Wednesday, April 28, 2010

Lean Blamed for Perils at John Deere

An article at Bloomberg Businessweek entitled low inventory angers John Deere customer caught my eye this week.  The article's author writes of the perils of running lean, claiming that lean is the cause of John Deere's customer service problem.  This strikes me as another unfortunate example of L.A.M.E. not Lean. Mark Graban coined the term "L.A.M.E." — Lean As Misguidedly Executed. L.A.M.E. includes stuff that people call "lean" but really isn't a good representation of true Lean mindsets and practices.

The article states that while lower inventories have helped the company meet short term financial results it has led to shortages in the supply chain.
In recent years, Deere has been focusing on becoming a build-to-order company. That bolstered prices and profit because keeping smaller stockpiles on hand reduces the amount of materials and working capital a company needs. But production cuts and the tightest inventories in the industry have led to a shortage of Deere equipment as the farm economy is strengthening. And that's pushing customers ….toward competitors.
Unfortunately the lower inventory levels will result in lost profits and market share.
Deere shrank its inventory 28% in the 12 months ended on Jan. 31. As a percentage of sales in the most recent reported 12 months, Deere's inventory was just 12.3%, the lowest among 15 farm and construction equipment makers, including Agco and Caterpillar. Fewer products have big implications for the company's dealers. "It means I am losing market share," says Larry Southard, co-owner of a central Iowa dealership that gets 90% of its sales from Deere gear. He figures his dealership's sales would be up to 20% higher this year if it had enough inventory to meet customer demand and products were shipped more quickly. "I suspect we can lose at least half a dozen deals a month," Southard says.
It appears the company has used their resources to focus on innovation.
Ken Golden, a spokesman for Moline (Ill.)-based Deere, says the manufacturer's "intense focus" on managing inventory has improved its financial performance and has allowed it to design better products for customers.
The company seems to have misjudged the market by not understanding the voice of the customer.
Deere Chief Financial Officer James M. Field said on a Feb. 18 conference call that the company had been too pessimistic about the effect of the global recession on North American farmers. In November, Deere predicted its net sales would decline about 1% in the year ahead after dropping 19% in the 12 months ended Oct. 31. Deere expected production tonnage to decrease 3%. In February the company revised its outlook upward, forecasting sales to increase up to 8% in 2010 as gains in farm cash receipts rise far more than expected.
It is not clear whether the author only or whether the author and John Deere doesn't understand Lean.  Lean is often mistakenly to blame for poor performance.  Low inventories are commonly linked to Lean because many organizations are able to reduce inventory level due to practicing Lean Thinking.  But "true" Lean Thinkers understand lower inventories are a resultant of a process improvement not a solution to a problem.

Now, we all understand that high inventory levels hide problems.  The same is true in this case.  While higher inventories might have met some short term demand at a higher cost, the real issue is related to poor understanding of the market.  John Deere did not fully understand what they needed to produce.  I think it would also be safe to say that the cycle time to produce their product is too long compared to the level of inventory and changes in market demand.  They simply can't keep up.  This is not a failure of Lean but rather a failure on not using Lean.  Lean is about understanding the customer demand, building to that demand efficiently via binary connections in your supply chain, and recognizing abnormalities so you can quickly react and solve problems.

Time will tell whether John Deere understands Lean and how they choose to react to this opportunity for them to exceed their customer's expectations.  For now, this can serve as a lesson for all of us to learn from.  Low inventory levels are not Lean.  Making your customers happy by meeting their demands is Lean.

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  1. Comment from LinkedIn:
    Nice insight on the issues with John Deere and their apparent use of L.A.M.E. I think this is the new "lean" business epidemic where the C is being placed well in front of S, Q, and D. At least that's where I see the danger in our current Lean journey.

    - Kurt Wheeler

  2. Sounds L.A.M.E. to me. Cutting inventory so low that you can't ship to customers - there's nothing lean about that. You need reliable, short cycle-time processes to be able to have very low inventories (oh, and you need very level, predictable demand).

  3. In answer to Marks comment (oh, and you need very level, predictable demand). Again if the voice of the customer says I am giving you unpredictable demand then the system must be designed for it.
    John Deer appear to have cherry picked the bit that gets short term gain - This approach is definately L.A.M.E.

  4. A quick Google search yields a long list of layoffs, which also occurred last year. They cut their capacity when the market tanked (at least 367 workers in Illinois and 494 in Iowa--but I didn't do any intensive research into the details.)
    This probably also contributes heavily to not being about to ramp up to higher production levels.

  5. Personally I don't think there's anything wrong with Deere by looking at their financials. This seems to be a L.A.M.E. attempt at gaining visibility by a less than stellar reporter succumbing to the job pressure brought on by us in the blogosphere.

    From a financial aspect, ‘right-sizing’ is what many companies in the US had to do in the months following the lockdown of the financial sector. To most there was little or no historical information on how the crisis would shake out, so they had to ‘scrap’ their Hoshin Plans and make new ones based on what they guessed would happen in the coming months and years.

    Take a look at DE and you’ll see they are doing well financially. Perhaps a possible market share loss in the short term, but as long as they keep building quality products, the market will come back to them.

  6. I worked at JD welland, you want to talk lean, we used to put 14 20ft Flexwings together in 7hrs, now thats lean.