John Deere and Advanced Inventory Optimization

While I've attempted to make Spend Matters more of a blog about economics than operations research or traditional supply chain planning, I must confess that I've got a geek side which is not truly fulfilled in these virtual pages. So finally, I'm going to step out on a limb given my own charter for this thing, and reference an article in Supply and Demand Chain Executive that discusses how John Deere has saved hundreds of millions of dollars using advanced inventory optimization. According to the article, "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."

Working with SmartOps, a supply chain vendor which focuses on multi-stage inventory planning and optimization, Deere analyzed "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." Today, the software takes "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, according to the article, are staggering. Here are some of the highlights.

"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."

"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."

OK, I admit, my two years in Pittsburgh hanging out with CMU geeks rubbed off on me, but even if I had no OR background, these numbers would get me excited about taking a second look at savings from improved planning and inventory optimization. And it's further proof that there's still savings on the table for companies who have already invested in SAP APO or Oracle's planning applications.

Jason Busch

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