Operations Case Studies

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OPMG-UB.1.001,002: Operations Management

Michael Pinedo
New York University
Fall 2013
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OPMG-UB.1.001,002: Operations Management,

Pinedo, Fall 2013
New York University
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OPMG-UB.1.001,002: Operations Management, Pinedo, Fall 2013

Table of Contents
Reengineering World Mobility: The Panama Canal Effect by Chernoff, Harry
G; Sosulski, Kristen A.
National Cranberry Cooperative, 1996 by Shapiro, Roy D.
1
11
XanEdu Extra
An Excel-formatted spreadsheet containing the exhibits for the case above is available at
http://content.xanedu.com/hs/688122p2.xls
L.L. Bean, Inc.: Item Forecasting and Inventory Management by Schleifer,

Arthur , Jr.
1
21
2
1
2
3
4
5
6
7
8
9
10
9-688-122
REV: JULY 7, 2011
Na
ational Cranbe
erry Co
ooperat
tive, 199
96
On February 14, 1996, Hug Schaeffer, vice preside of operati
O
1
go
ent
ions at the N
National Cran
nberry
Cooperative (NCC called his assistant, Mel OBrien, into his office.
C),
a
o
Mel, I spen all day yesterday revie
nt
ewing last fal process f
fruit operatio at receiving
ons
lls
pla #1 [RP1] with Will Walliston, the superintende
ant
W
ent, and talkin with the c
ng
co-op membe
ers
[gr
rowers] in th area. Its obvious to me that we ha
hat
m
avent solved our problem at that plan
ms
nt,
ye
et. Even though we spen $200,000 last winter fo a fifth Kiw
nt
or
wanee dump at RP1, o
per
our
ov
vertime costs were still out of control last fall, and th growers ar still upset t
w
t
he
re
that their truc
cks
an drivers had to spend so much time waiting to unl
nd
d
w
load process f
fruit into the r
receiving plant.
I cant blame th
c
hem for being upset. The are the ow
g
ey
wners of this c
cooperative, a
and they rese
ent
ha
aving to lease trucks and hire drivers to get the berr
h
o
ries out of the field and th watch the
e
hen
em
sta idle, wait
and
ting to unload1.
d
ity
Walliston th
hinks that the way to avo these prob
e
oid
blems next fa is to increa our capaci
all
ase
by buying som new equipm
y
me
ment. I want you to go o there and take a hard l
t
out
look at the R
RP1
op
peration and find out what we need to do to improv operations before the 1996 crop com
f
t
ve
s
mes
in. Were goin to have to move quickl if we are g
.
ng
ly
going to orde new equipment, since t
er
the
pu
urchasing and installation lead times ar in excess of six months. By the way, the growers in
d
re
f
,
tha region indicated that th plan on about the sam size crop th year as la
at
hey
me
his
ast. But it loo
oks
lik the percen
ke
ntage of water
r-harvested berries this ye will incre
b
ear
ease to 70% o total proce
of
ess
fru from last years 58%, which means that well h
uit
w
s
have to chang the way w schedule o
ge
we
our
da operation
aily
ns.
NCC and the Cranberry Industry

