Hello, everyone. Thank you for joining Did You
Know, the ESCO HVAC podcast. This episode brought
to you by Encompass Parts, one of the country's
largest suppliers of repair parts and accessories
for products throughout the home. Learn more
at Encompass .com. Scott Pearson, how are you,
my friend? Fantastic, Clifton. Super stoked to
be here. Thanks for having me. No, it's grateful
that we have the opportunity to get together.
You know, it's interesting how our industry just
kind of evolves. You know, we're all fighting
this same front. You know, I just came back from
the UA International Training Program, their
week of competition, as well as instruction for
all of the UA instructors. One of the things
that they mentioned was the significant labor
shortage that we have. The UA is looking at about
a 30 % shortage of technicians going into this
next year. And I think that is pretty common
across the entire industry. So today, let's talk
about some of the pain points that we're witnessing
in the industry and solutions that Encompass
is providing for that. What do you say? Yeah,
I mean, honestly, Colton, I think it's something
we've been talking about for five, six years
now, right? the impact that the skilled labor
shortage will have on the industry. And it's
probably worth considering a lot of the variables
that, that also play into the industry today
to, to really create challenges. You know, we've
been sitting on a fraction, very fragmented supply
chain for, you know, three decades with single
source brand distributing with, with, you know,
a contractor having to have seven or eight. relationships
across town just to get a simple day's work done
you know it poses a bigger challenge now that
you start to take some of that tribal knowledge
out of the industry with with guys that have
earned their retirement after 30 35 years right
and you're left with a younger generation that
doesn't have the the knowledge or the skill set
today because they they just got to put in the
work experience so big challenges ahead yeah
absolutely you know you've mentioned you know
like some of the the manufacturer supply chains
and the access to it, I can remember as a contractor,
that was one of the biggest challenges. I had
gotten to a point where I felt comfortable working
on just about any piece of equipment, but finding
the parts for those equipment was not always
the easiest thing. And there were some brands
that even if I could find the solution, I couldn't
find the OEM part because I wasn't an OEM dealer.
And so there's a lot of struggles. Especially
as we move into products that are more sophisticated,
like inverter driven products and modulating
gas furnaces. You know, there are parts that
you would hope would be readily available, but
you don't want to spend your day just sorting
through different supplies and supply houses
trying to locate those parts. You know, if I've
got a component and I have troubleshoot this
thing, I've found what it is. It's pretty disheartening
to know that if I call that distributor and they
say, oh, well, yeah, but you're not a dealer.
You don't have an account here. I actually can't
sell you that part. I got one on the shelf, but
I can't sell it to you. That's tough. Or maybe
they don't even have parts for that generation,
even though they're available. So there's a lot
of challenges that are out there that I think
could be simplified. Yeah, our thesis has always
been release the information to the people in
the field because I think gone are the days that
you could be just a good mechanic and get the
job done. It used to be that the parts were readily
available in the supply chain. You could go to
a lot of different distributors and find a correct
part. I think distributors did a great job of
somewhat genericizing solutions, but it may have
gone too far because to your point, we're at
a crossroads where equipment's more sophisticated.
because it has to be. And parts aren't necessarily
the common focus for most OEMs pushing down the
supply chain. So it puts distributors in an awkward
position, puts contractors in a much more awkward
position. And the impact that has on the homeowners,
almost a recessive tax. I mean, I think it ends
up having impacts on pricing, impacts on speed
to the solution. And Mrs. Jones doesn't want
to wait three more days with sweaty sheets to
get the job done. She's ready to have air conditioning.
Yeah, exactly. You know, in price in particularly,
I was listening to a podcast last week from a
person who was a previous parts manager for a
manufacturer. And he was discussing the cost
of inverter control boards for one particular
product. And he said because of the supply distribution.
What they paid for that at the OEM level versus
what it ended up at the local distributor, it
was a $600 part of the local distributor that
cost the manufacturer $11. And we're trying to
walk through that whole process. And he said,
but you got to realize that part, when it left
my warehouse, it stopped six different places.
Six different people were in that process and
everyone had their own amount of time and labor
involved with that, including the person in the
warehouse that was just putting that on the shelf
and stocking it. And so we've seen that with
that profile, it has increased some of the parts,
many of the parts on these inverter driven products.
And it's left a lot of technicians leery to work
on them. Because of that potential for high costs.
Because you'll have technicians go, but why is
there so much a difference in these costs? This
manufacturer is X and this manufacturer is Z.
And they really look very similar to each other.
And they might have different components, but
they're really, really close. And I don't understand
the difference in that. And I'm hoping as an
industry, we can solve some of those solutions.
