Executive Briefings

Deere Harvests $1bn in Inventory Savings with SmartOps MIPO

For Deere & Company, the $15.5bn global manufacturer best known for its agricultural and construction equipment, one of its fastest growing lines of business is its $3bn Commercial & Consumer Equipment (C&CE) division. Its products include riding lawn mowers, golf course equipment, small tractors and other utility vehicles.

"Most of these products require off-the-shelf product availability or the customer will buy it elsewhere," says James D. Smith, project manager, order fulfillment, for C&CE. He says that about 70 percent of C&CE products experience seasonal demand with 65 percent of retail sales occurring between March and June.

For decades, standard industry procedure has been to push the inventories to the 2,500 dealers, book the revenues at Deere, and hope that the dealers have the right products to sell at the right time. Although financing helped the dealers for some time, it was ultimately up to them to sell their inventory to end-customers. Understandably, the industry-wide paradigm of "pushing" inventory had to change. Inventories continually grew proportionally to sales, and returns on assets continued to diminish.

"There was firsthand feedback from independent dealers regarding their dissatisfaction with our on-time delivery performance," says Smith. "Even though dealers had ample inventory, they often did not have the right product configurations in stock."

As part of the strategic planning process during early 2001, C&CE set aggressive performance targets. Its inventory-to-sales (I/S) ratio had been 58 percent based on inventories at Deere and its dealers, which translated to fewer than two inventory turns. The C&CE leadership committed to reducing the total inventory by $500m in the short term and to $1bn in inventory over a five-year period. Additionally, the C&CE leadership committed to providing product delivery to the dealers by the date requested at least 90 percent of the time by 2005.

The success of the plan rested on C&CE supply chain managers to cut inventory levels dramatically while simultaneously improving product availability and delivery performance. In August 2001, the order fulfillment group of C&CE contacted SmartOps to tackle the inventory challenge using the vendor's Multi Stage Inventory Optimization (MIPO) software.

"We needed to achieve optimal inventory levels at each stocking point in our multi-tiered supply chain," says Smith. "By understanding these optimal inventory levels, we hoped that we would gain insight into the potential savings we needed to achieve."

The first phase consisted of finding a more granular, rational, and sophisticated approach to inventory target setting given the highly seasonal demand and the dealers' need to respond to customer service levels. Actual supply chain data from three C&CE plants and 25 dealers were loaded into SmartOps MIPO to calculate optimal inventory targets. A three-month simulation of a pull-based order fulfillment process with 25 dealers clearly demonstrated that an optimal inventory mix would allow dealers to improve their service levels, even though the total amount of inventory was less. Deere's C&CE implemented SmartOps MIPO and very quickly achieved the results they expected. By the end of 2004, the C&CE division exceeded its goal of $1bn of inventory reduction/avoidance, a full year ahead of schedule.

"By integrating the high-level operations researchers into their MIPO software, SmartOps makes it possible for us to optimize our entire supply chain," says Smith, adding that MIPO is built for speed and for cutting through complexity.

In just four hours each week, C&CE uses MIPO to calculate optimal targets across the North American supply network while considering 52 million variables and 26 million constraints. The enterprise-wide system integration has improved on-time shipment from factories from 63 to 92 percent while maintaining end-customer service levels at 90 percent.

According to Smith, the reduction in inventory prompted Deere to double the replenishment frequency during the peak spring season. However, given the high volumes during that time, no additional transportation cost was incurred. Thus the transportation cost per unit did not change as routes with full truckloads could be built. In addition, the amount of aged inventory dropped from about $140m to less than $50m, allowing for fresher, newer models to be offered to customers, avoiding loss of revenues from discounted inventory, losses that are co-shared by the independent dealers and Deere. The savings on avoided discounts alone account for over $10m annually.

Smith says that MIPO is now completely integrated into C&CE's routine order fulfillment processes, giving Deere the ability to provide monthly recommended stocking levels for 300 product configurations at 2,500 customer facing stocking locations and five warehouses.

