Can you every be to lean?
The answer is a resounding Maybe. It depends on your business model and the tolerance for risk. Here’s an example.
In a Bloomsberg Businessweek Article “Low Inventory Angers John Deer Customers“ Shruti Singh reports on the challenges John Deere has faced because of a change in management philosophy. According to Singh, John Deere opted to shift focus from building inventory to allow for quicker delivery to a build to order model that provides the customer with the product ordered, and reduces inventory and the associated carrying costs. While this has lead to reduced inventory an working capital tied up in inventory, and increased profits, the flip side is that the low inventory levels do not allow them to capitalize on the strengthening farm economy. One Deere dealership is quoted as saying they are probably losing at least a half dozen sales per month because of Deere’s inability to delivery. Let’s face it a farmer who needs to get his crops in in September is not going to wait until the following December for new equipment and will look to other suppliers.
Not only is this a short term loss for Deere, many died in the wool John Deere Green Farmers are now open to other brands such as Caterpillar, Case and New H0lland. The inventory mis-step also opened the door for loss of market share and an impact on brand reputation.
In my opinion, when the recession began, the Deere organization needed to look at options to make sure the company survived and thrived and minimized short term losses. They did this by significantly reducing inventory (to an industry low 12.3% of preceding 12 months sales) and focusing on more build to order products. This move significantly improved the company’s profit picture over their competitors with the lowest decline in profits (52% compared to Caterpillar’s 75%) and was applauded by some analysts.
This inventory reduction would not have affected them if the ability to ramp up production to meet demand was available, but as it apparently is not. Additionally, because they were unable to properly forecast the strengthening of the farm economy in time to react, they are left with lengthy delays in production while their competitors are able to provide delivery of product to meet the customer’s needs.
Overall I think the long term effects on this decision will probably be painful, an an opportunity for their competitors to take market share and convert the John Deere Greenies to a competitors color.