Yeah, I mean, my general opinion is that it is
about the supply chain. commonality between those
two parts is probably there there's probably
a distinct difference from a designer engineering
standpoint we know that um you know each engineer
has its own own flavor of how he designs a piece
of equipment and it's important that the true
oem part goes back in as a replacement so that
it doesn't segregate the life of the system however
how manufacturers decide to get parts to the
market changes the price drastically. I mean,
I think your example of it being touched six
times, that's a little bit excessive. We talk
about a fragmented supply chain, but six steps
to get to the local market is a very costly exercise.
And quite frankly, it's probably something we
can solve for. It's something we can definitely
solve for, for speed to market. When it comes
to pricing and availability of true OEM parts
to a technician, that's something that we've
got to consider because of the skilled labor
gap that's about to be in front of us. Yeah,
I mean, think about ways that we can get that
part to that technician faster. I can remember
back in the old days, if you didn't have a universal
part on your vehicle, you were going to the parts
house. You were making trips for almost every
job. And think about all of that lost time in
transport. And as a contractor, it's the same
way. I look about all of that lost revenue as
that technician is driving, getting parts, and
maybe going through a couple different parts
houses before they actually get the one that
they're looking for. That's a significant amount
of downtime and wasted time that could have been
focused on getting to other customers. Yeah.
I mean, the simple math is it's going to impact
price, right? If there's wasted time that you
can't necessarily get revenue flowing from a
contracting perspective, you'll have to make
it up somewhere. So right there, immediately,
you've got an impact on inflation and pricing.
If you go beyond that and start to look at the
efficiency of a business or the efficiency of
getting the jobs done for consumers, you really
are just wasting jobs per man day, right? I mean,
if you're traveling. let's just say an hour out
of every day to go shopping because ultimately
you aren't sure where it is or where it's going
to be, or you've got to call around to six different
people to get it. You know, that hour times five
days a week, that's another job on the book,
right? So if you can put another job on the board
for tech across, I don't know, 10 techs in a
company, now all of a sudden you've got a real
impact to not only revenue, but an opportunity
to become super competitive when it comes to
pricing. and still get more jobs done for consumers,
which is, to me, a huge impact on your goodwill
and brand in a local market if you're a contractor.
That's what I'd be thinking. Oh, yeah, yeah,
for sure. I look at that because I was at a distributor
level for quite a while, and on the premium products.
Those premium products were fantastic units and
they attracted some of the best contractors.
But the downfall as a supplier, you know, I had
to focus on, you know, turnover of supply and
the actual demand for certain parts. So I would
typically when a new product would come out,
I would have about a 30 to 40 percent product
parts order in place. So that would mean that
60 to 70 percent of the parts available for a
new unit, I could not stock. I couldn't carry
that many components. I could stock 30 to 40%,
which meant I was looking for the most common,
but the rest of those, I just physically couldn't
stock. I didn't have the overhead and the capability
of doing that. So I relied on other forms of
distribution to get those parts to the contractor
when they were looking for them. So it was typically
from the OEM direct or through a OEM distributor.
So even as a distributor myself. I was having
to source a pretty significant amount of products
from other locations, which adds additional time.
Yeah, I mean, it's the same thing we highlighted
a few minutes ago. It's the nature of how it
was designed from the get -go. Back when demand
truly outran supply, distributors and OEMs locked
up and created singularity in the supply chain,
right? So if I wanted true, genuine OEM parts,
I was... bound to one or two brands, tops, as
a distributor. And now that's having the impact,
like you mentioned, of if you want to take care
of your good contractor and make sure that they
have a process they can build math around with
a single source, you've got to go elsewhere to
get the parts. So it creates a nuance for having
too many cooks in the kitchen, right? As far
as pricing goes, availability goes, but to your
earlier point. Maybe it's not the responsibility
of that local distributor to carry everything,
but maybe have access to something, a single
source so that they can take care of their customer
at a competitive price and give them genuine,
true OEM parts. I mean, what do you think that
has on a basic level impact to the end user if
we swim down channel a little bit? Yeah, absolutely.
You know, if you think about a distributor, you
know, a distributor stocks parts because they
have to. A distributor, they're really in the
job of moving boxes. That is the direct path
to market for the manufacturers is through the
distributor. So carrying supply parts is kind
of like an ancillary. It's kind of like technical
support. It's something you have to have, but
it's not really a profit generator. There's a
lot of stocking, a lot of labor, a lot of transportation
into an individual parts. And so I would imagine
many distributors. would be very open to that
partnership of working with a parts supply contact
that could get those parts to that contractor
quickly so that they could focus on what they
were really designed to do, which was move a
lot of boxes. And I think you're right. I think
selling equipment and selling parts, it's two
different businesses. It is. If you think of
the mechanics behind it. The inventory planning,
the general buying and reselling of relationships
across parts, it's much different than the planning
associated with equipment. And to your point,
they're in the business to sell equipment. That's
where their high -stakes revenue is. That's where
their good margins are. If it's going to make
you more money and keep you on a balance sheet
healthier. to invest in equipment inventory versus
parts inventory you know it's the natural go
-to right my thought is is if they're so distinctly
different businesses you know why not separate
the two why not want to have equipment as a business
and parts as a separate business because think
about it it's not just the technicians in the
field that we're missing in the next five years
on, on skilled labor, it's upstream too. It has
an impact on the distributor, you know, the talent
and experience and those roles at the counter
manufacturers, you know, our group talks to parts
teams every day at OEMs. And you can see the
difference today versus 10 years ago with the
talent on the teams. It's not as, it's not as
healthy as it used to be. Well, if you think
about, you know, a common or typical parts counter
employee, you know, many of the parts counter
employees were technicians, right? They came
out of the field because they've got the parts
experience, which means for every person that
I put on the counter, I have now removed somebody
from the technical side. I've removed someone
from installation versus in the warehousing.
