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Item Forecasting and Inventory Management

MANAGEMENT CONSULTING

CASE 2: L. L. BEAN INC.

Q1. How do L.L. Bean use past demand data and a specific item forecast to decide how many units of that item to stock?

Ans. L. L. Bean use two main methods based on past demand data to determine on the quantities to be ordered for specific items to stock.

Method One

The First Method of forecasting is based on quite a conservative approach, primarily manual. Product related people sit together and decide on the basis of previous/book record. They look for dollar sales of each item and rank them on this basis. They also look for the forecasted quantity of items and check it with real sold quantity. But when they have to add a new item, they find that this item will create incremental demand or will cannibalize the sales of any other item. If they find cannibalization then they adjust the quantity of items accordingly. But this method is not the same all the time and can be changed accordingly, as per the need.

Method Two

The Second Method of forecasting uses historical forecast errors which is called the A/F Ratio i.e. (Actual Demand / Forecast Demand).

|A/F Ratio |Remarks |
|A=F |Forecast was perfect |
|A>F |Forecast was low- consequence: Understock |
|A<F |Forecast was high- consequence: Overstock |

By using the A/F ratio, L. L. Bean decide the quantity of new items on the basis of probability of past errors. In the first step, if