedicated website? If not, can a distributor who doesn't carry your equipment line go to your main site and find out all the details that he or she needs?

    Nordyne: Distributors that carry our equipment have access to our main website where they can access information on equipment and parts. Here they can search, check availability, place an order and track that order. In addition, they can search for, view and order literature and technical bulletins.

    In January 2007, we added a Partners Choice option to this website. The Partners Choice site contains Parts Quest™, our online searchable parts database; the new Partners Choice parts catalog; list prices, marketing manual and news on new parts; marketing programs; and services of interest to the distributor.

    We are currently building a website that will provide nonproprietary parts information for any distributor, be they an equipment distributor or a parts-only distributor. Although this site will be a great benefit, it will serve to complement the aggressive communication campaign that will inform, educate and provide our distributors with the knowledge and marketing tools they need to increase inventory turns, thus cash flow, in the parts business.

    Rheem: We make it a critical part of our business plan to ensure that all Rheem and Ruud distributors have ready access to information about the RPG programs and services as well as how to bring a PROSTOCK parts center to their business enterprise. In addition, our regional parts managers are in constant contact with distributors in developing and executing their growth and action plans for short- and long-term success.

    York: Distributors can learn more about Source 1 through a variety of sources. We have a dedicated website at www.sourceoneparts.com, and our regional sales managers' contact information is available on the site. We welcome all inquiries.

    How will you keep distributors informed about updates, program changes and added products?

    Nordyne: We generate product bulletins, new part announcements, marketing programs and other communication items and distribute via direct mail, e-mail and/or post online. In addition, we have an established team of regional sales managers who have built relationships with the distributors in their area and share parts updates and programs with our distributor partners, one-on-one.

    Rheem: RPG sends out regular communications pieces — recently converted to an all-electronic format — to keep our valued and independent Rheem and Ruud distributor partners apprised of all information and developments that could be of interest and add value to their business. RPG is dedicated to working hand-in-hand with distributors to help them grow their parts business.

    York: We use a number of communication vehicles: Website, secured access sites and weekly as well as “as-needed” direct communications.

    Who is in charge of your parts replacement business?

    Nordyne: Ozden Karakurt, director of Parts, Partners Choice
    [email protected]

    Doug Jones, vice president of Sales
    [email protected]

    Rheem: Don Harter is the general manager of the Rheem Replacement Parts Group.

    York: Day-to-day activities of the Source 1® team are managed by Frank Kern, director, Source 1®.
    [email protected]

    Tom Peric' is the editor of HVACR Distribution Business magazine. Contact him at 856/874-0049 or [email protected].