Data Mining Techniques for Optimizing Inventories for

Electronic Commerce
Anjali Dhond Amar Gupta Sanjeev Vadhavkar
Massachusetts Institute of Technology Massachusetts Institute of Technology Massachusetts Institute of Technology
Room E53-311 Room E53-311 Room 1-270
40 Wadsworth Street 40 Wadsworth Street 77 Massachusetts Avenue
617-253-8906 617-253-8906 617-253-6232
adhond@mit.edu agupta@mit.edu vada@mit.edu

ABSTRACT
As part of their strategy for incorporating electronic commerce
1. INTRODUCTION
The past two decades have witnessed a dramatic increase in
capabilities, many organizations are involved in the development
information being stored in electronic format. This surge will be
of information systems that will establish effective linkages with
further compounded by an ever-growing number of organizations
their suppliers, customers, and other channel partners involved in
embracing the paradigm of electronic commerce. The amount of
transportation, distribution, warehousing and maintenance
information in the world is estimated to double every 20 months
activities. These linkages have given birth to comprehensive data
and the size and the numbers of databases are increasing at a still
warehouses that integrate operational data with supplier,
faster pace. The increase in the use of electronic data gathering
customer, channel partners and market information. Data mining
devices, such as point-of-sale devices and remote sensing devices,
techniques can now provide the technological leap needed to
is one factor for this explosive growth.
structure and prioritize information from these data warehouses to
In electronic commerce environments, the rapidly escalating
address specific end-user problems. Emerging data mining
volume of data makes timely and accurate data analysis beyond
techniques permit the semi-automatic discovery of patterns,
the reach of the best human domain expert, even hordes of them
associations, changes, anomalies, rules, and statistically
working day and night. Instead, emerging data mining techniques
significant structures and events in data. Very significant business
offer far superior abilities to discover hidden knowledge,
benefits have been attained through the integration of data mining
interesting patterns and new business rules hidden within huge
techniques with current information systems aiding electronic
repositories of electronic databases. Currently regarded as the key
commerce. This paper explains key data mining principles that
element of the more elaborate process of Knowledge Discovery in
can play a pivotal role in an electronic commerce environment.
Database (KDD), the data-mining paradigm integrates theoretical
The paper also highlights two case studies in which neural
perspectives from the realms of statistics, machine learning and
network-based data mining techniques were used for inventory
artificial intelligence. From the standpoint of technology
optimization. The results from the data mining prototype in a
implementation, it relies on advances in data modeling, data
large medical distribution company provided the rationale for the
warehousing and information retrieval. However, the more
strategy to reduce the total level of inventory by 50% (from a
important challenges lie in organizing business practices around
billion dollars to half a billion dollars) in the particular
the knowledge discovery activity. As organizations gear towards a
organization, while maintaining the same level of probability that
web-enabled economy and increasingly rely on online information
a particular customer’s demand will be satisfied. The second case
sources for a variety of decision support applications, one will
study highlights the use of neural network based data mining
witness a growing reliance on data mining techniques in the
techniques for forecasting hot metal temperatures in a steel mill
electronic commerce space.
blast furnace.
Data mining involves the semi-automatic discovery of
patterns, associations, changes, anomalies, rules, and statistically
Keywords significant structures and events in data. In other words, data
Inventory Optimization, Temporal Data Mining, Data Massaging. mining attempts to extract knowledge from data. Data mining
differs from traditional statistics in several ways: formal statistical
inference is assumption-driven in the sense that a hypothesis is
formed and validated against the data. Data mining in contrast, is
discovery driven in the sense that patterns and hypothesis are
automatically extracted from large data sets. Further, the goal in
Permission to make digital or hard copies of part or all of this work or data mining is to extract qualitative models, which can easily be
personal or classroom use is granted without fee provided that copies are not translated into business patterns, logical rules or visual
made or distributed for profit or commercial advantage and that copies bear representations. Therefore, the results of the data mining process
this notice and the full citation on the first page. To copy otherwise, to
may be patterns, insights, rules, or predictive models that are
republish, to post on servers, or to redistribute to lists, requires prior specific
permission and/or a fee. frequently beyond the capabilities of the best human domain
KDD 2000, Boston, MA USA experts.
© ACM 2000 1-58113-233-6/00/08 ...$5.00

