In 2000, Deere and Co., the Moline, Ill.-based manufacturer of agricultural, construction, commercial and consumer equipment, spent $600 million on logistics, about 5% of its $12 billion in annual sales. This year, the company kicks off a comprehensive program, first conceived in 1999, that is expected to reduce its logistics costs by $60 million or more.

Jay Fortenberry, director of Deere's nascent Worldwide Logistics Division, says it all started two years ago with a trip around the world and a decision to take control of the company's decentralized and often outsourced logistics operations. "We initiated our plans in March 1999," Fortenberry says. "I spent six months traveling around the world to view our different facilities. In November 1999, the Worldwide Logistics Division began operations. Prior to that, logistics was outsourced in several areas and production facilities were scattered. This year Deere is building a global network. Next year we will implement best practices—the optimum way of operating our network."

A thorough investigation of Deere's supply chain showed low load factors—the percentages of trucks or containers it was filling with both in- and outbound shipments—to be the company's greatest logistics cost driver.

So, to start addressing its low load factor problem, Deere hired Manugistics Inc., a leading provider of supply chain management solutions based in Rockville, Md., to design a software system that would improve control over its logistics operations. Phase I of the system, which uses the Manugistics NetWorks transportation module, went live at Deere's Augusta, Ga., plant on April 10, 2001.

Jim Kowalski, group vice president of automotive and transportation at Manugistics, describes the product: "First, Deere builds parameters into a database around preferred transportation suppliers. The most commonly asked questions are 'Who do I call?' and 'What are the rates?' NetWorks performs as an optimizer, reducing costs by maximizing load factors and considering actual rates, not estimates," he says.

Deere personnel act as planners, inputting rules and building real-world constraints. "They input preferred carriers, contractual rates and equipment constraints," Kowalski explains. Deere personnel then view built loads and exceptions through the NetWorks system. "Users create optimized loads based on supply and demand. They are less clerks and more planners, performing exceptions management."

Customers' need dates are always the driving parameters, Kowalski says. "Under a less efficient system, delivering goods to customers on time involves a great deal of last-minute running around. The NetWorks system gives Deere control from a cost standpoint and gives control to customers by providing them with better visibility. The system works for planned as well as current orders and shares order information with partners, allowing both carriers and customers to plan their resources better."

Fortenberry says the NetWorks system is already providing increased control over the company's logistics operations while consuming fewer labor resources. "In a typical plant it would require two people or 16 man hours to build one trailer load. With the new system, the time has been reduced to 0.5 man hours." Previously, he adds, truckers would build their own loads and take inefficient routes. "Now Deere has more control over the process," he says.

Fortenberry notes that Phase I of the logistics improvement program covers only outbound shipments. "We are starting with one plant and one division, then quickly ramping up to others. First is our Consumer Products Division where load densities are much greater. For larger products such as combines, load building can work only so well. By the end of the calendar year, we will increase to a substantial part of the division."

Once the outbound system has been implemented, Deere plans to proceed to Phase 2 of its overall technology plan, optimizing its flow of inbound raw materials and intermediate goods.

Phase 2, which also involves Manugistics, will implement precise scheduling of raw materials and components deliveries in time for manufacturing.

Says Kowalski, "Multiple types of distribution make optimizing the inbound flow more complex." An example is a milk run, which is basically a fixed route picking up at multiple suppliers and delivering to a plant. But the inbound flow may also involve variables such as cross-docking—dropping off goods for temporary storage while they await pickup by other vehicles. "There are multiple ways to reach a plant," Kowalski observes. "Even with a fixed milk run, there are opportunities for optimization."

Kowalski notes also that Phase 2 will be driven by customer orders—not just reacting to orders, but understanding demand.

"This phase involves taking back outsourced processes," Fortenberry says. "Our ultimate goal is that suppliers know immediately when our customers place orders. Suppliers should know what is coming as quickly as possible and should be as informed as possible in order to get out of reactive and into proactive modes of operating. By summer, we should know when this will be implemented, when all of the pearls will be strung together into a necklace."

The final phase will be demand-driven manufacturing, when Deere starts communicating through its entire supply chain. Sales forecasting will be included and will be tied to the other phases. "Phase 3 is the big vision which affects both sides of the balance sheet," Kowalski says. "This will involve no change-over costs or down time, and will include the Enterprise Profit Optimization (EPO) system. Deere has the vision of taking logistics beyond the traditional view of being a cost center."

In addition to its multiphase software plan for supply chain optimization, Deere is also creating logistics service centers where raw materials and semi-finished goods can be collected before being sent to the company's manufacturing plants.

"Our Milwaukee facility opened last year, and our logistics service centers in Memphis, Nashville and Atlanta opened in March," Fortenberry says. "In Europe, our facilities in Livorno, Italy and Antwerp, Belgium have been in place for years, but in January they began to be used for customers worldwide, including those in the U.S., Mexico, South America, etc." In the latter part of the year, he says Deere expects to open consolidation facilities in Los Angeles, California; Laredo, Texas; and Portland, Oregon, as well as a large one in Mannheim, Germany. Following that will be facilities in Osaka, Japan, and in Moline, Illinois. "The whole network should be in place by November," Fortenberry says.

Immediate purpose of the logistics service centers is to pick up components for production, consolidate them, and ship them to production facilities. "Originally we had 67 production units. Each supplier would ship to production facilities separately, and there might have been as many as fifteen trucks. Now one truck can pick up from different suppliers and deliver to one service center."

Deere benefits, Fortenberry says, by leveraging volumes with steamship lines and freight forwarders and acting like the big industry player it is. Savings come also from reducing the number of miles for trucks, reducing LTL freight, and increasing load efficiencies by 17%. Fewer miles translate into fewer dollars. A 60% cube is now a 95% cube," he says.

Deere has great expectations for its new logistics system. "We expect to benefit from improved order fulfillment, cost reduction, and good maintenance of transaction records," Fortenberry says. "The key," Kowalski adds, "is using logistics as a competitive weapon. Logistics provides a crucial piece of customer service. It's important that supply and demand sides share information."

In total, Fortenberry says Deere anticipates at least a five-to-one return on its investments in logistics technology and other improvements. This includes planned improvements to its product packaging as well as its software installations and creation of consolidation centers. "Software is a tool that must be sculpted," Fortenberry says. "Our trailers are currently filled to 65% of capacity, but this will rise to 95%. Improved packaging will raise the quality of delivery and generate cost savings on returnable packaging from completed goods and components."