C
C
y
NCC was an organization formed and owned by gr
N
o
o
rowers of cran
nberries to p
process and m
market
their berries. In re
b
ecent years, 99% of all sale of cranber
9
es
rries were ma by the va
ade
arious cooperatives
active in the cranb
e
berry industry NCC was one of the la
y.
arger coopera
atives and ha operations in all
ad
the pr
rincipal grow
wing areas of North Ameri
ica: Massach
husetts, New J
Jersey, Wisco
onsin, Washin
ngton,
1 Grow
wers paid as much as $100 per hou to lease a truc and driver.
h
ur
ck
_______
_______________
_______________
________________
_______________
_______________
_______________
________________
______
This cas represents a major revision of the case American Cr
se
c
ranberry Cooperati
ive written by J. T
Tucker. Certain dat and financial da have
tes
ata
been dis
sguised. HBS cases are developed so
s
olely as the basis fo class discussion Cases are not int
or
n.
tended to serve as endorsements, so
s
ources of
primary data, or illustratio of effective or in
y
ons
neffective managem
ment.
Copyrig 1988, 1991, 1992, 1997, 2002, 2006, 2011 Presiden and Fellows of Harvard College. To order copies or request permi
ght
1
2
nt
f
.
s
ission to
reprodu materials, call 1-800-545-7685, write Harvard Business School Publishin Boston, MA 021
uce
1
ng,
163, or go to http:/
//www.hbsp.harvard.edu.
No part of this publication may be reproduce stored in a retri
n
ed,
ieval system, used i a spreadsheet, o transmitted in an form or by any m
in
or
ny
means
electron mechanical, pho
nic,
otocopying, recording, or otherwise
without the permi
ission of Harvard B
Business School.
11
688-122
National Cranberry Cooperative (Abridged)
Oregon, British Columbia, and Nova Scotia. Table A contains industry data for U.S. production and
sales of cranberries.
Table A
Data on U.S. Cranberry Harvest
Production/Utilization (in barrels)a

Acreage
Barrels
Fresh
Harvested
per Acre
Production
Sales
Crop Year
Process
Average Price
(all uses, $ per
barrel)b
Five-Year Average
1960-1964
1965-1969
1970-1974
1975-1979
1980-1984
1985-1989
1990-1994
26,022
25,434
26,205
24,842
21,448
20,778
20,988
23.7
24.9
31.3
39.8
51.2
62.6
73.7
615,000
643,300
822,580
983,660
1,096,160
1,300,120
1,546,120
466,844
380,965
381,320
439,170
427,520
468,340
327,980
148,256
253,335
436,060
532,070
543,860
755,750
1,169,360
22.12
31.00
34.30
23.42
21.54
24.00
38.24
Annual
1990
1991
1992
1993
1994
c
1995
20,640
20,760
21,220
21,135
21,185
21,445
69.6
77.0
66.2
69.4
86.1
95.1
1,436,800
1,598,600
1,404,300
1,467,800
1,823,100
2,038,600
389,600
328,000
278,300
301,900
342,100
367,000
1,033,200
1,249,600
1,034,900
1,111,200
1,417,900
1,418,600
31.00
34.32
37.20
41.24
42.20
36.10
Source:
Annual reports of Crop Reporting Board, Statistical Service, USDA.
Note:
Data gathered on five statesMassachusetts, New Jersey, Oregon, Washington, and Wisconsin.
a Differences between production and utilization (fresh sales and process) represent economic abandonment.
b Beginning in 1964 the series represents equivalent returns at first receiving station, fresh and processing combined. Years
prior to 1964 represent season average prices received by growers for all methods of sale, fresh and processing combined.
c Preliminary figures for 1995.
Some significant trends are observable in Table A. Probably the most important trend was the
increasing surplus of cranberries produced over those utilized. This surplus was serious enough by
1993 for the growers to resort to the Agriculture Marketing Agreement Act of 1937. Under this act,
growers can regulate and control the size of an agricultural crop if the federal government and more
than two-thirds of the growers agree to a plan for crop restriction. In 1993, 87% of the growers agreed
(making it binding on the others also) that no new acreage was to be developed over the next six
years and that each grower would have a maximum allotment at the end of six years equal to the
average of the growers best two years from 1993 through 1998.
In 1995 the growers resorted to the Agriculture Marketing Agreement Act once again. Under the
Cranberry Marketing Order of 1995, the growers and the government agreed that 10% of the 1995
crop should be set aside. The set aside berries (berries that are either destroyed or used in a way that
will not influence the market price) amounted to more than 200,000 barrels (bbls). (A barrel of
12
Nation Cranberry Co
nal
ooperative (Abri
idged), 1996
6
688-122
cranb
berries weighs 100 lbs.) Ha
s
andlers physic
cally set aside 10% of the b
e
berries before harvesting, u
e
under
the su
upervision of a committee of growers an representa
nd
atives from th Departmen of Agricultu
he
nt
ure.
Another impo
A
ortant trend was the incr
w
reasing mech
hanization of cranberry h
harvesting. W
Water
vicinity of re
harve
esting, in part
ticular, was developing ra
d
apidly in the v
eceiving plant No. 1. Under the
t
tradit
tional dry har
rvesting, berr were han
ries
nd-picked from the bushes In water ha
m
s.
arvesting, the bogs
e
were flooded, the berries were mechanical shaken fr
e
lly
rom the bush
hes, and the berries then were
collec
cted easily sin they floate to the surf
nce
ed
face of the wa
ater. Water h
harvesting cou result in y
uld
yields
up to 20% greate than those obtained vi dry harve
o
er
e
ia
esting, but it caused som damage a
t
me
and it
shorte
ened the time that harvest fruit could be held pri to either it use or free
e
ted
ior
ts
ezing for long
g-term
storag Water harvesting had developed at a remarkabl rate in som areas. Rec
ge.
t
le
me
ceiving plant No. 1
receiv 25,000 bbl of water-h
ved
ls.
harvested fruit in 1993, 125,
t
,000 bbls. in 1
1994, and 350,
,000 bbls. in 1
1995.
Rece
eiving Plant No. 1 (R
RP1)
RP1 received both fresh fruit and pr
R
b
f
rocess fruit d
during a seas that usually started ea
son
arly in
September and wa effectively finished by early Decemb (see Figur A). The fre fruit oper
as
e
ber
re
esh
ration
(preparing cranber
rries for sale as whole fre fruit) was completely separate from the process fruit
esh
s
m
s
opera
ation (that pre
epares cranbe
erries for juice canning, fre
e,
eezing, and ot
ther process f
fruit products and
s)
took the fruit from receiving th
t
m
hrough packa
aging. This c
case is concerned only wit the process fruit
th
s
opera
ation.
Figur A
re
Daily Delivery of Bo Fresh and Process Berr to RP1

