This article originally appeared as the cover story in the September 2022 issue of Security Business magazine. When sharing, don’t forget to mention Security Business magazine on LinkedIn and @SecBusinessMag on Twitter.
The pandemic disrupted many aspects of business, but for integrators, perhaps none have hit as hard as the disruptions to the supply chain. While the nightly news focuses on major disruptions to the automobile and consumer electronics industries, the security industry is also feeling the impact, as it relies heavily on products shipped from around the world – many of which require computer chips, which remain in critically short supply.
This means that frontline integrators are feeling the disruptions every day as they work to meet their customer’s security needs while maintaining profitability. The cost of parts and equipment soars as deliveries are delayed by weeks and sometimes months.
Integrators – from enterprise operators down to independent alarm companies – are being forced work through price increases and delivery delays. How are these issues being resolved with end-customers? How have vendor and distributor relationships changed? When will the markets return to the pre-pandemic normal?
Such a hot-button business issue for integrators makes it timely and important; thus, we posed these questions and others to the Security Business expert integrator panel – comprised of John Nemerofsky, COO of SAGE Integration, Mike Ruddo, Chief Strategy Officer at Integrated Security Technologies (IST), and Shaun Castillo, President of Preferred Technologies.
The Scope of the Problem
In some cases, product delays are stretching beyond a year. Nemerofsky says SAGE placed a June order for 5,000 access control cards for a large client and received an expected delivery date of September 2023.
“Who can plan that far ahead?” he asks. “We immediately ordered another 10,000 cards to have them available for other clients next year.”
Ruddo says smart locking solutions that require microchips are difficult to acquire. For example, at the earliest, two large orders IST made this year will take 11 months to fulfill. “We are telling our clients: ‘Look, if you commit to these orders this year, we will place an advance order now to get in the queue, so it does not impact next year’s projects.’”
Castillo says virtually every large project Preferred Technologies started this year faced a minimum three-month delay, with most set back six months or longer. His most significant product delays involve credentials, readers, controllers and some cameras. “As one issue gets resolved, another pops up,” he says.
Dealing with Vendors and Distributors
Ruddo says that some manufacturers were slow to communicate early into the supply chain crisis; in fact, IST often learned very late in the order process that delays were coming, leaving little time to suggest other options to clients.
That is changing recently, as some manufacturers have actually offered to co-present to IST clients. “I have had manufacturers draft letters outlining the issues and the planned steps to resolve them,” Ruddo says. “That helps, as every integrator appreciates the backup [with clients].”
Ruddo adds that many vendors hold prices for only one month – unlike the typical semi-annual or annual bumps the were common before the current crisis. Most vendors do not invoice until products ship; however, some integrators attempting advance orders may run into credit limits. “If [an integrator] is placing significantly larger orders than a vendor is used to seeing from them, an integrator may deal with credit challenges that must be worked through with those providers.”
Nemerofsky says some manufacturers disguise price increases as added surcharges. While he agrees that vendors should be making a fair profit, Nemerofsky objects to a lack of transparency. As an example, he cites one manufacturer that recently added a 6% surcharge for shipping of all orders.
“We ordered $300,000 worth of software from this company and were charged an extra $18,000,” he says. “There was nothing shipped – we get the software by clicking on a link. We refused to pay the charge.
“Another manufacturer recently announced that the cost of a chip required for its door controller increased 10-fold with the added charge passed to us,” Nemerofsky says. “We can tell our client why our charges are increasing, and then they decide whether to pay the extra fee to get the device in two weeks or wait until other options are available. That is being transparent.”
Castillo says Preferred Technologies tries to remain loyal to its regular vendors, but should a client request an alternative product capable of being delivered sooner, he has no choice but to comply. That said, before recommending a different product than specified initially, Castillo and his team are sure to test the alternatives to ensure their reliability.
He gives many manufacturers credit for trying to improve the current situation. “Our manufacturing partners look at every input into producing their products – how they can build resilience into their supply chain or present alternatives,” Castillo says. “Yes, it has taken them a while and the efforts must continue, but I think this process will serve us well in the coming decade.”
Castillo adds that some vendors and most distributor partners have e-commerce sites enabling integrators to log in, see open orders and get tracking information. He says his team often talks with vendors several times daily to get as much information as possible to help plan job assignments.
Sometimes, it is better to avoid manufacturers when ordering equipment, Nemerofsky says, adding that distributors usually negotiate better pricing than an individual integrator. Virtual distributors, such as PSA, do not stock anything but often have access to hard-to-locate equipment and offer free shipping and 90-day payment terms.
Nemerofsky also contends that large manufacturers bear some responsibility for limited access to certain components. For example, a leading board maker creates about $10 million of products monthly. Two large access control providers upped their orders to roughly that amount, effectively shutting off other resellers. “These smaller guys are getting one or two boards a month.” He also blames some manufacturers for not seeing the circuit chip shortage coming sooner.
Dealing with Customers: Communication
The three integrators agreed that the current supply disruptions and higher costs point to a need for better client communications. “We are talking more with our clients and working together to forecast their needs much better,” Nemerofsky says. “I tell them: ‘Don’t tell me what you need next month. Tell me what you need four months from now so I can order it.’ We feel the delays, but they have not
Castillo says better communication helps educate clients on the supply chain and pricing issues that are plaguing integrators in today’s market. “Our agreements now include a contingency budget line for potential cost increases that gives us a little room if prices climb,” Castillo says. “It protects our clients by setting maximum amounts of any increases. This is a conversation we have with every single client.”
