Supply chain reaction Featured

1:01pm EDT June 22, 2004
Nothing runs like a Deere, so goes the John Deere Co.'s slogan.

When it comes to selling lawn mowers and garden tractors, however, speed is just one piece of the logistics puzzle. So to solve a supply chain problem and reach its goal of reducing its inventory by $1 billion, the power equipment company turned to SmartOps, a North Shore software company that helps businesses with inventory optimization.

The Moline, Ill.-based company's commercial and consumer equipment division faced a huge challenge. With 2,500 dealers, 300 products in 1,500 configurations and a compressed sales cycle -- about 60 percent of its yearly sales occur over a three-month period -- the John Deere Co. needed a better way to keep its dealers stocked adequately without tying up excessive cash in inventory at various stages of the supply chain.

John Deere finances its sales to dealers, allowing them to defer payment for several months. Dealers, not wanting to chance missing a sale, tended to order more than they needed to avoid out-of-stocks. Salespeople, compensated by commission, had a natural tendency to sell as much as a dealer wanted.

"That makes everybody happy except the CFO and the CEO," says Sridhar Tayur, CEO and founder of SmartOps.

To squeeze excess inventory out of its supply chain, John Deere needed to convince its dealers that it could come up with a more efficient method to ensure that its products would be available when they were needed.

While supply chain management systems can generate production and inventory plans, Tayur says, they generally assume that nothing will change once the plan has been created. But real-world conditions -- severe weather, transportation disruptions, labor disputes -- can alter demand and availability, disrupt the supply chain at any stage and have a ripple effect throughout it.

Tayur, also a Carnegie Mellon professor, has developed a set of mathematical algorithms that take data from enterprise resources planning or supply chain management systems and combine them with information on unexpected occurrences, such as spikes in demand for certain products. The data are used to create new inventory plans to meet changing needs.

Instead of human beings crunching the data, the SmartOps multistage inventory planning and optimization software analyzes it and makes constant updates to the inventory plan.

John Deere was able to improve its on-time delivery to dealers dramatically and convince them that with its optimization software, it could meet their needs without running out of product. The company altered its dealer financing to cover the optimum level of inventory only, as determined by the optimization software. Now, dealers can purchase more if they choose to, but John Deere doesn't finance it.

To date, John Deere has achieved 90 percent of its dollar goal for inventory reduction and improved on-time delivery to its dealers from 63 percent to 92 percent.

"Our factories and our supply chain are continuing to build closer to demand, and we are setting our sights on another significant asset reduction by 2008," says John Jenkins, president of the commercial and consumer equipment division.

While John Deere's situation involves thousands of dealers and products over multiple locations, Tayur says smaller enterprises can benefit from optimization software as well. If a company has several locations, a couple dozen products and a few hundred customers over multiple time zones, the complexity can get overwhelming very quickly.

"Pretty soon, for almost any global company, you get to the millions, and that's basically too much for any human being to manage." How to reach: SmartOps, www.smartops.com; John Deere & Co., www.johndeere.com