D
oth
d
ries
13
688-122
The handling of process fruit at RP1 was highly mechanized. The process could be classified
into several operations: receiving and testing, dumping, temporary holding, destoning,2 dechaffing,3
drying, separation, and bulking and bagging. The objective of the total process was to gather bulk
berries and prepare them for storage and processing into frozen fresh berries, sauce, and juice.
Process Fruit Receiving

Bulk trucks carrying process berries arrived at RP1 randomly throughout the day as shown in
Exhibit 1. The average truck delivery was 75 bbls. When the trucks arrived at RP1 they were
weighed, and the gross weight and the tare (empty) weight were recorded. Prior to unloading, a
sample of about 30 lbs. of fruit (0.3 bbl.) was taken from the truck. Later, this sample would be run
through a small version of the cleaning and drying process used in the plant. By comparing the
before and after weight of this sample, it was possible to estimate the percentage of the trucks net
weight made up of clean, dry berries. At the same time, another sample was taken to determine the
percentage of unusable berries (poor, smaller, and frosted berries) in the truck. The grower was
credited for the estimated weight of the clean, dry, usable berries. (See Exhibit 2 for total 1995
deliveries of process berries.)
At the time the truck was weighed, the truckload of berries was graded according to color. Using
color pictures as a guide, the chief berry receiver classified the berries as Nos. 1, 2A, 2B, or 3, from
poorest color (No. 1) to best (No. 3). There was a premium of $1.50 per bbl. paid for No. 3 berries,
since color was considered to be a very important attribute of both juice products and whole sauce.
Whenever there was any question about whether or not a truckload was No. 2B or No. 3 berries, the
chief berry receiver usually chose No. 3. In 1995 the $1.50 premium was paid on about 450,000 bbls.
of berries. When these berries were used, however, it was found that only about half of them were
No. 3s.
To improve this yield, Schaeffer was considering the installation of a light meter system for color
grading. This system was projected to cost $40,000 and would require a full-time skilled operator at
the same pay grade as the chief berry receiver.
Temporary Holding
After a truckload of process berries had been weighed, sampled, and color graded, the truck
moved to one of the five Kiwanee dumpers. The truck was backed onto the dumper platform which
then tilted until the contents of the truck dumped onto one of five rapidly moving belt conveyors.
Each of the five conveyors took the berries to the second level of the plant and deposited them on
other conveyors capable of running the berries into any one of 27 temporary holding bins. Bins
numbered 1-24 held 250 bbls. of berries each. Bins 25, 26, and 27 held 400 bbls. each. All of the
conveyors were controlled from a central control panel.
It usually took from 7 to 8 minutes to back a truck onto a Kiwanee dumper, empty its contents,
and leave the platform. At times some trucks had to wait several hours, however, before they could
2Destoning was the separation of foreign materials, such as small stones, that might be mixed in with the berries.
3Dechaffing was the removal of stems, leaves, and so forth that might still be attached to the berries.
14
National Cranberry Cooperative (Abridged), 1996
688-122
empty their contents. These waits occurred when the holding bins became full and there was no
place in the receiving plant to temporarily store berries before further operations.
The holding bins emptied onto conveyors on the first level of the plant. Once the bins were
opened, the berries flowed onto the conveyors and started their way through the destoning (dry
berries only), dechaffing, drying (water-harvested berries only), quality grading, and either bulk
loading or bagging operations.
Destoning, Dechaffing, and Drying

