Minimizing Wrongness: The NORDYNE Forecast Objective

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?