L.L Bean Forecasting
1. Inventory decisions at L. L Bean use statistical processes on the frozen forecasts provided by the product managers. L. L Bean uses past forecast errors as a basis of measurement for future forecast errors. The decision for stock involves two processes. Firstly, the historical forecast errors are computed. This involves taking the ratio of actual demand to forecast demand. The frequency distribution of historical errors is then compiled across items, for new and never out items separately, to form a probability distribution. The probability distribution is then used to predict errors for the future.
The second step involves calculating the contribution margin if the unit is demanded and the loss if the unit has to be calculated. This is done to calculate the critical fractile for the demand which can be calculated by Gain/ (Gain+ Loss). The critical fractile is used to calculate the optimal level of stock by taking losses and gains from adding an extra unit to stock. This gives inventory managers at L. L. Bean the optimal order size which is the critical fractile of the item’s probability distribution of demand. The same fractile is applied to the distribution of the forecast errors calculated in the first step. The resultant error ratio is multiplied with the forecast demand to give a specific number that L L Bean commits with its vendors. Taking the information given in the case into account the ratio would be calculated as follows:
Gain= 30-15=15 Loss=15-10=5 Therefore the ratio equals= 5/(5+15) = 0.75.
So given this case the company should keep the additional item of inventory, only if 0.75 is greater than the probability that the item won’t be needed.
2.The costs and revenues primarily used by L. L. Bean to make decisions include the cost of the item that L. L. Bean pays to its vendors, the selling price of the item and the liquidation cost. The selling price and cost are used to calculate the gain from selling each item. The cost minus the
The second step involves calculating the contribution margin if the unit is demanded and the loss if the unit has to be calculated. This is done to calculate the critical fractile for the demand which can be calculated by Gain/ (Gain+ Loss). The critical fractile is used to calculate the optimal level of stock by taking losses and gains from adding an extra unit to stock. This gives inventory managers at L. L. Bean the optimal order size which is the critical fractile of the item’s probability distribution of demand. The same fractile is applied to the distribution of the forecast errors calculated in the first step. The resultant error ratio is multiplied with the forecast demand to give a specific number that L L Bean commits with its vendors. Taking the information given in the case into account the ratio would be calculated as follows:
Gain= 30-15=15 Loss=15-10=5 Therefore the ratio equals= 5/(5+15) = 0.75.
So given this case the company should keep the additional item of inventory, only if 0.75 is greater than the probability that the item won’t be needed.
2.The costs and revenues primarily used by L. L. Bean to make decisions include the cost of the item that L. L. Bean pays to its vendors, the selling price of the item and the liquidation cost. The selling price and cost are used to calculate the gain from selling each item. The cost minus the