By Michael Palmquist & Shawn Murphy
In the last blog post, we looked at techniques for simplifying your company’s product offerings to improve your day-to-day operations and make your company more profitable. In this post, we’ll look at important considerations when choosing and working with suppliers. For this article, we will define “supplier” as the source of the contractor’s materials (equipment, hardware, etc). Manufacturers and distributors are both examples of suppliers.
A distributor buys products from manufacturers, houses them in a warehouse, and then sells them to local contractors. Some manufacturers sell directly to contractors, while others require that you purchase from distributors.
Each type of supplier has its advantages. For example, buying directly from a manufacturer can potentially save on costs and strengthen your relationship, while buying from a distributor can simplify the purchasing process by allowing contractors to get all their materials from just one supplier. Distributors usually keep stock of certain products so that solar contractors can have quick access to them. This can reduce the inventory your company needs to keep on-hand.
A solar contractor’s operation and reputation depends to a large extent on the suppliers they choose to do business with. If a contractor can’t install a system on time because of supply issues, or if the equipment they install fails, it is usually the installer who shoulders the blame. Such issues can cost the contractor a lot of time and money and can make customers less likely to refer new customers or make other purchases from that contractor in the future. Let’s look at good practices and rules pertaining to the contractor-supplier relationship.
Procurement Strategies: Sole, Single, and Multiple Sources
Procurement strategy(ies) can have profound effects on a contractor’s business. We’ll briefly examine the dynamics of each here.
A sole source is defined as the only supplier that can provide you with a given product. The sole source has either established a monopoly or is the only provider within a geographic region from which contractors can obtain a given product. A sole source doesn’t give you any options on price, availability, or quality because there is only one supplier that can provide you with the given product. A sole source supplier relationship is mostly driven by the contractor’s choices about product offerings. That is, the contractor chooses to offer a product that has only a sole supplier. Contractors sometimes make this choice because effective marketing has made the product popular with customers. Service of older systems can necessitate working with a sole supplier because you need a product that must be compatible with an already installed item. But contractors should critically examine the costs of a sole supplier relationship before entering into one. Sole source supplier relationships make your company more susceptible to unacceptably long lead times as well as other practices that can harm a contractor’s business, as described later in the article below.
In both single and multiple source strategies, contractors compare different suppliers on factors such as price, availability, and quality. Multiple source procurement is the strategy of purchasing a given product from more than one supplier. Single source procurement is when the contractor chooses to use only one of two or more suppliers that can supply the desired materials. A single source arrangement is beneficial if the contractor can negotiate better pricing from the supplier because of larger volumes and it can simplify day to day purchasing.
The ability of a single supplier (sole or single source) to support demand fluctuations, adjust capacity to needs, mitigate quality or production issues, and survive disasters are all important issues. If that supplier is disrupted, your supply chain can quickly come to a halt. Single and multi-source procurement is usually preferable to sole source. Buying from multiple sources mitigates supply continuity risks, but can cost more for materials, operational complexity, and additional procurement administration.
Contractors should not quote or sell products they cannot reliably procure within a reasonable timeframe. Failure to follow this basic rule can cause all kinds of process issues and end up costing contractors significant time and money. Remember that in almost all cases, the cost is borne by the local contractor – not the supplier. When materials are not received on time (or at all), solar installers must handle the consequences, which can include:
- Rescheduling installations
- Creating a change order to substitute an alternate product if available
- Keeping jobs open for an extended period, hoping to get the material at a later date
- Canceling the agreement with the customer entirely
Delivery issues can be even more disruptive in cases where solar PV is sold in a single project with other services (such as energy storage, EV supply equipment, or solar thermal). Anything that delays completion of one of the services can delay the entire project, and increases the likelihood that the entire project will be canceled.
While all suppliers can run into delivery delays from time to time, the goal is to avoid suppliers that habitually have issues delivering products. Ask yourself the following questions to determine if you are in a supplier relationship that may adversely affect product delivery:
- Is this supplier a sole source?
- Does the supplier have a history of overpromising and under delivering?
- Is your business important to the supplier?
