Minimizing Wrongness: The NORDYNE Forecast Objective

Jan. 1, 2012
In today's tight economy, no manufacturer, wholesaler or contractor can afford to have excess inventory of products that aren't selling. Forecasting the

In today's tight economy, no manufacturer, wholesaler or contractor can afford to have excess inventory of products that aren't selling. Forecasting the HVAC industry — and predicting consumer demand — is one of the most difficult tasks most companies face. All forecasters and planners know that if they can improve the forecasting process, the results can improve inventory turns, customer satisfaction, plant efficiency and overall company performance.

Forecasting is difficult because of the many outside influences that can dramatically affect overall HVAC industry volume: housing activity, failures of existing systems, the economic and employment situation, weather extremes, changing market or customer trends, market incentives, regulation and available consumer cash and financing. Given all of these dynamics, it's fair to say a manufacturer's forecast is never right and never will be. Our goal — and the goal of anyone who does forecasting — is to minimize wrongness.

Recent forecasting challenges.

In 2010, tax incentives caused the volume of high-efficiency equipment to increase substantially. In 2011, reductions in tax incentives, along with the economic and employment situation, drove a 180-degree shift to the lowest-cost solution for failed systems. For many consumers, replacing compressors or coils on aged condensing units was the only financial option available.

At NORDYNE, we accurately forecasted this shift from replace to repair (or replace with a window unit) and subsequently initiated the development of uncharged HCFC-22 replacement condensing units. These uncharged HCFC-22 replacement condensing units have been one of the industry's hot buttons in 2011, with contractors and distributors arguing for and against them. We believe the units have been a boon to the industry, displacing compressor sales and not system sales. We also feel strongly that for many home-owners, this is a more financially and environmentally responsible option to repairing their condenser or replacing it with a window unit.

The only things certain heading into 2012 are that change will continue and the complicating factors related to forecasting will continue to expand.

Additional regulatory changes due to the new ENERGY STAR and DOE regional requirements are quickly approaching. Economic pessimism remains. Housing activity continues to be slow. And available cash for unplanned expenses like a new furnace, air conditioner or entire heating and cooling system limit the industry's growth.

On the not-too-distant horizon are also regional efficiency standards. At NORDYNE, we have a good understanding of the regional standards, but given the breadth of our product line, one of the challenges is understanding the right product for each market. What SKUs need to be eliminated, and when is the correct time to eliminate those SKUs as options for distributors and contractors?

Page 2 of 2

We do not want to hurt volume, so timing of sku reduction is critical. As skus are eliminated or introduced, managing the supply chain to avoid obsolescence is also a challenge. Bear in mind that since many component suppliers are overseas, the length of the supply chain is very long, and managing our stock, their stock and these transitions is critical.

NORDYNE's planning: How we do it.

By using the published economic and housing forecasts as a base — and applying upward or downward revisions based on internal consensus opinion — NORDYNE begins to plan the layers of HVAC activity. They include: New home application, dual systems, commercial and the largest component of activity, replacement.

We can quickly calculate HVAC volume tied to new housing activity based on HVAC application rates, dual systems and commercial applications. NORDYNE uses a proprietary linear regression model over time to calculate replacement condenser opportunity. The percentages of units repaired, deferred or displaced by lower cost options, such as window units, are then removed from the opportunity. These percentages are shifting with economic outlooks, introductions of replacement dry condensers and overall availability of consumer cash. Once these depression percentages are calculated, the layers of HVAC compressor-bearing activity are complete.

A similar process is used to calculate industry gas furnace activity, although new housing application rates are a much larger component. After regulation drove all compressor-bearing activity to 13 SEER, outdoor condenser failures and the cost of replacement caused increased complete system changes, generating upward pressure on furnaces. At the same time, heat pump applications have to be applied as a downward pressure to calculate overall industry activity.

The NORDYNE 2012 forecast.

At NORDYNE, we are cautiously optimistic about 2012. We anticipate slight overall growth in HVAC activity, but we suspect consumers will continue to choose low-cost solutions when failures occur. For distributors, we recommend stocking cost-effective options with emphasis on the greatest value.

Even though we had a tax credit in 2011, it was not significant enough to move sales to high-efficiency equipment. For most homeowners to invest in high efficiency, the credit almost needs to pay for the cost difference. If wholesalers are in markets with local utility rebates, they should help their contractors bundle these rebates into a bottom line number that may help pay for the upgrade from standard to high efficiency. We encourage the application of high-efficiency systems by offering products like the industry-leading iQ Drive® systems with SEER ratings as high as 24.5.

We are continuing to invest in high-efficiency innovations but are also looking at midrange efficiency that will appeal to a greater number once the economy returns. Our R&D is also focused on solving industry issues beyond efficiency, such as formicary corrosion. In 2011, we launched the first Micro-Channel evaporator coil. Because it is all-aluminum, this technology will prevent formicary corrosion, a major cause of coil leaks due to tighter construction and other environmental contaminants.

Throughout all of this change and its resulting uncertainty, wholesalers and contractors can count on NORDYNE to monitor, adapt, plan and manage market changes to enable high order fill and the quickest order turnaround on the right products and brands. We will continue to serve the needs of our customers — positioning them for prosperity and growth in 2012 and beyond.

Mike Seabaugh is vice president of supply chain at NORDYNE. Contact Mike at 636/561-7300 or [email protected] or visit