Running inventory like a Deere

By restructuring the supply chain for one of its divisions, John Deere cut inventory and reduced freight costs to better manage assets and enhance shareholder value. Excess inventory can act as a drag on financial performance. Yet any company has to have enough products in its dealers' showrooms to generate sales. The trick is to optimise the delivery of product so that the bare minimum is maintained yet enough product is available in the stores to support sales. Moline, Illinois-based Deere & Company, better known as John Deere, tackled this problem head-on over the past five years in its $4 billion Worldwide Commercial and Consumer Equipment (C&CE) division. It restructured that division's supply chain to trim inventory and freight costs, thereby improving the company's financial performance for its shareholders. Across the company, Deere has been able to reduce its overall assets-to-sales ratio compared with the same quarter of the previous year for 29 consecutive quarters. To accomplish this in the C&CE division, John Deere applied advanced software to figure out how to better align its production with demand and reduce inventory. "Our overall strategy was to use better science to address our challenge," says Loren Troyer, director of order fulfilment at Deere's C&CE division. "We recognised that optimisation tools could help us do that." Taking a cue from the top The supply chain transformation was guided by Deere's overall financial strategy. When Robert W. Lane took over as CEO of John Deere in 2000, he emphasised the importance of improving shareholder valuethat is, delivering better financial performance with fewer assets. Lane also wanted to make Deere more successful through all business cycle fluctuations. Because the company's largest business is agricultural machinery and services, in the past, its fortunes often rose and fell with those of the U.S. farm economy. "If farmers were not doing well, we didn't do well because they didn't have the money to buy our equipment," Troyer explains

Today Deere offers three product lines: agricultural, commercial and consumer, and construction and forestry. For decades, the company has been growing its nonagricultural divisions and expanding sales worldwide, reducing its dependence on the U.S. farm economy. Under Lane, the company set higher performance goals and required its divisions to implement strategies that would gain a better return for shareholders invested capital. Deere also began emphasising the importance of "shareholder value added," which is determined by subtracting an asset charge from operating profits. "Because of the focus on return on assets and shareholder value added, it became very important to manage our assets better," Troyer explains. "And a very big part of our assets in the C&CE division is finished goods inventory, both in our factories and in our dealers' hands." Determined to trim inventory as a way to free up capital, John Deere began an inventory-reduction initiative in the fall of 2001. At that time, finished goods inventory in the commercial and consumer division amounted to an estimated $1.4 billion, and the company expected inventory to reach $2 billion to support anticipated sales growth. "Our goal was to take that down to about $1 billion by offsetting the need for new inventory and reducing the current amount of stock on hand,"

Troyer says. Source: Cosgrove, 2019

Questions 1. Distinguish the possible costs could John Deere incur that are associated to inventory management

2. Identify any four possible inventory related metrics that John Deere should consider when making inventory related decisions

3. In the case study it is mentioned that "If farmers were not doing well, we didn't do well because they didn't have the money to buy our equipment, Assess how can John Deere manage inventory to reduce the risk of seasonal stock