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L.L Bean (2)

L.L Bean (2)

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Published by Umair Babar Chishti

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Published by: Umair Babar Chishti on Jan 06, 2012
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Supply Chain Management
L.L Bean Inc
 October 27, 2011Presented by:
 Ahsan Khawar 12020378Fahd Iqtidar Mir 12020367Nabeel Siraj 12020325Umair Babar Chishti 12020157
L.L. Bean uses several different calculations in order to determine the number of units of a particular item it should stock, whether it is a new item or a never out item. It first freezes aforecast for its demand for the upcoming season. This figure is a result of a consensus betweenthe 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 forecasterrors 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 errorswere within 0.7 and 1.6, the forecast for this year would be adjusted accordingly. Next, each itemcommitment quantity was tabulated using its individual contribution margin and salvage value if any. For e.g. if an item had a margin of $15 if sold, and $5 loss if not sold, the commitment valuewould be 0.75. Hence the optimal stock to keep would be 0.75 fractile of the probabilitydistribution 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.
We explain different scenarios to determine relevant costs and revenues. The first scenario iswhere the stock kept of a particular item is sold. In this case, all the costs related to buying andselling that product would be included. The selling price of the product, the cost of buying fromthe vendor, the carrying cost of that particular stock item, and the cost of marketing that item inthe catalogue are the relevant costs to be included. In the second scenario, excessive stock is keptand at the end of the season, it is still not sold. In this case, the relevant costs are the cost of  buying the stock from vendor, its storage and marketing cost in the catalogue, and the salvagecost ( if any) of that particular item. In case there is no salvage cost for an item, its redundancycost becomes relevant. The final case is where the stock for a particular item is not kept, butdemand for that item is there, resulting in a stock out. Since L.L. Bean is a direct orderingcompany, the cost of a stock out is very high for it in terms of lost goodwill. Hence, the cost of goodwill lost becomes relevant in this scenario as well.
Scott Sklar should have data on actual and forecasted demand of the item that were previouslyintroduced as µnew item¶. It will give him an idea about various costs that go on in launching aµnew¶ item. He should have information on selling price which will be determined after consulting with the marketing, sales and production department of L.L Beans. It will be usefulfor both the company and Scott. Information on cost of sales, commissions provided (if any) for sales, stock outs and backorders cost are relevant in his decision making. He can get salesinformation on a new catalogue item by comparing it with that of Bean¶s competitors¶ similar item and by consulting with the marketing department. It will help him understand the currentmarket trends for that particular item. After analyzing the market, he can observe what level of  buffer stock he should have to avoid stock outs. For this, he will have to compare stock out costsand over-stocking costs for that item. To acquire this information, he needs to sit down with his buyers, sales and inventory personnel. Moreover, he should also know what promotion cost eachµnew¶ item will incur in getting printed in one catalogue. How much space will it require to benoticed as a new item in a particular category? In other words, he should gather information onthe promotion costs of the new item. He should alsofind the service level based off a profitmargin calculation.These bases will help him forecast demand for the new item. He should alsoobserve what happens to the demand of existing products whenever new products are introducedin the market. If the new product is pulling customers away from the existing products then thisfactor should be incorporated in the demand forecast of the new catalogue item.
One thing that Fasold need to realize is that we lose more when we have stock outs then whenwe liquidate our inventory. He can take a simple example that for example selling one item givesyou 15rs worth of profit, and the liquidation cost for that item is 5rs. So if you have inventorythen you can earn 15rs as compared to the cost of stock out which is pretty less. So a proper cost benefit analysis could be done for Fasold. But here a proper cost benefit analysis should be madeto give a true picture that also has the cost on inventory storing and not just the loss because of liquidation. Also he should be explained that forecasts are never accurate. Also this over stockingis more for the ³new items´, so L.L Bean should introduce them in the catalogues to get a fait bitof idea before actually introducing them.

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