Holding bins 25-27 were for wet (water-harvested) berries only. Holding bins 17-24 could be
used for either wet or dry berries. Wet berries from these bins were taken directly to one of the three
dechaffing units (destoning was unnecessary with water-harvested berries) which could process up
to 1,500 bbls. per hour each. After dechaffing, these wet berries were taken to one of the three drying
units where they were dried at rates up to 200 bbls. per hour per dryer.
Holding bins 1-16 were for dry berries only. Berries from these bins were routed through one of
three destoning units, each of which could process up to 1,500 bbls. of berries per hour, before going
through a dechaffing unit. Frequently, both wet and dry berries were processed at the same time
though the system. The wet berries would be processed through the part of the system that included
the dryers, while the dry berries were processed through the area containing the destoning units.
National Cranberrys current plant layout had two dechaffing units dedicated to wet berries, and one
to dry berries.
Superintendent Walliston had told OBrien that, with an increasing percentage of wet berries
coming to the plant, it might make sense to convert some of holding bins 1-16 so they could be used
for wet berries also. This would cost $10,000 per bin. Or, perhaps, he had mentioned, a few new
dryers might be needed. These would cost $60,000 each. He wondered what the benefits might be of
adding more dryers and whether those benefits would warrant the cost.
Quality Grading
After destoning, dechaffing, and drying, berries were transported to large take-away conveyors
that moved berries from the first level of the receiving building to the third level of the adjoining
separator building. Here these take away conveyors became feed conveyors as they were now
feeding berries into the jumbo separators (see Figure B). The jumbo separators identified three
classes of berriesfirst quality berries, potential second-quality berries, and unacceptable berries.
15
688-122
Figure B
National C
Cranberry Coope
erative (Abridged)
RP1 Separa
ator Building
s
ocess was a simple one th was based on the fact that good cr
s
hat
d
t
ranberries wi
ill
The separation pro
bounce hi
igher than poor cranberries (see Figure C for a drawi of the sep
ing
paration proce
ess).
16
Nation Cranberry Co
nal
ooperative (Abri
idged), 1996
igure C
Fi
6
688-122
Sep
parator Opera
ation
The first-qualit berries went directly on one of thr take-away conveyors o the second level
ty
nto
ree
y
on
d
and were transpor
w
rted to the sh
hipping area. The unaccep
ptable berries fell through waste chute into
s
h
es
water
r-filled waste flumes on th first level and were flo
he
oated off to th disposal area. The pot
he
tential
secon
nd-quality ber
rries fell into the Bailey mills on the sec
cond level of the building The Bailey mills
f
g.
y
separated the strea of incomi berries in second-qu
am
ing
nto
uality berries and unaccep
ptable berries. The
Bailey mills operat on the sam principle as the jumbo separators. O
y
ted
me
a
Over the years the percenta of
age
secon
nd-quality ber
rries had cons
sistently been close to 12%.
.
Each of the thr separator lines could process up to 4 bbls. per hour, but the rate of proce
ree
p
450
e
essing
declin as the per
ned
rcentage of ba fruit increa
ad
ased. It was estimated tha the average effective cap
at
e
pacity
was probably close to 400 bbls. per hour for each line.
p
e
e
Bulk
king and Bagging
B
Conveyors car
C
rried berries from the sepa
f
arator buildin into the shi
ng
ipping building, feeding b
berries
onto any one of the three main flexible conve
a
e
f
eyors in the sh
hipping area. Each of the three convey
.
yors in
the sh
hipping area could be mo
oved to feed berries into b
bagging stati
ions, bulk bin stations, or bulk
n
r
17
688-122
truck stations. The berries left RP1 in bulk trucks for shipment directly to the finish processing plant
or in bins for storage at freezers with bulk storage capability.
Scheduling the Work Force

