2005 Supply & Demand Chain 100 Case Study - Deere & Company Commercial & Consumer Equipment Division / SmartOps Corporation

Profiles in Supply Chain Enablement: $3.5 billion division eliminates $1 billion in inventory costs using planning and optimization solution

Profiles in Supply Chain Enablement: $3.5 billion division eliminates $1 billion in inventory costs using planning and optimization solution

Company: Deere & Company Commercial & Consumer Equipment Division (Moline, IL)
Company Size: Large
Company Sector: Manufacturing (Heavy Equipment)
Area(s) of Enablement: Supply Chain Integration & Infrastructure
Enabler: SmartOps Corporation (Pittsburgh, PA)

SDCE 100 2005Case Study: In 2001, Deere & Company's $3.5 billion Commercial & Consumer Equipment (C&CE) division set goals of eliminating $1 billion in inventory costs by the end of 2005 through inventory reductions and avoidance of additional costs in response to increased sales. C&CE's goals also included improving on-time delivery to dealers as it replaced its traditional "push and pray" inventory approach.

A number of factors complicated the task:

  • Five product lines — consumer and commercial riding lawn equipment and mowers, golf course mowers and aerators, utility vehicles and utility tractors — comprise 100 product families.

  • Most products require off-the-shelf availability or consumers will buy elsewhere.

  • 70 percent of products experience seasonal demand, with 65 percent of retail sales between March and June.

  • Financing incentives encouraged dealers to carry inventory.

  • Even with ample inventory, dealers frequently lacked proper product configurations in stock and were dissatisfied with C&CE's on-time performance.
The fundamental question facing C&CE supply chain managers was: Can the company cut inventory levels this drastically and boost product availability and delivery performance at the same time, or will it negatively affect product availability and sales?

The Solution

Deere C&CE turned to SmartOps and its Multi-stage Inventory Planning & Optimization (MIPO) software to provide a way to scientifically and accurately calculate inventory targets for a complex supply chain subject to wide-ranging variability and uncertainty.

C&CE and SmartOps loaded MIPO with actual supply chain data from three C&CE plants and 25 dealers to calculate optimal inventory targets, conducting a three-month simulation of pull-based order fulfillment with dealers. MIPO calculated optimal targets and demonstrated that the right inventory mix would improve dealer service performance, even with less inventory.

Based on the simulation, C&CE implemented the system throughout its dealer network, instituting pull-based inventory optimization. Implementation time was about six months.

The Results

It now takes MIPO software just four hours per week to consider 52 million variables and 26 million constraints, as well as calculate optimal targets for the North American supply network.

The results exceeded C&CE's expectations:

  • Enterprise-wide system integration boosted on-time factory shipments from 63 percent to 92 percent while maintaining end-customer service levels at 90 percent.

  • During peak season, the company doubled replenishment frequency with no increase in transportation costs, thanks to better planning.

  • MIPO automates and streamlines planning and optimization tasks, eliminating manual data entry and human error.

  • Aged inventory dropped from $140 million to under $50 million, avoiding the need for product discounts and saving $10 million annually.

  • At the end of 2004, C&CE met its $1 billion inventory reduction/avoidance goal, a full year ahead of schedule.

  • Savings translated into more than $107 million in positive shareholder value add (SVA), a measurement that positively affects share price.
Overall the company saw payback on its investment in the solution in less than 12 months.

C&CE has been expanding its use of SmartOps MIPO to encompass dynamic supply chain network design. Deere & Company also plans to apply the model to its international business and move analysis upstream to work-in-progress inventories.

Armed with MIPO, Deere & Company is in hot pursuit of "the next billion dollars" in value.

For more stories of successful supply chain implementations, read the "2005 Supply & Demand Chain Executive 100" article in the June/July 2005 issue of the magazine. Also watch the Today's Headlines section of SDCExec.com every Tuesday and Thursday for more in depth best practices drawn from this year's Supply & Demand Chain Executive 100.