Want to hear what could be one of the best supply-chain success stories ever? Take the US$4 billion commercial and consumer equipment division of a $20 billion company, reduce inventory by $500 million, and as sales grow, keep inventory constant — thus avoiding an additional $500 million in inventory. This is what John Deere did starting in 2002, with the help of supply-chain optimization software vendor SmartOps.
When I spoke with SmartOps CEO Sridhar Tayur, he told me that the key concept behind Deere’s success is the use of stochastic theory when building forecasts. According to Tayur, stochastic theory dictates that what you know today is quite likely to change tomorrow. How likely it is to be different is what you capture in the model.
Whereas most BI tools take a deterministic view of data — data is known and unchanging — stochastic modeling anticipates change and captures characteristics of the variation mathematically.Text
Whereas most BI tools take a deterministic view of data — data is known and unchanging — stochastic modeling anticipates change and captures characteristics of the variation mathematically. One way of discovering variability in the future is by looking at past variability. But what stochastic analysis is really doing is finding comparable variations.
Consider the complexity of the task at John Deere. Reduce the inventory-to-sales ratio by half, and as sales increase, keep inventory levels stable with 2,500 dealer/owners and 100 product families, each with 10 to 15 configurations. Products include everything from ride-on lawn mowers to golf course maintenance equipment, aerators, and utility tractors. Plus, 65 percent of all retail sales occur between March and June.
John Deere’s director of order fulfillment, Loren Troyer, tells me that Deere executives knew they could bring inventory down, but didn’t know whether that would cause shortages that would hurt service levels, given that John Deere sells “impulse-purchase products.”
(There must be more fearless folks out there who would buy a ride-on mower on impulse than I thought. But that’s another story.)
Before turning to SmartOps, Deere used a “crude rule of thumb” to plan target inventory levels for each dealer. The goal was to maintain 30 percent of annual sales in inventory for each dealer. But this rule of thumb didn’t take into account seasonality