Executive Briefings

A Supply Chain Overhaul That Delivers It All to Deere & Co.

The manufacturer sets out to craft a supply chain that will lead to lower cost and better customer service, while coping with the extremely seasonal nature of the business.

Supply chain overhauls tend to focus on one of two highly desirable but often conflicting objectives: better service or lower cost. But the Commercial & Consumer Equipment (C&CE) Division of Deere & Co. wasn't about to make a choice. It wanted both.

With sales of around $4bn a year, Deere's C&CE Division makes riding lawnmowers, golf-course maintenance equipment, and utility vehicles. Although the units are heavy and expensive, they must be kept close to consumers, who will buy them elsewhere if a dealer is out of stock. Other products are highly configurable and sold on a make-to-order basis.

Further complicating matters is the seasonal nature of the C&CE supply chain. Fully 65 percent of retail activity occurs between March and July, with the biggest sales squeezed into April and May. By late fall, business has dropped off sharply.

Deere had been holding product at warehouses located near each of its manufacturing plants. Replenishment orders by the company's 2,500 North American dealers were filled on a weekly basis, either through direct shipment or cross-dock terminals. That system, however, was proving to be costly and inefficient. Delivery lead times were unacceptable, stretching to five days or more for 39 percent of dealers. Some deliveries required up to eight days to complete.

In 2004, C&CE executives dictated a change. The company wanted to boost the responsiveness of its distribution network. At the same time, it was demanding a 10-percent reduction in transportation costs over the next four years. To tackle those seemingly contradictory goals, Deere came up with a new logistics initiative that would account for the market's seasonality.

The idea was to "build a business that was as good as its products," says Reid M. Stines, manager of logistics for the C&CE Division. For help, it turned to SmartOps Corp., a vendor of inventory optimization software. The company had already helped Deere take $1bn of inventory out of its supply chain. Now it was being called on to provide a system that would allow for network optimization on both the strategic and tactical levels.

The task was a huge one, and Deere approached it in stages. The company designed a series of five projects, each focusing on a six-month period. Each would build on the lessons and successes of the preceding one, with Deere progressively widening the scope of the effort. Actual savings would be assessed on a quarterly basis.

Deere's first innovation was to set up a multi-stage distribution network. To cut down on order lead times, the company divided the staging of inventory into three locations: at the factory warehouses, at intermediate sites called merge centers, and at the dealers. The merge centers would hold high-volume, non-configurable products, and be close enough to dealers to ensure delivery within one or two days. The setup would allow for daily replenishment, as well as less inventory at the dealer level.

The merge centers would lead to further efficiencies because they would contain product from multiple factories, eliminating the need for a dealer to take delivery of different shipments from each factory. Fewer deliveries mean fewer trucks interrupting operations at the dealerships, especially during the busy peak season.

The next innovation focused on consolidating shipments into cost-saving, multi-stop truckloads. Dealers' assigned shipping days could be compressed because less volume was flowing from the factory warehouses. (The merge centers were handling most of the high-volume activity.) The change opened the door to more consolidation and linehauls through regional breakbulk terminals (BBTs).

To determine the best location for merge centers and cross-dock facilities, Deere deployed SmartOps' optimization software. It helped the company to identify the best transshipment points, transport modes, replenishment frequencies and shipment days for each factory-dealer pairing. The technology also allowed Deere to assign the best BBTs to each dealer, and decrease the number of such terminals in use during the off-peak season.

Traditionally, network design has been strategic in nature. Assuming that accurate cost data can even be obtained, the effort often calls for expensive new distribution centers or a change of logistics partners. By bringing the exercise down to the tactical level, Deere can better examine the true cost of transportation, warehousing and inventory, with all system constraints accounted for. And with the help of third-party logistics providers, changes in routing or inventory allocation can take place within a matter of weeks.

Through the five projects, four of which have been completed, Deere has been able to move from a high-level view of its distribution network to more detailed, ground-level observations. Each project has yielded substantial savings, ranging from $587,000 in the peak season of 2005 to nearly $2.7m in peak 2007. Savings in the latter period were derived from such factors as greater use of truckloads, warehouse consolidation, better selection of BBTs, and reduced inventory expense, says Stines. By the end of the collaboration with SmartOps, Deere expects to save more than $8m.

Service has improved, too. In peak 2005, with just two merge centers opened, 22 percent of high-volume demand was being replenished on a daily basis. By peak 2007, with five merge centers in operation (in addition to some daily service from the three factory warehouses), that amount had climbed to 88 percent. Meanwhile, delivery lead times of three days or less rose from 65 percent of shipments in 2004, to 89 percent in 2007.

Deere views its success as proof of the growing importance of transportation as a means of cutting cost and boosting customer service. And new optimization technology has made it possible. Says the company: "The resulting tactical and operational improvements at Deere have resulted in millions of dollars of incremental savings."