During the harvest seasonSeptember 1 to December 15the process fruit side of RP1 was
operated seven days a week with either a 27-member work force or a 53-member work force,
depending on the relative volume of berry receipts. Will Walliston explained to Mel OBrien,
Last year, trucks arrived at 7:00, and we only staffed the dumpers and the bins, and then started
the rest of the operation at 11:00. This year, with an increase in the percentage of wet berries that we
expect, were going to have to fire up the operation, on peak days, with two shifts one from 7:00 to
3:00, and one from 3:00 to 11:00. Im hoping thatll cut into last years huge overtime expenditures and
will limit the extra capital that well need to spend. But, thats what your report will help me decide.
There were 27 employees at RP1 who were employed for the entire year; all others were hired for
the season only. The 27 non-seasonal employees were all members of the Teamsters Union, as were
15 seasonal workers. Seasonal workers could work only between the dates of August 15 and
December 25 by agreement with the union. Most seasonal workers were employed via a state
employment agency that set up operations each fall. The employment agency helped in placing
seasonal workers in the receiving plant and in harvesting jobs with the local growers. The pay rate
for seasonal workers in the process fruit section was $8.00 per hour. They were paid the overtime
rate of 1-1/2 times their straight-time rate for anything over 40 hours per week. The straight-time pay
rate for the full-year employees averaged $13.00 per hour.
When it was necessary to work beyond 11 p.m., a crew of only eight or nine workers was
required to run the holding bins empty and do bulk loading. Although dry fruit could be held in the
bins overnight, it was considered undesirable to hold wet fruit any longer than necessary, so wet fruit
was always run out before shutting down. The plant never ran more than 22 hours a day, since at
least 2 hours were required for cleaning and maintenance work. (Downtime due to unscheduled
maintenance was very small; said Walliston: We ran 350,000 bbls. through the wet system in 1995
and we were down a total of less than 8 hours.)
18
Nation Cranberry Co
nal
ooperative (Abri
idged), 1996
Exhib 1
bit
688-122
Log of Total Deliver on September 23, 1995

ries
m
5
19
688-122
Exhibit 2
Deliveries of Process Berries 1995
Total Deliveries
(scale weight
in bbls.)
Day
9/19/19
9/20
9/21
9/22
9/23
9/24
9/25
9/26
9/27
9/28
9/29
9/30
10/1
10/2
10/3
10/4
10/5
10/6
10/7
10/8
10/9
10/1012/10
Total barrels
Delivered
Wet
44,176
16,014
17,024
16,550
18,340
18,879
18,257
17,905
16,281
13,343
18,717
18,063
18,018
15,195
15,816
16,536
17,304
14,793
13,862
11,786
14,913
238,413
54%
31
39
39
42
41
36
45
42
38
43
59
69
60
60
57
55
46
61
56
54
75
6%
0
0
0
2
0
0
0
0
0
1
1
1
2
3
5
2
7
3
0
0
0
72%
44
35
22
22
21
14
10
18
15
11
9
11
18
12
21
26
32
39
36
33
22
22%
56
65
78
76
79
86
90
82
85
88
90
88
80
85
74
72
61
58
64
67
78
610,185
58
25
74
Color No. 1
Color No. 2
Color No. 3
10
20
Harvard Business School
9-893-003
Rev. September 7, 1993
L.L. Bean, Inc.

