L.L. Bean Case Study - Harvard Case
Jennifer Norcutt
Case Study Week 2
MBA 622 - Operations Management
June 2, 2013
Good forecasts are an important facet of business: "The forecast is the only estimate of demand until actual demand becomes known" [ (Heizer & Render, 2014) ]. L.L. Bean estimates that annual costs of lost sales and backorders to be $11 million and costs of having too much or the wrong inventory were an additional $10 million. With losses like these it would appear from the outside that L.L. Bean has serious issues with item forecasting and inventory management. While there are several things that go into the decision of how many units to stock I will cover one. One major thing is the hard cut-off date of May 1st to "freeze the forecast". The preliminary forecast is started in December based on past data. The commitments to vendors are based on these forecasts. Because some of the vendors are overseas they have one shot to get the commitment correct due to longer production lead times. To do this they take the actual demand and the forecast for that year and divide it; Actual/Forecast = historical forecast errors. "The frequency distribution of past forecast errors was then used as a probability distribution for the as yet unrealized future forecast errors" (Schleifer, 1993). Forecasting just isn 't about how many sweaters or boots that L.L. Bean thinks they are going to sell. There are relevant costs and revenues that also come into play. Some of those include: * The cost to produce the item * The sales price of the item * The price of the liquidated item This information is used to determine the actual profit generated by each individual item. It can then also be used to determine a loss when items that were over forecasted have to be liquidated. Forecasting the sales of a new item can prove to be tricky. In order to properly forecast a new item the team really must make a judgment call. If there is an item similar to it already in
Case Study Week 2
MBA 622 - Operations Management
June 2, 2013
Good forecasts are an important facet of business: "The forecast is the only estimate of demand until actual demand becomes known" [ (Heizer & Render, 2014) ]. L.L. Bean estimates that annual costs of lost sales and backorders to be $11 million and costs of having too much or the wrong inventory were an additional $10 million. With losses like these it would appear from the outside that L.L. Bean has serious issues with item forecasting and inventory management. While there are several things that go into the decision of how many units to stock I will cover one. One major thing is the hard cut-off date of May 1st to "freeze the forecast". The preliminary forecast is started in December based on past data. The commitments to vendors are based on these forecasts. Because some of the vendors are overseas they have one shot to get the commitment correct due to longer production lead times. To do this they take the actual demand and the forecast for that year and divide it; Actual/Forecast = historical forecast errors. "The frequency distribution of past forecast errors was then used as a probability distribution for the as yet unrealized future forecast errors" (Schleifer, 1993). Forecasting just isn 't about how many sweaters or boots that L.L. Bean thinks they are going to sell. There are relevant costs and revenues that also come into play. Some of those include: * The cost to produce the item * The sales price of the item * The price of the liquidated item This information is used to determine the actual profit generated by each individual item. It can then also be used to determine a loss when items that were over forecasted have to be liquidated. Forecasting the sales of a new item can prove to be tricky. In order to properly forecast a new item the team really must make a judgment call. If there is an item similar to it already in
Cited: Heizer, J., & Render, B. (2014). Operations Management. Saddle River: Prentice Hall. Schleifer, A. (1993). L.L. Bean, Inc. Item Forecasting and Inventory Management. Harvard Business School , 5.