L.L. Bean, Inc. Case Study
1. What item costs and revenues are relevant to the decision of how many units of that item to stock?
The two main basic components that are relevant in determining how many units of an item that L.L Bean should stock are the cost of the item for L.L. Bean and also the price at which they can sell the item. Calculating these two figures, selling price minus the item’s cost, will give L.L. Bean their profit margin, which in turn relates to the cost of understocking. The annual cost for understocking in the case is $11 million. They also need to figure their overstocking costs. Taking the original cost of the item minus the liquidation value will give them the loss for failing to sell that item, in essence overstocking an item. L.L. Bean has an annual cost of $10 million for having too much of the wrong inventory, according to the case. Another cost that is involved with overstocking is the annual holding time of their facility when they keep inventory for the next year.
2. What information should Scott Sklar has available to help him arrive at a demand forecast for a particular style of men's shirts that is a new catalog item?
Due to the inability to look at historical data for this particular item, Scott Skylar needs all the data from previous new items that L.L. Bean has offered in the past. The data specifically needs to include the forecasted demand and the actual demand to see if there are any hidden trends that he may discover while analyzing it. The next thing he needs is other data from the whole industry and the demand for when they offer new, similar products. Companies like Land’s End and Eddie Bauer, or another one of L.L. Bean’s competitors most likely has a similar item on the market. Therefore, Scott Sklar should also collect data from when they released the similar item to get a feel for the demand. With both data from L.L. Bean and it’s competitors, it will give Scott an idea if this item will steal demand...
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