For heavy equipment dealers and their customers, the compounding problems of Covid-19, supply-chain disruptions and inflation outlined in Part 1 of this series boils down to two results – heavy equipment and the parts needed to maintain it are in short supply and prices are going up dramatically.
“There's a lot of work going on behind the scenes to try to get the inventory in the right spot for customers. But it's very challenging,” says Diane Benck, general operations manager and part owner of West Side Tractor Sales, a John Deere Construction & Forestry equipment distributor in Northern Illinois and Indiana. Benck gave a dealer’s perspective on this issue last week in a Triangle Talk webinar hosted by the Association of Equipment Management Professionals.
“In many cases, we just don't have inventory to meet all our customer demand," Benck says. "Many products are sold out for all of 2022, and manufacturers are not accepting orders yet for 2023.”
“We used to get price increases annually or maybe twice a year, but that occurred much more frequently in 2021,” says Benck. While consumer inflation is running about 7.5%, for the steel- and materials-intensive heavy equipment industry, it’s more like 10%, she says. “We’ve also seen 30% increases on attachments, and availability doesn’t seem much better."
Roots in the past
While Covid is certainly a precipitating factor, a lot of the problems contractors are facing today stem from the easy availability of rental equipment in the past.
After the Great Recession of 2008-2009, contractors turned to rental equipment and leases rather than direct ownership to lower their financial exposure. “The dealer rental fleets ballooned everywhere. And it was fueled by low interest costs and favorable tax policy,” says Benck.
A lot of customers got used to relying on dealer rental fleets when they got a large job, she says. When Covid hit, manufacturers cut production schedules and then couldn’t produce because of the supply-chain issues and labor shortages. Then the demand for construction surged at the end of 2020 and kept growing through 2021.
Reduced rental fleets
“What this has done is drastically reduce dealer rental fleets,” Benck says. “If I had to guess how much dealer rental fleets are down right now, I’d say 15% to 20%. That doesn't sound huge. But when you couple that with markets going up 10% or 15%, it creates an enormous shortfall, depending on the dealer and location.”
And while major OEMs plan to make more machines this year than they did last year, it's unlikely to be enough to replenish sold-out dealer rental fleets, says Benck. “That's why this isn't going to be over in a year. It's going to take more time than that. We're looking to least until the end of 2023 before dealer rental fleets can be replenished and possibly well into 2024.”
Benck’s West Side Tractor is in better shape than many dealers because it had lots of inventory when Covid hit. “We never cut back orders, and our market didn't grow as much as others across the country. But despite all that, if I could snap my fingers and add another 150 machines to our rental fleet I would.”
Parts and maintenance
Many of the same issues hampering machine availability are likewise making spare parts and maintenance supplies hard to get. One of the toughest challenges is filters.
“Apparently there is a worldwide paper shortage and a good percentage of all our backorders are filters right now,” says Benck. “The good news is that there are a lot of filter manufacturers, and we can generally source around it.”
To stay one step ahead of the problem, West Side Tractor is pulling its maintenance contracts months ahead of time to make sure it has all the filters available or on order. “This is so that we don't have any disruption in the maintenance plans we have with our customers,” says Benck.
Other parts challenges include electrical components, undercarriages, rubber tracks and emissions-related parts, says Benck. “Plan ahead for as many of these items as possible right now. I don’t think we’ll see a quick improvement on parts availability. We've taken parts from tractors in the yard. We've done all kinds of creative things, but because of our declining rental fleet, we just don't have the resources we had last year.”
What’s a contractor to do?
While these challenges will remain for some time, there are still plenty of things contractors can do the ease the impact on their businesses, says Benck. For example:
- First, make a plan. If you’re one of those contractors who doesn’t do a lot of forecasting, now is the time to start.
- Consider talking to dealers about your Spring 2023 orders. Those who get orders in now will take the available order slots from those who are not planning.
- Plan for downtime as a result of parts shortages.
- Service your equipment now to prevent unplanned downtime.
- Keep the machines that you do have. The additional maintenance costs of keeping a machine another year or two might not look that bad in light of price increases.
- If you lease, negotiate to keep your leases longer, buy out your lease or at least keep the equipment you have until new equipment is available.
- Sell idle assets. There is no better time in the history of the industry to get rid of underutilized equipment. Inflation and availability are working in your favor now.
- Embrace technology to get the most out of the equipment you have. This includes GPS for production efficiency and telematics to understand your utilization.
Not like other industries
“I believe this is a passing phase for our industry and not a new, lower level of service for our customers,” says Benck. “As an industry, we are driven by long-term relationships with our customers rather than short- term profits.”
Keep in mind, Benck says, that your equipment dealer shares your pain. “I also ask you to be aware that everyone at a dealership is pretty miserable. Even though we are hitting sales highs, we feel like we’re letting you guys down, and I want to say thank you. I’ve been struck by the level of patience most of our customers show us and how much we appreciate that in terms of these truly unprecedented times.”
Coming up next: Part 3 of this series will dive into how the supply-chain crisis has affected contractors, equipment prices and availability.
Part 1: Untangling the Supply-Chain Crisis: What are Manufacturers Doing?