Supply chain overhauls tend to focus on one of two highly desirable but often conflicting objectives: better service or lower cost. But the Commercial & Consumer Equipment (C&CE) Division of Deere & Co. wasn't about to make a choice. It wanted both.

With sales of around $4bn a year, Deere's C&CE Division makes riding lawnmowers, golf-course maintenance equipment, and utility vehicles. Although the units are heavy and expensive, they must be kept close to consumers, who will buy them elsewhere if a dealer is out of stock. Other products are highly configurable and sold on a make-to-order basis.

Further complicating matters is the seasonal nature of the C&CE supply chain. Fully 65 percent of retail activity occurs between March and July, with the biggest sales squeezed into April and May. By late fall, business has dropped off sharply.

Deere had been holding product at warehouses located near each of its manufacturing plants. Replenishment orders by the company's 2,500 North American dealers were filled on a weekly basis, either through direct shipment or cross-dock terminals. That system, however, was proving to be costly and inefficient. Delivery lead times were unacceptable, stretching to five days or more for 39 percent of dealers. Some deliveries required up to eight days to complete.

In 2004, C&CE executives dictated a change. The company wanted to boost the responsiveness of its distribution network. At the same time, it was demanding a 10-percent reduction in transportation costs over the next four years. To tackle those seemingly contradictory goals, Deere came up with a new logistics initiative that would account for the market's seasonality.

The idea was to "build a business that was as good as its products," says Reid M. Stines, manager of logistics for the C&CE Division. For help, it turned to SmartOps Corp., a vendor of inventory optimization software. The company had already helped Deere take $1bn of inventory out of its supply chain. Now it was being called on to provide a system that would allow for network optimization on both the strategic and tactical levels.

The task was a huge one, and Deere approached it in stages. The company designed a series of five projects, each focusing on a six-month period. Each would build on the lessons and successes of the preceding one, with Deere progressively widening the scope of the effort. Actual savings would be assessed on a quarterly basis.

Deere's first innovation was to set up a multi-stage distribution network. To cut down on order lead times, the company divided the staging of inventory into three locations: at the factory warehouses, at intermediate sites called merge centers, and at the dealers. The merge centers would hold high-volume, non-configurable products, and be close enough to dealers to ensure delivery within one or two days. The setup would allow for daily replenishment, as well as less inventory at the dealer level.

The merge centers would lead to further efficiencies because they would contain product from multiple factories, eliminating the need for a dealer to take delivery of different shipments from each factory. Fewer deliveries mean fewer trucks interrupting operations at the dealerships, especially during the busy peak season.

The next innovation focused on consolidating shipments into cost-saving, multi-stop truckloads. Dealers' assigned shipping days could be compressed because less volume was flowing from the factory warehouses. (The merge centers were handling most of the high-volume activity.) The change opened the door to more consolidation and linehauls through regional breakbulk terminals (BBTs).

To determine the best location for merge centers and cross-dock facilities, Deere deployed SmartOps' optimization software. It helped the company to identify the best transshipment points, transport modes, replenishment frequencies and shipment days for each factory-dealer pairing. The technology also allowed Deere to assign the best BBTs to each dealer, and decrease the number of such terminals in use during the off-peak season.

Traditionally, network design has been strategic in nature. Assuming that accurate cost data can even be obtained, the effort often calls for expensive new distribution centers or a change of logistics partners. By bringing the exercise down to the tactical level, Deere can better examine the true cost of transportation, warehousing and inventory, with all system constraints accounted for. And with the help of third-party logistics providers, changes in routing or inventory allocation can take place within a matter of weeks.

Through the five projects, four of which have been completed, Deere has been able to move from a high-level view of its distribution network to more detailed, ground-level observations. Each project has yielded substantial savings, ranging from $587,000 in the peak season of 2005 to nearly $2.7m in peak 2007. Savings in the latter period were derived from such factors as greater use of truckloads, warehouse consolidation, better selection of BBTs, and reduced inventory expense, says Stines. By the end of the collaboration with SmartOps, Deere expects to save more than $8m.

Service has improved, too. In peak 2005, with just two merge centers opened, 22 percent of high-volume demand was being replenished on a daily basis. By peak 2007, with five merge centers in operation (in addition to some daily service from the three factory warehouses), that amount had climbed to 88 percent. Meanwhile, delivery lead times of three days or less rose from 65 percent of shipments in 2004, to 89 percent in 2007.

Deere views its success as proof of the growing importance of transportation as a means of cutting cost and boosting customer service. And new optimization technology has made it possible. Says the company: "The resulting tactical and operational improvements at Deere have resulted in millions of dollars of incremental savings."