L. L. Bean, Inc.

Rohit Kapoor
 Introduction
• Matching supply with demand
– Context
• Supply must be chosen before observing demand
 Issue
• How much demand uncertainty there is for
the apparel A?
Discrete Distribution

Q F(Q)
2,200 0.25
3,200 0.75
4,200 1
 Relative Forecast Errors
• A/F Ratio
– Meaning of > 1?
– Meaning of < 1?
 ITEM FORECAST ACTUAL A/F Ratio Rank Percentile
Torrent Twill Parka 470 116 0.25 1 3.0
Wool Tweed Blazer 3190 1195 0.37 2 6.1
Stretch Web Belt 430 239 0.56 3 9.1
Travel Umbrella 650 364 0.56 4 12.1
Wool/Cashmere Coat 6490 3673 0.57 5 15.2
Windbloc Fleece Vest 1220 721 0.59 6 18.2
Stretch Gabardine Trench Coat 430 274 0.64 7 21.2
Tulip Collar Sweater 680 453 0.67 8 24.2
Adventure Duffle Bag 120 83 0.69 9 27.3
Upland Field Coat 1020 732 0.72 10 30.3
Ridge Runner Jacket 390 311 0.80 11 33.3
Swix Ski Gloves 450 365 0.81 12 36.4
Two-Layer River Driver's Shirt 740 607 0.82 13 39.4
Wool/Cashmere Blazer 3810 3289 0.86 14 42.4
Bayside Walking Shorts 170 163 0.96 15 45.5
Boat Mocs, Slide 180 175 0.97 16 48.5
Torrent Stretch Parka 460 450 0.98 17 51.5
Bayside Belt 140 143 1.02 18 54.5
Classic Poplin Shirt 180 195 1.08 19 57.6
Polartec Super 200 Fleece Vest 320 369 1.15 20 60.6
Polartec Sandal Socks 270 317 1.17 21 63.6
Tropic Weight Flight Jacket 660 788 1.19 22 66.7
Wool Blazer Coat 1490 1832 1.23 23 69.7
Boat and Tote Bag 170 212 1.25 24 72.7
Traditional Wool Cruiser Vest 500 635 1.27 25 75.8
Apparel A 1300 1696 1.30 26 78.8
Trail Model Rain Pants 610 830 1.36 27 81.8
Summer Stripe Polo 440 623 1.42 28 84.8
Wicked Good Clogs 1060 1552 1.46 29 87.9
Reversible Down Jacket 380 571 1.50 30 90.9
Power Dry Crewneck 380 587 1.54 31 93.9
3-in-1 Ski-Vertible Jacket 90 140 1.56 32 97.0
Wool Toggle Coat 2190 3504 1.60 33 100.0
 Interpretations
• Assuming that this season’s forecasting
errors
– Similar to last year’s forecasting errors
• 3.0% chance that demand will be 800 units or fewer
– (= 0.25 * 3200)
• 90.9% chance that demand will be 4,800 units or
less
– (= 1.5 * 3200)
A/F Ratio Q F(Q)
0.25 790 0.0303
0.37 1199 0.06061
0.56 1779 0.09091
0.56 1792 0.12121
0.57 1811 0.15152
0.59 1891 0.18182
0.64 2039 0.21212
0.67 2132 0.24242
0.69 2213 0.27273
0.72 2296 0.30303
0.80 2552 0.33333
0.81 2596 0.36364
0.82 2625 0.39394
0.86 2762 0.42424
0.96 3068 0.45455
0.97 3111 0.48485
0.98 3130 0.51515
1.02 3269 0.54545
1.08 3467 0.57576
1.15 3690 0.60606
1.17 3757 0.63636
1.19 3821 0.66667
1.23 3934 0.69697
1.25 3991 0.72727
1.27 4064 0.75758
1.30 4175 0.78788
1.36 4354 0.81818
1.42 4531 0.84848
1.46 4685 0.87879
1.50 4808 0.90909
1.54 4943 0.93939
1.56 4978 0.9697
1.60 5120 1
Empirical vs normal demand
distribution
1.00
0.90
0.80
0.70
.

0.60
Probability

0.50
0.40
0.30
0.20
0.10
0.00
0 1000 2000 3000 4000 5000 6000
Quantity
Empirical distribution function (diamonds) and normal distribution function with
mean 3192 and standard deviation 1181 (solid line)
 Expected Profit – Maximizing
Order Quantity
• Balancing the risk and benefit of ordering a unit
 Critical Ratio I
• Expected loss on a unit
– Expected loss is Co * F(Q)
 Critical Ratio – Part II
• Expected gain on a unit
• Equating I and II
F(Q) = Cu/(Cu + Co)