1.
Deere & Company
Deere & Company (brand name John Deere) is famed for the manufacture and supply of
machinery used in agriculture, construction, and forestry, as well as diesel engines and lawn
care equipment. In 2014, Deere & Company was listed 80th in the Fortune 500 America’s
ranking and was 307th in the 2013 Fortune Global 500 ranking.
Supply Chain Cost Reduction Challenges: Deere and Company has a diverse product
range, which includes a mix of heavy machinery for the consumer market, and industrial
equipment, which is made to order. Retail activity is extremely seasonal, with the majority of
sales occurring between March and July.
The company was replenishing dealers’ inventory weekly, using direct shipment and cross-
docking operations from source warehouses located near Deere & Company’s manufacturing
facilities. This operation was proving too costly and too slow, so the company launched an
initiative to achieve a 10% supply chain cost reduction within four years.
The Path to Cost Reduction: The company undertook a supply chain network-redesign
program, resulting in the commissioning of intermediate “merge centers” and optimization of
cross-dock terminal locations.
Deere & Company also began consolidating shipments and using break-bulk terminals during
the seasonal peak. The company also increased its use of third-party logistics providers and
effectively created a network that could be optimized tactically at any given point in time.
Supply Chain Cost Management Results: Deere & Company’s supply chain cost-
management achievements included an inventory decrease of $1 billion, a significant
reduction in customer delivery lead times (from ten days to five or less) and annual
transportation cost savings of around 5%.
2. Intel
One of the world’s largest manufacturers of computer chips, Intel needs little introduction.
However, the company needed to reduce supply chain expenditure significantly after bringing
its low-cost “Atom” chip to market. Supply chain costs of around $5.50 per chip were
bearable for units selling for $100, but the price of the new chip was a fraction of that, at
about $20.
The Supply Chain Cost Reduction Challenge: Somehow, Intel had to reduce the supply
chain costs for the Atom chip, but had only one area of leverage—inventory.
The chip had to work, so Intel could make no service trade-offs. With each Atom product
being a single component, there was also no way to reduce duty payments. Intel had already
whittled packaging down to a minimum, and with a high value-to-weight ratio, the chips’
distribution costs could not be pared down any further.
The only option was to try to reduce levels of inventory, which, up to that point, had been
kept very high to support a nine-week order cycle. The only way Intel could find to make
supply chain cost reductions was to bring this cycle time down and therefore reduce
inventory.
The Path to Cost Reduction: Intel decided to try what was considered an unlikely supply
chain strategy for the semiconductor industry: make to order. The company began with a
pilot operation using a manufacturer in Malaysia. Through a process of iteration, they
gradually sought out and eliminated supply chain inefficiencies to reduce order cycle time
incrementally. Further improvement initiatives included:
Cutting the chip assembly test window from a five-day schedule, to a bi-weekly, 2-
day-long process
Introducing a formal S&OP planning process
Moving to a vendor-managed inventory model wherever it was possible to do so
Supply Chain Cost Management Results: Through its incremental approach to cycle time
improvement, Intel eventually drove the order cycle time for the Atom chip down from nine
weeks to just two. As a result, the company achieved a supply chain cost reduction of more
than $4 per unit for the $20 Atom chip—a far more palatable rate than the original figure of
$5.50.
3. Starbucks
Like Intel, Starbucks is pretty much a household name, but like many of the most successful
worldwide brands, the coffee-shop giant has been through its periods of supply chain pain. In
fact, during 2007 and 2008, Starbucks leadership began to have severe doubts about the
company’s ability to supply its 16,700 outlets. As in most commercial sectors at that time,
sales were falling. At the same time, though, supply chain costs rose by more than $75
million.
Supply Chain Cost Reduction Challenges: When the supply chain executive team began
investigating the rising costs and supply chain performance issues, they found that service
was indeed falling short of expectations. Findings included the following problems
Fewer than 50% of outlet deliveries were arriving on time
Several poor outsourcing decisions had led to excessive 3PL expenses
The supply chain had, (like those of many global organisations) evolved, rather than
grown by design, and had hence become unnecessarily complex
The Path to Cost Reduction: Starbucks’ leadership had three main objectives in mind to
achieve improved performance and supply chain cost reduction. These were to:
1. Reorganize the supply chain
2. Reduce cost to serve
3. Lay the groundwork for future capability in the supply chain
To meet these objectives, Starbucks divided all its supply chain functions into three main
groups, known as “plan” “make” and “deliver”. It also opened a new production facility,
bringing the total number of U.S. plants to four.
Next, the company set about terminating partnerships with all but its most effective 3PLs. It
then began managing the remaining partners via a weekly scorecard system, aligned with
renewed service level agreements.
Supply Chain Cost Management Results: By the time Starbucks had completed its
transformation program, it had saved more than $500 million over the course of 2009 and
2010, of which a large proportion came out of the supply chain, according to Peter Gibbons,
then Executive Vice President of Global Supply Chain Operations.