L.L. Bean Case
Written on 7:34 PM by Shaun Hutchings
Here is several questions we answered in regards to a case we studied. The case the L.L. Bean case and how they handled forecast and inventory management/ordering. This was my class preparation answers before we discussed these topics in detail in class. So they may not be right but they were my initial response when analyzing the case.
- How does L.L. Bean use past demand data AND a specific item forecast to decide how many units of that item to stock? Hint: this is not a simple question...it requires thorough study and understanding.
There are a couple of things that go into the decision on how many units of an item to stock. The first thing is the ‘frozen forecast’ which is the forecast for that specific item for that upcoming season. This forecast comes from the forecasting department. After the frozen forecast is received they analyze it by comparing past data. They take the actual demand and the forecast for that year and divide it. A/F (actual divided by forecast). They use this to find a range of inventory that the new product would be the following year. For example if last year new products had this ration between .7 and 1.6 then using that data if the frozen forecast is 1000 that means the new product could have an actual demand for the upcoming year of 700 to 1600 units. Finally they use the profit margin calculation to see how much profit each unit brought in compared to how much the unit would lose if it was liquidated. For instance, if a unit was purchased at $15 each and sold for $30 the profit for that item would be $15 dollars per unit. When liquidated it could be sold for $10 then it would lose $5 per unit. These are then used to calculate a fractile which is then used to determine the actual order size as long as it falls in the range of the past data.
- What item costs and revenues are relevant to the decision of how many units of that item to stock?
The cost to make the item, the price the item sells for, and the price of the liquidated item. Then you use this information to find the profit generated by each item (Price of item minus cost). Then you can use this find the loss per item when liquidated (Cost of item minus the liquidated price).
- How would you address Mark Fasold's concern that the number of items purchased usually exceeds the number forecast?
This is so because the margin or the loss of benefits from losing demand is much higher than that of money lost when liquidated. This means that it’s more beneficial to have too much inventory so that you don’t stock out of an item than it is to have too much an item. For instance if the profit margin is $15 dollars per item then for 1000 items over the actual forecast that would result in a $15,000 loss. You could have made that money. Then let’s say you would lose $5 dollars on every item that is liquidated, for a 1000 unit overstock you would lose $5,000. You can show that it would be better to get the $15,000 dollars of profit you could have received if you have enough inventory compared to the $5,000 loss of money of having too much inventory.
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