Deere’s Tight Inventory Control Makes Customers Look Elsewhere

A recent article in Business Week reported on John Deere’s current approach to reducing inventory by building equipment to order. While this approach has, according to reports, bolstered Deere’s prices and profit, since keeping smaller stockpiles on hand reduces the amount of materials and working capital a company needs, the article points out that it also has had an effect that Deere might not be prepared for — customers going elsewhere to purchase equipment due to long wait times for the green equipment.

Production cuts and the tightest inventories in the industry have led to a shortage of Deere equipment as the farm economy is strengthening, the article reports. In turn, this has pushed many consumer loyalists into the hands of their competitors as the amount of time it takes to get Deere equipment has been lengthened by months, where as competitors have the product on hand for a quick delivery.

Deere said it 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,” said Larry Southard, co-owner of a central Iowa dealership that gets 90% of its sales from Deere gear. Southard told BW 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 said.

Ken Golden, a spokesman for the company, said the manufacturer’s “intense focus” on managing inventory has improved its financial performance and has allowed it to design better products for customers. Golden said the company is now boosting production to match the improved orders.

Deere’s approach did help temper the hit to its profits during the recession, when sales declined for some equipment makers. Deere’s 52% decline in trailing 12-month profit was smaller than AGCO’s 65% drop and Caterpillar’s 75% plunge.

Deere Chief Financial Officer James M. Field said in February 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.