"I suspect we can lose at least half a dozen deals a month"
Jay Armstrong just broke a 50-year family tradition at his Kansas farm: He bought his first major piece of equipment that's not a John Deere brand. The Italian-made corn harvesting combine attachment Armstrong ordered from Dragotec USA will arrive in May. The same $59,000 part from Deere (DE) wouldn't have been delivered until August. "I used to be blind to all colors but [Deere's] green and yellow," he says. "My color blindness is now gone."
In recent years, Deere has been focusing on becoming a build-to-order company. That bolstered prices and profit because keeping smaller stockpiles on hand reduces the amount of materials and working capital a company needs. But production cuts and the tightest inventories in the industry have led to a shortage of Deere equipment as the farm economy is strengthening. And that's pushing customers such as Armstrong toward competitors.
Deere shrank its inventory 28% in the 12 months ended on Jan. 31. As a percentage of sales in the most recent reported 12 months, Deere's inventory was just 12.3%, the lowest among 15 farm and construction equipment makers, including Agco (AGCO) and Caterpillar (CAT). Fewer products have big implications for the company's dealers. "It means I am losing market share," says Larry Southard, co-owner of a central Iowa dealership that gets 90% of its sales from Deere gear. He figures his dealership's sales would be up to 20% higher this year if it had enough inventory to meet customer demand and products were shipped more quickly. "I suspect we can lose at least half a dozen deals a month," Southard says.
One reason: A farmer who recently has ordered a tractor for crops such as corn and soybeans, which are harvested starting in September, may not be able to get the equipment until December or January, he says.
Ken Golden, a spokesman for Moline (Ill.)-based Deere, says the manufacturer's "intense focus" on managing inventory has improved its financial performance and has allowed it to design better products for customers. Deere's sharp-penciled ways certainly helped temper the hit to its profits during the recession, when sales declined for some equipment makers. Deere's 52% decline in trailing 12-month profit was smaller than Agco's 65% drop and Caterpillar's 75% plunge. "Deere is likely a little ahead [in managing its stocks]," says UBS (UBS) analyst Henry Kirn, because it has "focused on taking inventories out of the channel and becoming leaner over time."
Deere Chief Financial Officer James M. Field said on a Feb. 18 conference call that the company had been too pessimistic about the effect of the global recession on North American farmers. In November, Deere predicted its net sales would decline about 1% in the year ahead after dropping 19% in the 12 months ended Oct. 31. Deere expected production tonnage to decrease 3%. In February the company revised its outlook upward, forecasting sales to increase up to 8% in 2010 as gains in farm cash receipts rise far more than expected.
Deere's Golden says the company is boosting production to match the improved orders. Still, Kansas farmer Armstrong says bad feelings may linger as a result of the company's inventory squeeze. "Deere's business plan of trying to control the supply vs. selling a product and providing a service is going to come back and haunt them," he says.
The bottom line: Inventory management is crucial in a slump. But maximizing profit without forgoing future sales is difficult as business strengthens.