1. Each catalog for L.L. Bean had a gestation period of about 9 months. Its creation included merchandising, design, product, and inventory specialists. The first step of its creation process is initial conceptualization followed by the preliminary forecasts of total sales. Then forecasts were developed by book. After the layout and pagination of the books, initial commitments to vendors were made. The subsequent step is that item forecasts were repeatedly revised and finally the items were fixed.
When catalogs were in the hands of customers, inventory managers decided on additional commitments to vendors, scheduled replenishments, handle backorders, etc. inventories which cannot be sold at that time might be liquidated, marked down and sold through special L.L. Bean promotions, or carried over to the next year.
2. The company determine their actual demand based on historical forecast errors. The historical forecast errors were computed for each item in the previous year and the frequency of these errors. The frequency of past forecast errors was used as a probability distribution for the future errors. For example, in the past year, if there were 50% of the forecast errors for “new” items were between 0.7 and 1.6. Then the company can assumed that the forecast errors for “new” item in the current year also would be between 0.7 and 1.6 with the possibility 50%. If the frozen forecast for an item is 1000 units, we can assume that with the probability 50%, the actual demand of the item would fall between 700 and 1600 units.
3. After forecasting the demand based on historical forecast errors. The company will determine the item’s commitment quantity by balancing the individual item’s contribution margin if demand against