Message to buyers: make sure you communicate with senior management using financial measures that are clear and easily understood.

Deere & Co., Moline, Ill., has developed a Web-based tool designed to track and manage actual and forecasted cost changes using current representative (or "rep") products. The system is enterprise-wide and is based on bill of materials' costs.

"This allows Deere to know exactly where we stand and will stand on costs and cost reduction goals by product, buyer, location, supplier, raw materials and rep machines," says Maxine Wade, project manager, cost accounting in the Deere Finance Division. Phased in starting two years ago, the approach replaces several systems used by different functional groups (for example, accounting vs. purchasing), and locations.

The old systems used different definitions, making it impossible for simple comparisons. As a result, factories were reporting cost reduction data that conflicted with data reported by supply management professionals. "All the reports served their own purposes well, but they created confusion at the management level," Wade said in an interview at Deere's Moline headquarters.

As cost reduction goals grew at Deere, so too did demands for a common cost tracking structure.

The new approach pulls cost data from common purchasing, activity-based cost systems and a forecast warehouse, and reports results based on the total factory warehouse cost (TFWC) of rep machines (standard machines that contain the options most typically ordered) which includes direct materials costs, direct labor and overhead.

Deere developed the software internally, starting in its Agricultural Equipment Division factories in late 1999. Simple comparison modules were introduced first, followed by reporting and then forecasting modules.

Buyers can make several choices when entering forecasted price changes. Forecasts can be based on impacts of imminent design changes, buyers' materials cost projections or exchange rate fluctuations. For example, if new polypropylene production plants are coming on line and sales personnel are offering discounts at a future date, the forecasts would be built into the system. "In some cases, a new strategic sourcing contract for steel or indirect supplies could yield a forecasted change," says Jon Stegner, who heads strategic sourcing at Deere, which is implementing a sourcing program for steel that focuses on distributors.

If a supplier makes some specific effort to change its price, the code entered is "B" for supplier-production-cost. If the cost is changing because of market conditions or other factors beyond the supplier's control, the change is entered as "C" for supplier material cost. Tooling amortization costs are considered overhead and are excluded from outside supply reports (see example).

"One feature we really like is the ability to use the Web, and to convert Web pages to Excel spreadsheets," says Wade. "Buyers like to use Excel spreadsheets to conduct 'what-if' scenarios."

Up to 30% of bonuses paid to Deere employees are tied to results from the cost reduction system. The system is also tied into Deere's Achieving Excellence program, in which Deere tracks suppliers' cost reduction efforts in addition to quality and delivery performance. On tap is a plan to tie the cost accounting system into Deere's SAP software. The company's North American plants are on the system. It moves to Europe this year.