Item Forecasting and Inventory Management
When you order an item from an L.L. Bean catalog and were out of stock, Im the guy to
blame. And if we end up liquidating a bunch of womens wool cashmere blazers, its my fault. No
one understands how tough it is. Mark Fasold, Vice PresidentInventory Management, was
describing the challenge of item forecasting at L.L. Bean. Forecasting demand at the aggregate level
is a piece of cakeif were running short of expectations, we just dip deeper into our customer list
and send out some more catalogs. But we have to decide how many chamois shirts and how many
chino trousers to buy, and if were too high on one and too low on the other, its no solace to know
that we were exactly right on the average. Top management understands this in principle, but they
are understandably disturbed that errors at the item level are so large.
In a catalog business like ours, you really capture demand. Thats the good news. The bad
news is, you learn what a lousy job youre doing trying to match demand with supply. Its not like
that in a department store, say, where a customer may come in looking for a dress shirt and lets the
display of available shirts generate the demand for a particular item. Or if a customer has some
particular item in mind but its not available, he or she may just walk out of the store. In a
department store you never know the real demand or the consequences of understocking. But in our
business every sale is generated by a customer demanding a particular item, either by mail or by
phone. If we havent got it, and the customer cancels the order, we know it.
Rol Fessenden, ManagerInventory Systems, added: We know that forecast errors are
inevitable. Competition, the economy, weather are all factors. But demand at the item level is also
affected by customer behavior, which is very hard to predict, or even to explain in retrospect. Every
so often some item takes off and becomes a runaway, far exceeding our demand forecasts. Once in a
while we can detect the trend early on and, with a cooperative vendor, get more product
manufactured in a hurry and chase demand; most of the time, however, the runaways leave us just
turning customers away. And for every runaway, theres a dog item that sells way below
expectations and that you couldnt even give away to customers.
Annual costs of lost sales and backorders were conservatively estimated to be $11 million;
costs associated with having too much of the wrong inventory were an additional $10 million.
This case was prepared by Professor Arthur Schleifer, Jr. as the basis for class discussion rather than to illustrate either
effective or ineffective handling of an administrative situation.
Copyright 1992 by the President and Fellows of Harvard College. To order copies or request permission to
reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to
http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system,
used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying,
recording, or otherwisewithout the permission of Harvard Business School.
1
21
893-003
L.L. Bean, Inc.
L.L. Bean Background

In 1912 Leon Leonwood Bean invented the Maine Hunting Shoe (a combination of
lightweight leather uppers and rubber bottoms). He obtained a list of nonresident Maine hunting
license holders, prepared a descriptive mail-order circular, set up shop in his brothers basement in
Freeport, Maine, and started a nationwide mail-order business. The inauguration of the U.S. Post
Offices domestic parcel post service in that year provided a means of delivering orders to customers.
When L.L. Bean died in 1967, at the age of 94, sales had reached $4.75 million, his company employed
200 people, and an annual catalog was distributed to a mailing list of 600,000 people.
L.L.s Golden Rule had been Sell good merchandise at a reasonable profit, treat your
customers like human beings, and theyll always come back for more. When Leon Gorman, L.L.s
grandson, succeeded him as president in 1967, he sought to expand and modernize the business
without deviating from his grandfathers Golden Rule. By 1991, L.L. Bean, Inc. was a major cataloger,
manufacturer, and retailer in the outdoor sporting specialty field: Catalog sales in 1990 were $528
million, with an additional $71 million in sales from the companys 50,000 square-foot retail store in
Freeport. Twenty-two different catalogs (often referred to as books by company employees)114
million pieces in allwere mailed that year. There were six million active customers.
The mail-order business had been giving way to telephone orders after the company installed
nationwide 800 service in 1986. By 1991, 80% of all orders came in by telephone.
Major direct-mail competitors included Lands End, Eddie Bauer, Talbots, and Orvis. A 1991
Consumer Reports survey on customer satisfaction with mail-order companies found L.L. Bean
heading the list for overall satisfaction in every category for which they offered merchandise.
In explaining why L.L. Bean had not expanded its retail operations beyond the one store in
Freeport, Leon Gorman contrasted the direct-marketing (catalog) and retail businesses. The two
approaches require very different kinds of management. Mail-order marketers are very analytic,
quantitatively oriented. Retailers have to be creative, promotional, pizzazzy, merchandise-oriented.
Its tough to assemble one management team that can handle both functions. 1
Product Lines
L.L. Beans product line was classified hierarchically (see Exhibit 1). At the highest level of
aggregation were Merchandise Groups: mens and womens accessories, mens and womens
apparel, mens and womens footwear, camping equipment, etc. Within each Group were Demand
Centers; for instance, womens apparel had as Demand Centers knit shirts, sweaters, pants, skirts,
jackets and pullovers, etc. Each Demand Center was further broken down into Item Sequences; for
example, womens sweaters consisted of Midnight Mesa Handknit Cardigans, Indian Point Pullovers,
Lambswool Turtlenecks, and about twenty other products. Item Sequences were further broken
down into individual items, distinguished primarily by color; it was at this item level that forecasts
had to be issued and, ultimately, purchase commitments had to be made.2 About 6,000 items
appeared in one or another of the catalogs that were issued in the course of a year.
1L.L. Bean, Inc.: Corporate Strategy, Harvard Business School Case (581-159), 1981.
2Items were further broken down by size into stock-keeping units, or SKUs.
This was done by applying

