Supply Chain Management
L.L Bean Inc
October 27, 2011
Fahd Iqtidar Mir
Umair Babar Chishti
L.L. Bean uses several different calculations in order to determine the number of units of a particular item it should stock, whether it is a new item or a never out item. It first freezes a forecast for its demand for the upcoming season. This figure is a result of a consensus between the product people, buyers and inventory managers. Once the predicted demand is frozen, L.L. Bean uses its historical demand and forecast data to analyze the forecasting errors. The forecast errors are calculated for each individual item and a frequency distribution of these is made, which is further used as a probability distribution for future errors. Thus, if 50% of the errors were within 0.7 and 1.6, the forecast for this year would be adjusted accordingly. Next, each item commitment quantity was tabulated using its individual contribution margin and salvage value if any. For e.g. if an item had a margin of $15 if sold, and $5 loss if not sold, the commitment value would be 0.75. Hence the optimal stock to keep would be 0.75 fractile of the probability distribution of demand. If for instance, the corresponding error for 0.75 is 1.3, the optimal stock to keep for that item would be 1.3 * frozen forecast. Hence, this value is the stock for that item.
We explain different scenarios to determine relevant costs and revenues. The first scenario is where the stock kept of a particular item is sold. In this case, all the costs related to buying and selling that product would be included. The selling price of the product, the cost of buying from the vendor, the carrying cost of that particular stock item, and the cost of marketing that item in the catalogue are the relevant costs to be included. In the second scenario, excessive stock is kept and at the end of the season, it is...
Please join StudyMode to read the full document