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442 CHAPTER 10 INVENTORY MODELS

MANAGEMENT SCIENCE IN ACTION

Multistage Inventory Planning at Deere & Company
eere & Company’s Commercial & Consumer each dealer, as well as optimal levels for each
D Equipment (C&CE) Division, located in Raleigh, product at each plant and warehouse. The com-
North Carolina, produces seasonal products such puterized system developed, known as Smart Ops
as lawn mowers and snow blowers. The seasonal Multistage Inventory Planning and Optimization
aspect of demand requires the products to be built (MIPO), manages inventory for four C&CE Division
in advance. Because many of the products involve plants, 21 dealers and 150 products. Easily
impulse purchases, the products must be available updated, MIPO provides target inventory levels
at dealerships when the customers walk in. Histor- for each product on a weekly basis. In addition,
ically high inventory levels resulted in high inventory the system provides information about how opti-
costs and an unacceptable return on assets. As a mal inventory levels are affected by lead times,
result, management concluded that C&CE needed forecast errors and target service levels.
an inventory planning system that would reduce the The inventory optimization system enabled the
average finished goods inventory levels in company C&CE Division to meet its inventory reduction goals.
warehouses and dealer locations, and at the same C&CE management estimates that the company will
time would ensure that stock-outs would not cause a continue to achieve annual cost savings from lower
negative impact on sales. inventory carrying costs. Meanwhile, the dealers also
In order to optimize inventory levels, Deere benefit from lower warehouse expenses, as well as
moved from an aggregate inventory planning lower interest and insurance costs.
model to a series of individual product inventory
Based on ‘Deere’s New Software Achieves Inventory Reduction Goals’,
models. This approach enabled Deere to deter-
Inventory Management Report (March 2003): 2.
mine optimal inventory levels for each product at

WORKED EXAMPLE

s ffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
small women’s cooperative based in Edinburgh,

A Scotland produces hand-printed, eco-friendly Q ¼ 2DC o
ð1 D=PÞC h
t-shirts for the local tourist shops. The cooperative
has decided that it is economic only to produce t-shirts The key variables are:
in batches through the year rather than continuously.
Historically, demand for the t-shirts has been around C h holding cost
6000 a year although the cooperative has the capacity C o set up cost
to produce 2000 a month, typically working 20 days D annual demand
each month. The t-shirts cost E10 to produce and P annual production
there is a setup cost each time a batch of t-shirts is
produced of E150. The cooperative estimates a hold- Here we have:
ing cost of 1 per cent per month. The cooperative is
C h ¼ E1:20 ð12% E10Þ
trying to plan its t-shirt production for the coming
C o ¼ E150
tourist season. What advice can we give them?
D ¼ 6 000
P ¼ 24 000
Solution
We have a production lot problem where the coop- Substituting into Equation (10.16) we obtain a value
erative is trying to determine how much to produce of Q ¼ 1414. To minimize costs the cooperative
and how often. Equation (10.16) is appropriate: should produce batches of 1414 t-shirts at a time.

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