standard size-distribution breakdowns. Although an inappropriate distribution could lead to excessive
inventory of some sizes and stockouts of others, management concern was directed to the item level, since there
was no evidence of a better system than assuming that the distribution of demand by size would behave in the
future as it had in the past, and would be indistinguishable from one item to another.
22
L.L. Bean, Inc.
893-003
Items were also classified into three seasonal categories (spring, fall, and all year), and into
two additional categories (new or never out) that described whether the item was a recent or
more permanent member of the companys offerings, and consequently characterized the amount of
historical demand data available for the item.
The Bean Catalogs

The major catalogsspring, summer, fall, and Christmaseach came out in several versions.
A full catalog, running from 116 to 152 pages, went to Beans regular customers. A smaller
prospect catalog was circulated to potential customers; it contained primarily a subset of items
from the full catalog. (Bean identified such prospect customers in a variety of ways, for example,
through the purchase of mailing lists, or by recording recipients of gifts from other Bean customers.)
In addition, a number of specialty catalogsSpring Weekend, Summer Camp, Fly Fishing, etc.
presented items that were unique to that catalog, as well as some items found in the major catalogs.
There was some overlap in circulation: the best customers received almost all the catalogs,
and those customers known, through past purchasing behavior, to be interested in various specialties
might receive an appropriate specialty catalog in addition to the seasonal full catalogs.
Item Forecasting
Each catalog had a gestation period of about nine months, and its creation involved
merchandising, design, product, and inventory specialists. For example, the initial conceptualization
for the Fall, 1991 season began in October, 1990. Preliminary forecasts of total sales for each catalog
were made in December. Product managers developed preliminary item forecasts by book in the
December, 1990 to March, 1991 time frame. Layout and pagination of the books began in January,
1991. Initial commitments to vendors were made in January and February. In the subsequent
months, as the catalogs took shape, item forecasts were repeatedly revised and finally frozen by
May 1. By early July a black-and-white version of the layout was available internally. At this point,
the product managers handed off their product line to the inventory managers.
The completed Fall 1991 catalogs were in the hands of customers around August 1. As the
catalog generated demand, inventory managers decided on additional commitments to vendors,
scheduled replenishments, handled backorders, etc. This catalog remained active through January,
1992; inventory left over at that time might be liquidated, marked down and sold through special L.L.
Bean promotions, or carried over to the next year.
Scott Sklar was a buyer for mens shirts. He described the forecasting process as follows:
Four or five of usmy inventory buyer, some product people, and Imeet to forecast shirt sales by
book. We start by ranking various items in terms of expected dollar sales. Then we actually assign
dollars in accordance with the ranking. Theres discussion, arguments, complaints. People invent
rules of thumb. I say invent, because there arent any good rules of thumb.
We set this up on an Excel spreadsheet. We look at the book forecast and make adjustments
accordingly. We look at the total of forecasted shirt sales and check it for reality. Does it feel good?
Does it make sense? We do it book by book, item by item, and thats how we get an item level
forecast.
Of course, when we add a new item, we have to make a judgment: will this item generate
incremental demand, and if not, from what items is it going to steal demand? And then those items
need to be adjusted accordingly.
23
893-003
L.L. Bean, Inc.
Barbara Hamaluk, a buyer for mens knit shirts, observed that the sum of the item forecasts
for a catalog was often at variance with the dollar target for that book. Usually this roll-up comes in
on the high side, so you try to reduce forecasts on certain items. Or you can just say, if were too high