Ruddo says IST uses contracts that allow the integrator to substitute products if they cannot obtain preferred devices within – or close to – a project’s schedule. “It is an opportunity to be transparent with your client,” he says.
The First Big Choice: Pass Along or Eat the Price Increases?
Integrators experiencing rapidly increasing costs face a dilemma – do they pass along the costs to their clients or absorb all or a portion as part of doing business? The answer depends on factors such as generated revenue and length of service with the client.
Ruddo says integrators need to plan and add language to contracts covering wildly accelerating costs such as shipping. “We include a bulk freight add for large items like turnstiles that are undeliverable in a FedEx or UPS truck. If an integrator is not already doing this, it is probably worthwhile to help recoup bulk freight charges that have risen dramatically.”
Ruddo adds that few IST projects have been canceled due to price increases; however, some have been delayed or portions pushed into the next budget cycles.
Nemerofsky says SAGE proposals have always been valid for 30 days. “We would not increase the price. The 30-day guarantee is one
The Second Big Choice: Which Jobs Get the Limited Equipment?
With vendors frequently unable to meet an integrator’s full product orders, it sometimes becomes necessary to decide which clients receive equipment as it becomes available. The three integrators say several factors play into their decision-making.
Castillo says that while he looks to serve all customers equally, the reality is that larger projects typically get top priority. “I ask myself: Can I hang a few cameras on Project A, or can I have eight guys engaged for an entire week on Project B,” Castillo says. “We usually choose the latter.”
Ruddo says decisions to move forward with limited products depend on customer-generated revenue, a project’s urgency and the ability to replace scarce equipment with other, more readily available products. He says some manufacturers prioritize new construction based on the end-user’s time to gain a certificate of occupancy.
Also, IST has many federal government clients, including those under the umbrella of the Department of Defense. A law – the Defense Property Accountability System (DPAS) – was initially drafted to ensure the military received priority during wartime. “We pass along a list of our projects with a DPAS rating to manufacturers prioritizing those over all other orders.”
Internal Dilemma: Planning Ahead
Nemerofsky says that soon after the supply chain disruptions began, SAGE increased its product inventory by 20%. “That is a process that may be financially difficult for some integrators,”: he says. “But we all must be sharper on our minimum and maximum equipment levels. If you did not invest in warehouse management before the disruptions, now is the time to do so.”
Nemerofsky adds that he recommends asking clients for up-front deposits to help offset expanding inventory costs.
IST added inventory based on longer-term customer needs. “We told our clients it was time to accelerate orders and get them into the queue because products that typically take a week or two to get onsite now require two to three months or more,” Ruddo says. “Fortunately, we were in the cash position that allowed us to do that. It was the biggest way we tried to mitigate the supply problems.”
Castillo says Preferred Technologies’ operations team meets weekly to review what products are available or are expected to arrive soon and prioritize projects for the next couple of weeks. “Just because we are promised a delivery within the next week doesn’t mean it will happen,” he says. “We must remain agile and go with what we have. Product availability is the primary driver of what jobs get done first.”
As shipping costs continue to increase, SAGE has taken steps to speed deliveries while reducing costs. Nemerofsky says the company needed products from a Salt Lake City provider. The cost of transporting them to SAGE headquarters in Ohio was $2,000 plus a $3,000 markup. “We sent our truck there for the pickup and saved costs that way,” he explains. “We are not going to build a logistics and trucking business, but we will use this process when it makes sense.”
Internal Dilemma: More Hiring and Training
In addition to rising product prices, integrators are hammered by increased costs for employees and training. “We are exploring every avenue to attract employees and retain those we have, including different benefits and pay and more types of training – not just technical training, but leadership training,” Castillo says. “We have hired an in-house recruiter and are probably going to add a second. We are going to develop apprenticeship programs. These steps represent our biggest challenge for years to come.”
Nemerofsky says the need to use replacement products unfamiliar to an integrator will require additional technician training. “Training may take two and a half days of sitting in a conference room – time they are not generating expected income. That represents five days of costs to me.”
The impacts of the supply chain crisis weigh on an integrator’s entire business. “The business projections developed pre-2022 may have taken the supply chain into account, but definitely not at the level we are seeing,” Ruddo says. “Project delays create revenue slips, which affect more than the project people. The back office and all other aspects of the operation are impacted.”
Nemerofsky recommends integrators provide more significant support to billing and collections to help pay for unexpected costs during the current situation.
Light at the End of the Tunnel?
Nemerofsky says he sees the current shipping backups peak during the second quarter of 2023. After that, he predicts 12 to 16 weeks of gradual improvement until a camera with a current four-month backlog is received a day or two after being ordered.
Castillo says he cannot estimate how long the current situation would continue; however, he expects to continue current operating practices through the end of 2022. “From a financial perspective, we have seen ourselves improve through optimized planning, tracking and coordination,” he says. “Those things impact our profit in a good way.”
Ruddo says a few months ago, he was optimistic that the current problems would end this year. “Now I’m hearing we will be lucky if we get out of this by the end of next year,” he says. “This entire process requires micromanaging at a level most integrators simply are not used to doing.”
Security PR and marketing expert Jon Daum contributed to the writing of this article. Connect with him on LinkedIn at www.linkedin.com/in/jondaum.
