How John Deere Reduced Supply Chain Inventory

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Deere & Company’s Commercial & Consumer Equipment Division (C&CE) manufactures tractors, garden mowers, and ATVs. They are sold to U.S. consumers through a network of 2,500 dealers. Sales are seasonal; 65 percent of annual sales occur between March and July.

Surprisingly, most consumer purchases of C&CE products are made by impulse. In a typical scenario, a consumer walks into a dealership (usually a hardware store) looking to make a different purchase but ends up buying a tractor or mower after seeing it on display. To support impulse sales, dealers must maintain a significant level of inventory available. Thus, in the past Deere encouraged dealers to maintain as much inventory as possible by providing financing. However, even though the inventory was sold to dealers, it actually remained a Deere asset. This is because the inventory was financed and thus remained in Deere’s books as accounts receivable.

With this policy, it is no surprise that the total level of inventory in the supply chain ballooned to 1.4 billion in 2001. Moreover, it was expected to reach about $2 billion by 2005. This represented a substantial share of the total sales revenue of $4 billion in its Worldwide C&CE division in 2005.

The excess inventory resulted in financial pressure, both internal and from Wall Street, to reduce inventory. Deere decided to reduce supply chain inventory by $1 billion in four years. The plan consisted of four major components. The first component was to introduce a sophisticated sales forecasting capability to help determine the amount of inventory that dealers should keep in order to adequately support sales.

The second component was to restructure production to introduce fast and flexible manufacturing. The goal was to add flexibility by producing in smaller lots. The flexibility translated into a greater ability to react to changes in demand. If a particular model sold more than forecasted, production could be adjusted upward and sales would not be hindered by a large inventory of a model with weaker-than-expected sales.

To change the production plan to increase production to match the sales season was the third component. This enabled Deere to avoid creating excess inventory by producing too much in the off-season. An important part of this component was to work with suppliers to ensure that their deliveries match the revised production plan. Finally, Deere worked to reduce delivery time to dealers from 10 to 5 days by adding DCs closer to key markets. This enabled dealers to carry less inventory. Deere inventory is slightly higher than it would be without the DCs, but overall supply chain inventory is lower.

As a result of the reduction in supply chain inventory, Deere’s stock price went up from about $40 in 2001 to about $70 in 2005.

 

Source: James A. Cook, “Running Inventory Like a Deere,” Supply Chain Quarterly, Vol. 1, No. 3 (2007), pp. 46–50; David Maloney, “Billion Dollar Baby,” DC Velocity, April 2006, pp. 43–46; and Lisa Harrington, “Inventory Velocity: All the Right Moves,” Inbound Logistics, Vol. 25, No. 11 (2005), pp. 36–4

Review the exhibit above , “How John Deere Reduced Supply Chain Inventory”, and respond to the following questions in 200 words:

Discuss the need for inventory management in supply chain management and 2 key reasons for holding inventory.
Explain how strategic alliances and partnerships help optimize an organization’s outsourcing strategy.

2. write 300–500 words that respond to the following questions after reading from this link:

https://www.investopedia.com/insights/what-is-international-trade/

Explain how international trade contributes to job creation in a country.
Provide two examples of industries or sectors that have experienced significant employment growth due to expanded global trade.

 

Sample Solution

1. Inventory Management and Strategic Alliances

Inventory Management in Supply Chain Management:

Inventory management is essential for optimizing supply chain operations by balancing the need to meet customer demand with the cost of holding inventory.

Key Reasons for Holding Inventory:

  • Meeting Demand: Having inventory on hand allows companies to fulfill customer orders promptly and avoid stockouts, ensuring customer satisfaction and retaining business.

  • Buffering Against Uncertainty: Holding inventory provides a buffer against unexpected fluctuations in demand, supply disruptions, or lead times. This mitigates risks and ensures the continuity of operations.

Strategic Alliances and Partnerships:

Strategic alliances and partnerships play a crucial role in optimizing an organization’s outsourcing strategy. They offer several benefits:

  • Shared Resources and Expertise: Partnerships allow organizations to leverage the resources and expertise of other companies, reducing the need for internal investment and development.

  • Increased Efficiency and Cost Savings: Shared resources and expertise can lead to increased efficiency and cost savings through economies of scale and specialized skills.

  • Access to New Markets and Customers: Partnerships can provide access to new markets and customers, expanding market reach and generating new revenue streams.

  • Improved Innovation and Knowledge Sharing: Collaborating with partners fosters innovation and knowledge sharing, leading to improved product development, processes, and technologies.

2. International Trade and Job Creation

How International Trade Contributes to Job Creation:

  • Increased Exports: As a country expands its exports, it creates demand for goods and services produced domestically. This leads to increased production, requiring more workers and boosting employment in export-oriented industries.

  • Imports and Consumer Demand: International trade allows consumers to purchase goods and services from abroad at lower prices, increasing consumer purchasing power and stimulating domestic demand. This demand fuels job creation in industries related to distribution, transportation, and retail.

  • Foreign Direct Investment (FDI): Expanded international trade often attracts foreign direct investment, which brings in capital, creates new businesses, and generates employment opportunities in diverse sectors.

  • Specialization and Comparative Advantage: International trade allows countries to specialize in producing goods and services where they have a comparative advantage. This specialization leads to increased efficiency, productivity, and economic growth, ultimately contributing to job creation.

Examples of Industries/Sectors:

  • Manufacturing: The expansion of global trade has led to a surge in manufacturing jobs, particularly in sectors like electronics, automobiles, and textiles. Countries with lower labor costs and access to raw materials have become major export hubs, creating employment opportunities in manufacturing and related industries.

  • Services: Global trade has also spurred growth in service sectors, particularly in industries like transportation, logistics, finance, and tourism. As businesses increasingly operate across borders, there is a growing demand for services that support international trade.

Conclusion:

International trade plays a crucial role in economic growth and job creation. By opening up markets, expanding export opportunities, and attracting foreign investment, global trade has contributed significantly to employment gains in various sectors across the world.

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