by 10%, well just slash everything across the board by 10%. We really ought to have an intermediate
level of forecasts at the Demand Center level, reconcile item forecasts with Demand Center forecasts,
and the latter with the book forecast.
Production Commitments
The typical production lead time for most domestic orders was eight to twelve weeks. (Of
course, deliveries against a commitment could be scheduled to conform to the anticipated pattern of
in-season demand.) With some vendors who cooperated with L.L. Beans Quick Response
initiative, it was possible, after observing some early-season demand, to place a second order, which
would be delivered in sufficient time to meet late-season demand. However, with many domestic
and most offshore vendors, lead times were sufficiently long so that it was impractical to place a
second commitment order in the course of the season. (In the remainder of this case, then, discussion
will be limited to these one-shot commitments.)
The commitments were generally not equal in size to the forecasts, but were determined in
two steps as follows: First, historical forecast errors (expressed as A/F ratios the ratio of actual
demand to forecast demand) were computed for each item in the previous year, and the frequency
distribution of these errors was compiled across items.3 The frequency distribution of past forecast
errors was then used as a probability distribution for the as yet unrealized future forecast errors. For
example, if 50% of the forecast errors for new items in the past year had been between 0.7 and 1.6,
then it would be assumed that with probability 0.5, the forecast error for any new item in the
current year also would fall between 0.7 and 1.6. So in such a case, if the frozen forecast for a
particular item were 1,000 units, it was then assumed that with probability 0.5, actual demand for
that item would end up being between 700 and 1,600 units.
Next, each items commitment quantity was determined by balancing the individual items
contribution margin if demanded against its liquidation cost (or value) if not demanded. Suppose,
for example, that an item cost Bean $15, would regularly sell for $30, and could be sold at liquidation
for $10. The gain for selling a marginal unit would be $30 - 15 = $15; the loss for failing to sell the
marginal unit would be the cost less the liquidation value, i.e. $15 - 10 = $5. Accordingly, the optimal
order size should be the 0.75 fractile of the items probability distribution of demand. Suppose the 0.75
fractile of the distribution of forecast errors was 1.3, and the frozen forecast for that item was for 1,000
units. Then the 0.75 fractile of the demand distribution would be 1,000 x 1.3 = 1,300, and Bean would
make a commitment for 1,300 units.
Rol Fessenden expressed concern that the methodology treated the errors associated with all
never out items as equally representative of the forecast errors that might be anticipated for the
forecast demand of any never out item (and similarly for new items). Youd think that the error
distribution for some of our buyers might be tighter than for other buyers, or that the distribution for
womens sweaters might have more dispersion than the distribution for mens footwear, but we cant
find any real differences. Also, Im not entirely convinced that we go about estimating contribution
margin and liquidation cost correctly.
Mark Fasold was worried about the wide dispersion in forecast errors, both for never outs
and new items. He was also concerned about the implications of the methodology: If the cost
3This was done separately for new items and for never outs;
not surprisingly, the historical error

distribution of never outs had less dispersion than that of new items. No other way of segmenting items
had revealed significantly different distributions of forecast errors.
24
L.L. Bean, Inc.
893-003
associated with understocking exceeds the cost of overstocking, which is the usual case here, we end
up committing to more than the frozen forecast. And for new items, about which we obviously
know very little, the excess over the frozen forecast is even greater than for never outs. The buyers
are understandably upset when we commit to more than they forecast; they perceive us as going way
out on a limb for new items.
Exhibit 1
25
26
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