912 Words4 Pages

Case Report: LL Bean Case Thibault Faramarzi Section 22
1) L.L. Bean uses several different calculations in order to determine the number of units of a item it should stock.
It first freezes on the 1st May of each year a forecast for its demand for the next 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 calculated using its contribution margin and its total contribution in dollar to the revenue of the company. 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 three quarters of the probability 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.
2) There are different scenarios to determine relevant costs and revenues. The first scenario is where (geographically spoken) 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

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