In 2001, the commercial and consumer equipment (C&CE) division of Deere & Co. started to realize that it had a problem when it heard from dealers that they were running out of garden equipment even before hitting the height of the spring sales season, the period in which C&CE was supposed to be taking in 65% of its annual revenues, then $2.53 billion. Yet, at the same time, the division decided it was also carrying too much inventory for its sales volume. Executives knew the system needed some serious automation. The question–with 100 product lines and a network of 2,500 dealers in the U.S. and Canada–was how and where to start.
After some initial research, C&CE decided to put its money on inventory optimization software by Smart-Ops Corp., based in Pittsburgh. The software helped C&CE to determine the optimal product mix and quantities to be shipped to each dealer, based on such things as seasonal demand, manufacturing schedules and shipping constraints. "The idea here was to achieve good order fill performance for your customers, the dealers, and improve your asset turnover," says Michael Mack, now Deere's corporate treasurer but formerly senior vice president of marketing and administration for C&CE and a member of the team that brought in SmartOps. "Doing one of them well is at times easy, but to do both of them well, that's hard and requires you to do things differently than you did in the past."
As a result of the inventory management program, asset turns at C&CE rose from 0.9 times in 2001 to 2.7 last year, and on-time delivery rates to dealers shot up to more than 90% in 2004, from 63% in 2001. The SmartOps system also allowed C&CE to reduce dealer inventories by $500 million. Mack estimates that the division avoided another $500 million of inventory expense by maintaining lean and more efficiently stocked inventories as sales continued to grow.
Recommended For You
There were other advantages. With the information and analysis from SmartOps, Mack and his team were able to realign C&CE's dealer-financing program to cover only the optimal inventory amounts, as determined by the optimization software. So, while dealers could get as much product as they wanted, Deere was no longer obligated to finance more than the recommended amount.
Deere is not alone in recognizing the potential benefit to the company's bottom line from efficient inventory management. ColgatePalmolive Co., Hewlett-Packard Co. and Gillette Co. are among several companies that have embraced similar multi-echelon inventory optimization solutions. And according to a recent study by Boston-based consultants Aberdeen Group Inc., the consumer products companies have chopped inventory by 20% to 30% across their entire supply chains and improved order fill rates by as much as 20%. "This is definitely a breakthrough in managing inventories," says Beth Enslow, vice president of enterprise research at Aberdeen.
Inventory optimizers, like SmartOps, bolt onto and work alongside ERP or supply-chain management systems. "It's not like you have to disrupt your internal organization or tear your technology upside down," says Enslow. "But you have to have the data about your supply chain. For some companies, that's still a lot of work. For others, who have better information, it's not that big of a deal."
While traditional ERP vendors, including SAP AG and Oracle Corp., have their own inventory management solutions, the companies attracting the most attention at the moment are best-of-breed vendors like SmartOps; Burlington, Mass.-based Optiant Inc. and Amsterdam-based ToolsGroup. These software solutions unravel the complexities of managing multiple stages of the supply chain, variability in demand and available capacity with sophisticated algorithmic and stochastic modeling. They can ensure that companies get the right mix of products in the right quantities at the right warehouses at the right time across an entire chain.
The endgame of this exercise: Freeing up working capital. "Not only will it reduce your costs, but it will improve your customer satisfaction, which could translate into better margins, or better revenues," says Noha Tohamy, principal analyst at Forrester Research Inc. in Boston.
Although the core technology has been available for a while, top vendors are building out so-called visualization capabilities to support "what-if" analyses. ToolsGroup, with clients including Colgate and Italy's Luxottica Group S.p.A., runs something it calls a parallel event simulator as an ongoing benchmarking tool to compare the ideal model with what's actually happening. This uncovers discrepancies right down to the stock-keeping-unit level, and in real time. "It's as if you're playing chess against a computer," says ToolsGroup co-founder and physicist Joseph Shamir. "Companies are able to benchmark what they are doing, compared to an ideal process, which is simulated. Usually the model wins."
Aberdeen's Enslow found that only 5% of the 178 companies surveyed use multi-echelon inventory optimization solutions. She also found that 60% of the companies with more than $1 billion in revenues use simplistic inventory management methods, such as weeks-of-supply rules or just-in-time stocking. The result: They frequently have 15% to 30% more inventory than they need, along with lower service levels. "Everyone thought they were doing the right thing, but in reality, they weren't," says Enslow. "They need to make some adjustments, and by making [them], they will be able to drive big dollar savings."
Deere's Mack says the decision to revamp the way the division managed its inventories stemmed from a company-wide strategy spearheaded by Deere Chairman Robert Lane to adopt shareholder value-added (SVA) as a metric to measure success. Similar to economic value-added, the metric links the balance sheet to the profit-and-loss statement, using such quality improvements as better inventory management as a way to increase margins. Mack notes that better inventory management saves $120 million a year in C&CE SVA–money that would otherwise have been tied up to pay for that extra $1 billion in what turned out to be unnecessary inventory. "It's a real significant payoff," says Mack. "It's the pot of gold we were after."
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
