Reference no: EM133792981
How John Deere Reduced Supply Chain Inventory
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.
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.
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.