"SmartOps has helped John Deere understand the value of operating at optimal inventory levels," says Smith.

For Deere & Company, the $15.5bn global manufacturer best known for its agricultural and construction equipment, one of its fastest growing lines of business is its $3bn Commercial & Consumer Equipment (C&CE) division. Its products include riding lawn mowers, golf course equipment, small tractors and other utility vehicles.

"Most of these products require off-the-shelf product availability or the customer will buy it elsewhere," says James D. Smith, project manager, order fulfillment, for C&CE. He says that about 70 percent of C&CE products experience seasonal demand with 65 percent of retail sales occurring between March and June.

For decades, standard industry procedure has been to push the inventories to the 2,500 dealers, book the revenues at Deere, and hope that the dealers have the right products to sell at the right time. Although financing helped the dealers for some time, it was ultimately up to them to sell their inventory to end-customers. Understandably, the industry-wide paradigm of "pushing" inventory had to change. Inventories continually grew proportionally to sales, and returns on assets continued to diminish.

"There was firsthand feedback from independent dealers regarding their dissatisfaction with our on-time delivery performance," says Smith. "Even though dealers had ample inventory, they often did not have the right product configurations in stock."

As part of the strategic planning process during early 2001, C&CE set aggressive performance targets. Its inventory-to-sales (I/S) ratio had been 58 percent based on inventories at Deere and its dealers, which translated to fewer than two inventory turns. The C&CE leadership committed to reducing the total inventory by $500m in the short term and to $1bn in inventory over a five-year period. Additionally, the C&CE leadership committed to providing product delivery to the dealers by the date requested at least 90 percent of the time by 2005.

The success of the plan rested on C&CE supply chain managers to cut inventory levels dramatically while simultaneously improving product availability and delivery performance. In August 2001, the order fulfillment group of C&CE contacted SmartOps to tackle the inventory challenge using the vendor's Multi Stage Inventory Optimization (MIPO) software.

"We needed to achieve optimal inventory levels at each stocking point in our multi-tiered supply chain," says Smith. "By understanding these optimal inventory levels, we hoped that we would gain insight into the potential savings we needed to achieve."

The first phase consisted of finding a more granular, rational, and sophisticated approach to inventory target setting given the highly seasonal demand and the dealers' need to respond to customer service levels. Actual supply chain data from three C&CE plants and 25 dealers were loaded into SmartOps MIPO to calculate optimal inventory targets. A three-month simulation of a pull-based order fulfillment process with 25 dealers clearly demonstrated that an optimal inventory mix would allow dealers to improve their service levels, even though the total amount of inventory was less. Deere's C&CE implemented SmartOps MIPO and very quickly achieved the results they expected. By the end of 2004, the C&CE division exceeded its goal of $1bn of inventory reduction/avoidance, a full year ahead of schedule.

"By integrating the high-level operations researchers into their MIPO software, SmartOps makes it possible for us to optimize our entire supply chain," says Smith, adding that MIPO is built for speed and for cutting through complexity.

In just four hours each week, C&CE uses MIPO to calculate optimal targets across the North American supply network while considering 52 million variables and 26 million constraints. The enterprise-wide system integration has improved on-time shipment from factories from 63 to 92 percent while maintaining end-customer service levels at 90 percent.

According to Smith, the reduction in inventory prompted Deere to double the replenishment frequency during the peak spring season. However, given the high volumes during that time, no additional transportation cost was incurred. Thus the transportation cost per unit did not change as routes with full truckloads could be built. In addition, the amount of aged inventory dropped from about $140m to less than $50m, allowing for fresher, newer models to be offered to customers, avoiding loss of revenues from discounted inventory, losses that are co-shared by the independent dealers and Deere. The savings on avoided discounts alone account for over $10m annually.

Smith says that MIPO is now completely integrated into C&CE's routine order fulfillment processes, giving Deere the ability to provide monthly recommended stocking levels for 300 product configurations at 2,500 customer facing stocking locations and five warehouses.

"SmartOps has helped John Deere understand the value of operating at optimal inventory levels," says Smith.