- Do the products you buy depend on material or labor that the manufacturer shares with another product line that is more strategically important or profitable to them? If so, are there potential supply issues with that material or labor?
- If demand outstrips supply for your product, who receives preferential treatment?
Business Alignment and Independence
The contractor-supplier relationship is a business partnership that should have well-defined roles with a shared alignment of interests. Suppliers should be focused on supplying materials and providing services that support this role, such as willingness to extend terms on purchases and postpone debt when needed by their customers, particularly if your company grows quickly or if you must “carry the rebate” for your customers. However, additional roles can complicate this relationship and cause issues. Your supplier should:
- Not compete with you. A supplier should not have their own solar sales consultants who bid jobs against you.
- Not restrict what other products you can sell. Your supplier should not set quotas or tell you that a certain percentage of your projects must be sold using their products.
- Not require you to purchase a certain amount of equipment at the end of the quarter or the end of the year. This can be a deceptive business practice used by a manufacturer to inflate its sales by deliberately sending contractors along its distribution channel more products than they can sell in a reasonable time period. This can be achieved by offering discounts, or by implying that material may be difficult to source in the upcoming year.
Despite business interdependence, both parties should be independent.
Local Residential Installers should “Own” the Customer
A solar contractor’s existing customers are its best source of new leads. They are also a source of recurring revenue, as existing customers add new equipment (such as energy storage systems or EV charging stations) to existing solar arrays. Your customers may also pay you to service equipment or perform routine maintenance. For these reasons, it is important that your customer’s call you first (as opposed to your supplier) when they have a service question or want to refer a friend.
Assuming you are not acting as a subcontractor, suppliers must respect the solar contractor’s relationship with their customers. The following questions can identify warning signs that you may not “own” your customer base:
- Does your supplier unnecessarily collect your customer’s contact information? For example by having you enter information into their portal.
- Do customers call you or the supplier when there are issues with installed systems?
- Does the supplier ever proactively contact your customer directly?
- If the supplier is also a competitor, do they know of, or have access to your new leads?
- If you have any co-branded marketing material, such as business cards or signs, does this material direct the customer to you, or to the supplier?
- Are your existing customers ever directed to refer neighbors or friends directly to the supplier, as opposed to you, the local solar contractor?
Impacts on Soft Costs
Over time, solar hardware costs have fallen much faster than soft costs, so that soft costs now account for over half of the total project’s cost. Contractors must carefully consider how their choice of product offerings and suppliers affects their soft costs, such as the cost of designing, revising, permitting, installing and inspecting systems.
Some suppliers may require that projects using their equipment be handled in a specific way that differs from other projects the contractor does. For example, certain suppliers will require that you enter data into their portal and create proposals/designs/orders using their software. This is operationally inefficient because the contractor also needs to input much of that information into their own systems. In another example, some panel manufacturers have their own proprietary racking system, which means you may need to use multiple racking systems if you install other panels. Be aware of how these “partial” solutions affect your overhead.
Support and Warranty Issues
Contractors should consider the costs related to supporting the equipment they install. Although these aspects are primarily manufacturer based, you may need to deal with the distributor to handle warranty processes. When evaluating a supplier, be sure to answer these questions:
- What happens if a part needs to be replaced? Does the supplier compensate the contractor for the labor to diagnose and replace equipment still under the manufacturer’s warranty? If so, does this adequately compensate your company for all administrative and travel expenses?
- What is the Return Material Authorization (RMA) policy? Does the supplier need to receive the defective equipment before sending replacement equipment?
- Has the manufacturer had product recalls in the past? If so, investigate examples of past quality issues and how they were handled. Does the supplier have a guaranteed turnaround time? Do they offer to replace production lost due to part failures?
A solar contractor’s operation and reputation is highly dependent on the suppliers they choose to do business with. When choosing suppliers, contractors should carefully consider sourcing strategy, product availability, business alignment and independence, soft costs, and ongoing support costs. With the large number of high-quality suppliers for all types of solar and storage equipment, there is no reason a local solar contractor should feel forced into a poor relationship with a supplier.