Optimization solutions manage inventory

By Bob Trebilcock, Editor at Large -- Modern Materials Handling, 11/17/2005

In 2001, when John Deere wanted to optimize the inventory of lawnmowers and tractors stored in its warehouses and at its network of 2,500 dealers, it did not turn to a traditional supply chain planning solution.

Instead, Deere employed a multi-stage inventory and planning optimization engine (SmartOps, 412-231-0115), an emerging new niche in the supply chain management world. Inventory optimization solutions bring in information from a variety of sources, including some not traditionally tapped by enterprise resource planning (ERP) systems.

That could be information about work-in-process and finished goods at the plant, inventory levels in a warehouse as well as last week’s sales. In Deere’s case, it included a weekly update on what had just sold along with production schedules and current inventory levels at every location.

The information is validated and then run through the planning system using a new technique known as multi-echelon stochastic inventory theory that sets inventory targets across a network.

Rather than push out inventory to dealers based on spreadsheets, hunches and traditions, these new optimization systems can account for both predictable variables (such as service level constraints)and unpredictable variables (such as time-varying demands, time-varying capacities and time-varying minimum inventories to create a plan).

The driver behind the adoption of these new inventory optimization engines is the same that drove the adoption of warehouse management and manufacturing execution systems. End users implemented an enterprise or supply chain planning system thinking it would solve all their problems, only to find there were still significant gaps in the functionality needed to get the job done. That opened the way for a new class of niche solutions, according to Sridhar Tayur, CEO of SmartOps.

“We noticed that even after investing in ERP and planning systems, people were still using spread sheets and traditional rules of thumb to set their inventory levels,” says Tayur. “At the same time, supply chains were getting more complex, with many locations, many items and a hierarchy of items and locations.”

At Deere, the results have been impressive. Over the last few years, Deere has improved on-time shipments from factories from 63 to 92% while maintaining customer service levels at 90%.

More importantly, Deere has supported increased sales while reducing inventory by $1 billion.

“This has been a transformational change for them,” says Tayur.

Click below to read more about manufacturing at John Deere:

A tale of two factories (January 1, 2003)

Building 21st century John Deere tractors (March 1, 2001)