John Deere Upgrades Inventory Management, Order Fulfillment

The Problem

Inventory management was becoming a significant financial challenge for Deere & Company, a top global manufacturer of capital goods for agriculture, consumer and forestry applications. Like many of its competitors, Deere and its Commercial and Consumer Equipment (C&CE) Division operated from an inventory “push” business model, pushing inventories to its 2,500 independent dealers, booking the revenue, then hoping that dealers had the right products to sell at the right time. All too often, they did not, with negative financial implications for both dealers and Deere. With intensifying competition in the markets Deere served, something had to change. Yet the complexity of creating a sustainable inventory optimization system for an enterprise as large and complex as Deere, with some 100 product families, highly variable product demand and production capacity, was enormous.

The Analytics Solution

With the benefit of a software tool called Multistage Inventory Planning and Optimization (MIPO), Deere determined that it could meet customer requirements with significantly lower inventory levels. MIPO, an analytics-powered application, uses sophisticated mathematics to predict inventory utilization patterns and their implications when specific products need to arrive at particular locations throughout Deere's vast, geographically dispersed network of warehouses and dealerships. The system also provides for inevitable variations in stocking levels over the course of peaks and valleys of consumer demand, necessitated by constraints on manufacturing production capacity.

The Value

In 2003, the C&CE Division's average end-of-month inventories were $890 million below where they would have been based on 2001 trends, and $550 million lower than 2001's actual inventory. Because 91% percent of that drop was in dealer inventories, Deere took a temporary hit on booked revenues as dealer inventories were drawn down. Yet a phased-in accounting adjustment for the change was more than offset by a $107 million increase in “shareholder value-added,” a financial performance indicator used by securities analysts to value corporate stock. Additional benefits of the more finely calibrated inventory management include superior dealer customer service, lower product transportation costs due to a reduction in emergency shipment of small orders in partially loaded trucks, and lower working capital requirements.