If someone has experience in warehousing from
other industries, they've already got good experience
in organization and in management of inventory.
So when we look at a company that is leveraging
their labor, it is much more advantageous for
the entire industry to have our labor in the
actual warehouse side of it versus that parts
counter. Because as we continue losing our labor
from the field. And we're bringing it into the
parts counter. Yes, we're adding some good technicians
at the parts counter that can help find the right
parts. But now we've lost that additional labor
force out in the field. Yeah, I mean, it comes
down to, in my opinion, it comes down to the
data, right? You can't teach a novice counter
person how to ID parts unless they have the experience
or. They have access to information that they
can learn. Yeah, a lot of training. I think that's
the challenge that I've seen in roles at distribution
for the last 20 years is training people on the
counter is tough because the access to the information
to train them is hard to reach. You know, when
a guy calls in and says, hey, I need part number
price and availability. If you don't know where
to start that research process. you're in a bad
state and you won't be able to give them an answer
for hours. And quite frankly, we don't staff
the counter for the peak season. So hours is
not something we have the liberty of. Very true.
So what kind of solutions, like what can we do
to expedite this process and maybe think about
it from a slightly different perspective? Yeah,
I think if we focus on the data component. One
of the biggest challenges that I've seen over
the past 20 years is related to that fragmented
supply chain. You've got parts information and
ID information behind 100 different firewalls.
Everybody locked it up and said, this is exclusive
to this distributor. If you need to ID that OEM
part, you've got to call that distributor. I
think that was well intended. It was a means
of competition. crossing today that we've got
to consider hey if we release that information
it might actually help accelerate the supply
chain take care of hvac in general and so my
thought is release the information aggregated
in a way that's easily accessible and not in
a way that's guessing right we've got lots of
solutions out there today that attempt to cross
reference to a good degree but they're all falling
short to some extent 10, 20 % of the time they're
inaccurate. That has an impact on the technician
and the homeowner. So let's focus on what was
intended to be in that machine by the OEM and
give that true information away so that we're
not necessarily guessing down the line and we
can create real solutions. So it needs to be
more of a database like Encompass is building
where it's direct access to OEM parts, direct
access to the information, key in a model number,
serial number. And bring back a full bill of
material with parts ID, price, availability,
and something you can start to build math around.
Right. And so that's the world that Encompass
is moving into? Yeah. I mean, our thesis has
always been, let's aggregate the whole. Let's
focus on parts. You know, that's a business that
we're in. You know, if you had a soundbite for
Encompass in general over the past 70 years,
it's really anything with a power source for
the home we have the parts for. So when you're
doing repairs in a home service standpoint, you've
got access to 27 different verticals. HVAC and
plumbing is now the capstone to that home. But
one of our big focuses on self -sufficiency in
the field or at the counter for a distributor
to ID parts. Even if you don't buy from us, use
our site today for parts ID. It's pretty fantastic.
But the idea that you can drop a model number
in. and get back a full parts list for that machine,
there's very few places you can get that. So,
you know, goodwill intended, you know, parts
ID is there from Encompass .com. But, you know,
hopefully as a nice value exchange, that also
becomes a transaction. Because I think that's
the one thing missing from a lot of the tools
out there today is you can find the part number
sometimes, but then where do you go to buy it?
Very cool. One -stop shop. I guess. I've always
hated that term, but single -source solutions
that you can build back around are important.
I like that terminology, too. Very cool. So I
encourage everyone to start thinking outside
the box, thinking from a different perspective.
Try to utilize software, utilize tools and technology
to... make our industry more efficient. And there
are a variety of different aspects that need
to be more efficient, all the way from parts
allocation to distribution to just making sure
that we're getting that customer satisfied and
up and running in as short a period of time as
possible. So I encourage you all to learn more
about Encompass at Encompass .com. And Scott
Pearson, I'm grateful that you joined us today.
Glad to be here, Clifton. Thank you.