Case study analysis- John Deere Case
1. Where are the opportunities at John Deere Reman to improve its business model and value proposition? What changes would be required for the integration between John Deere Reman and the corporate function of engineering, operations, and supply chain management?
2. As Chris Garrison, what recommendations would you make to Jena Steele at your meeting and why?
3. What is the value proposition of John Deere Reman?
4. What are the constraints that John Deere Reman faces in improving its performance?
5. What are the difficulties in acquiring cores? How can John Deere Reman increase the core return rate?
6. What are the alternatives to core acquisition? 5. Is this a closed-loop or open-loop supply chain?
John Deere Reman: Creating Value Through Reverse Logistics W18286 JOHN DEERE REMAN: CREATING VALUE THROUGH REVERSE LOGISTICS R. Chandrasekhar wrote this case under the supervision of Professor P. Fraser Johnson solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e)
[email protected]; www.iveycases.com. Copyright © 2018, Ivey Business School Foundation Version: 2018-05-04 Chris Garrison, factory manager at John Deere Reman (Reman) in Edmonton, Alberta, was reviewing the latest plant performance report. The Edmonton plant was one of two John Deere (Deere) operations that remanufactured parts and components (referred to as “cores”) that were used by company dealers to repair and maintain customer equipment. The performance of Deere’s remanufacturing division required careful coordination of a closed-loop supply chain that balanced supply of cores with customer demand. The latest report indicated that core return rates had declined steadily during the past year, creating the potential for parts shortages. Furthermore, a constant and steady flow of cores was essential to ensure proper utilization of the Edmonton operation. It was September 27, 2017, and Chris was preparing for his quarterly meeting the following week with Jena Steele, general manager of Global Reman Operations and Marketing. This meeting, however, had particular importance. In Jena’s email the previous week, she had told Chris: Our remanufacturing operations have showed steady improvements during the last decade. However, I don’t want to be complacent. During our meeting on October 4th in Springfield, I want to discuss opportunities for changes that will provide value to the company, improve customer service, and support the company’s commitment to environmental sustainability. JOHN DEERE (DEERE) Deere manufactured and distributed a full line of agricultural, construction, turf, and forestry equipment. The company first began manufacturing agricultural equipment in 1837, and it operated 43 factories globally and employed 60,500 people in 2017. Of the company’s 23 factories in the United States and Canada, 14 were devoted to agriculture and turf equipment, four to construction and forestry equipment, one to engines, two to engine and component remanufacturing, and two to hydraulic and power train components. Revenues in fiscal year 2017 were US$29.7 billion with a net income of US$2.2 billion.1 The two main business divisions, Agriculture and Turf, and Construction and Forestry, were supported by 1 John Deere, Deere & Company 2017 Annual Report, accessed February 11, 2018, https://s22.q4cdn.com/253594569/files/doc_financials/annual_proxy/2017/2017_John-Deere-Annual-Report.pdf. For the exclusive use of B. Erdenebat, 2019. This document is authorized for use only by Bolor Erdenebat in Operations Management-1 taught by DAVID LENDRY, Southern New Hampshire University from Jul 2019 to Nov 2019. mailto:
[email protected] http://www.iveycases.com/ Page 2 9B18D008 a parts distribution operation that included 21 distribution centres. Revenues from parts sales were US$5.5 billion in 2016, representing approximately 21 per cent of total equipment revenues.2 JOHN DEERE REMAN (REMAN) Reman was an abbreviation for remanufacturing, which represented a process whereby used components were completely disassembled, cleaned, and inspected for damage; all failed and critical parts were replaced with original equipment manufacturer (OEM) quality parts. The components were then reassembled, painted, inspected, and tested. Warranties for remanufactured parts were equivalent to new parts. In contrast, reconditioned and rebuilt components only replaced failed parts, and warranties were not provided; in essence, reconditioning and rebuilding fixed only what was broken (see Exhibit 1). Generally, the operating performance and expected life of Deere remanufactured parts was equivalent to new parts, at 50 to 70 per cent of the cost of new. Besides providing a lower cost alternative to new components, remanufacturing provided important societal and environmental benefits. Remanufacturing promoted recycling, resource conservation, pollution reduction, and energy conservation by reducing raw material inputs, reusing parts, and reducing inputs compared to new parts manufacturing. Deere started its remanufacturing operation in 1996 as a joint venture with Springfield Remanufacturing Corporation, focusing on engines. In 2002, Deere fully acquired the joint venture and expanded the scope and size of its Reman business unit. By 2017, the company had two remanufacturing factories— Springfield, Missouri and Edmonton, Alberta—which serviced North America, Latin America, Europe, and Australia. Reman product categories included engines and engine components, fuel injection systems, hydraulics, drivetrains, electrical components, electronic components, transmissions, and fuel injection components (see Exhibit 2). Located on a six-acre site, the Edmonton Reman facility was 130,000 square feet and employed 45 salaried staff and 140 production employees. Major functional areas included product engineering, quality, manufacturing engineering, and purchasing. Production employees included highly skilled licensed mechanics and non-licensed shop support workers, across two shifts. The plant was organized into seven key functions: shipping/receiving, bead blast, disassembly, machining and reclaim, assembly, test, and paint and package. The factory was also organized by major product segments. Exhibit 3 provides the general flow in facility. The Edmonton plant had approximately 700 stock keeping units (SKUs) within the product categories of drivetrain (e.g., axles and transmissions) and hydraulics (e.g., pumps and motors). Both product categories consisted of a mix of Deere-designed components; for some components the intellectual property (IP) was owned by Deere, and for other components the IP was owned by suppliers. Chris commented on the product mix: The company relies heavily on suppliers for design and manufacturing of components, such as drivetrains. For example, some axles and transmissions are designed by a large global supplier, which owns the IP for its products. This places limitations on us and represents a potential barrier for some parts where there is demand for remanufactured products. Our options in those situations are to outsource remanufacturing to the original equipment supplier, license the technology, or reverse engineer the product and parts that are re-used in order to remanufacture in-house. For Deere-designed major components, it is fairly straightforward for us to be able to 2 “Parts: Parts Distribution Operations,” John Deere Parts Fact Book, accessed February 11, 2018, https://s22.q4cdn.com/253594569/files/doc_downloads/books/2017/WW-Parts-Locations_2017.pdf. For the exclusive use of B. Erdenebat, 2019. This document is authorized for use only by Bolor Erdenebat in Operations Management-1 taught by DAVID LENDRY, Southern New Hampshire University from Jul 2019 to Nov 2019. Page 3 9B18D008 remanufacture since we have access to the product designs, bill of materials, supply base, and service parts. Core raw material inventory levels were approximately $20 million, most of which was stored on a one- acre area adjacent to the plant, made up primarily of axles and boxed transmissions that did not require indoor storage. In addition, the Edmonton plant also leased a 30,000-square-foot warehouse that was used to store additional core raw material and limited amounts of finished goods prior to delivery to the Deere parts network. Most finished goods inventory of remanufactured products was located at John Deere distribution centres in preparation for delivery to customers. The Edmonton plant generated annual revenues of approximately $200 million. Its sister plant in Springfield was 300,000 square feet and had annual revenues of approximately $500 million. THE REMANUFACTURING SUPPLY CHAIN The Reman supply chain began with the recovery of cores, which represented the raw material for the Edmonton plant. Cores were acquired from a variety of sources but mainly through the dealer channel. When parts reached the end of their useful lives, they were typically returned to the dealer for credit and represented close to 95 per cent of the cores received. Other sources included independent equipment dealers and equipment repair shops and suppliers. Value was created at two steps in the remanufacturing process: core management and core recovery (see Exhibit 3). A key part of core management was availability, which represented one of the strategic challenges for Reman. Both the timing of core availability and the volume of cores were uncertain. Furthermore, fluctuations in customer core returns made forecasting difficult. Core recovery meant salvaging worn or damaged components using machining or different technologies to return them to their original level of quality. Both steps significantly reduced material costs and allowed Deere to offer them to the market as finished remanufactured components at a fraction of the cost of new components. Chris offered the following example: The process starts with a customer who has a major component on their machine that fails and needs a replacement; let’s assume in this example it is an axle, which is one of our main products at the Edmonton plant. The customer has several options, assuming he or she wants to continue to operate their machine: buy a new service part, buy a remanufactured part, or repair the broken component. New service parts will come at a premium price, let’s say $10,000 for example, and there are no considerations given to the value of their failed component—it likely ends up in a landfill or used for spare parts. Repairing the component has the opportunity cost of lost production while that machine is down and waiting for the labour required to complete the repairs—maybe in this example, $6,000 without a warranty and maybe two weeks downtime. It also requires expertise to diagnose the problem correctly, order the right parts and perform the work quickly. Reman offers the customer a drop-in replacement, with the same quality of a new service part,