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 In the electronic commerce space, data mining techniques
have the potential of providing companies with competitive
advantages in optimizing their use of information. Potential
applications include the following [16][17][18][19]:
♦ To manage customer relationships by predicting customer
buying habits, calibrating customer loyalty and retention,
analyzing customer segments, target marketing and
promotion effectiveness, customer profitability, customer
lifetime value, and customer acquisition effectiveness.
♦ To enable financial management through analytical fraud
detection, claims reduction, detection of high cost to serve
orders or customers, risk scoring, credit scoring, audit
targeting and enforcement targeting.
♦ To position products by product affinity analysis that shows
opportunities for cross selling, up selling and strategic
product bundling.
♦ To develop efficient and optimized inventory management
system based on Web customer demand predictions.
♦ To implement more efficient supply chains with suppliers
and contractors.
2. CASE STUDIES
2.1 Medicorp – Pharmaceutical Distribution
Company
Large organizations, especially geographically dispersed
organizations, are usually obliged to carry large inventories of
products ready for delivery on customer demand. Inventory
optimization pertains to the problem of how much quantity of
each product should be kept in the inventory at each store and
each warehouse. If too little inventory is carried relative to
demand, unsatisfied customers could turn to competitors. On the
other hand, a financial cost is incurred for carrying excessive
inventory. In addition, some products have short expiration
periods and shelf life and therefore, must be replaced periodically.
Inventories take a lot of money to maintain. The best way to
manage an inventory is through the development of better
techniques for predicting customer demands and managing stock
inventories accordingly. In this way, the size and the constitution
of the inventory can be optimized with respect to changing
demands.
With hundreds of chain stores and with revenues of several
billion dollars per annum, “Medicorp” is a large retail distribution
company. Medicorp revenues exceeded $15 billion from over
4100 stores in 25 states in the United States. Medicorp dispenses
approximately 12% of all retail prescriptions in the United States.
In keeping with its market-leading position, Medicorp is forced to
have a large standing inventory of products ready to deliver on
customer demand. The problem is how much quantity of each
drug should be kept in the inventory at each store and warehouse.
Because of unfulfilled prescriptions, unsatisfied customers may
switch company loyalties, relying on other pharmacy chains for
their needs. On the other hand, Medicorp incurs a financial cost if
it carries excessive inventories. In addition, pharmaceutical drugs
have a short expiration date and must be renewed periodically.
Historically, Medicorp has maintained an inventory of
approximately a billion dollars on a continuing basis, using
traditional regression models to determine inventory levels for
each drug item. The corporate policy of Medicorp is governed by
two competing principles: minimize total inventory and achieve
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highest level of customer satisfaction. The former principle is not
quantified in numerical terms. On the latter issue, Medicorp
strives to achieve a 95% fulfillment level. That is, if a random
customer walks into a random store on a random day for a random
drug, the probability for the availability of the particular item
must be 95%. The figure of 95% is based on the type of goods
that Medicorp carries, and the service levels offered by
competitors of Medicorp for the same items. Medicorp has a
corporate wide data warehouse system that maintains data on what
was sold, at what price, and to whom at each store.
After reviewing various options, and using conventional
inventory optimization techniques, Medicorp adopted a “three-
weeks of supply” approach. This approach involved the regression
study of historical data to compute a seasonally – adjusted
estimate of the forecasted demand for the next three week period.
This estimated demand is the inventory level that Medicorp keeps,
or strives to keep, on a continuing basis. Each store within the
Medicorp chain orders replenishments on a weekly basis and
receives the ordered items 2-3 days later from a regional data
warehouse. Historically, this model has yielded the 95% target for
customer satisfaction.
To find the best solution to the inventory problem, we
analyzed data maintained within the transactional data warehouse
at Medicorp. The Medicorp data warehouse is of the order of
several gigabytes in size. In the modeling phase, we extracted a
portion of the recent data fields, which was deemed to provide
adequate raw data for a preliminary analysis:
♦ Date field – Indicates the date of the drug transaction
♦ NDC number – Uniquely identifies a drug (equivalent to a
drug name)
♦ Customer number – Uniquely identifies a customer (useful in
tracking repeat customers)
♦ Quantity number – Identifies the amount of the drug
purchased
♦ Sex field – Identifies the sex of the customer
♦ Days of Supply – Identifies how long that particular drug
purchased will last
♦ Cost Unit Price – Establishes the per unit cost to Medicorp
of the particular drug
♦ Sold Unit Price – Identifies per unit cost to the customer of
the particular drug
Before adopting neural network based data mining
techniques, preliminary data analysis was utilized to help search
for seasonal trends, correlation between field variables and
significance of variables, etc. Our preliminary data provided
evidence for the following patterns:
♦ Most sales of drug items showed minimal correlation to
seasonal changes.
♦ Women are more careful about consuming medication than
men, indicating that women customers were more likely to
complete the prescription fully than men.
♦ Drug sales are heaviest on Thursdays and Fridays, indicating
that inventory replenishment would be best ordered on
Monday.
♦ Drug sales (in terms of quantity of drug sold) show differing
degrees of variability:
♦ Maintenance type drugs (for chronic ailments) show low
degrees of sales variability.
♦ Acute type drugs (for temporary ailments) show high degrees
of sales variability.
 There is no general theory that specifies the type of neural
network, number of layers, number of nodes (at various layers), or
learning algorithm for a given problem. As such, data mining
analysts must experiment with a large number of neural networks
before converging upon the appropriate one for the problem in
hand. In order to evaluate the relative performance of each neural
network, we used statistical techniques to measure the error values
in predictions. Most major neural network architectures and major
learning algorithms were tested using sample data patterns from
Medicorp. Multi Layer Perceptron (MLP) models and Time Delay
Neural Network (TDNN) models yielded promising results and
were studied in greater detail.
Modeling short time-interval predictions is difficult, as it
requires a greater number of forecast points, shows greater sales
demand variability, and exhibits lesser dependence on previous
sales history. Using MLP architectures and sales data for one class
of products, we initially attempted to forecast sales demand on a
daily basis. The results were unsatisfactory: the networks
produced predictions with very low correlation (generally below
20 %) and very high absolute error values (generally above 80 %).
Hence, modeling for larger time intervals was attempted next.
As expected, forecasting for a week proved more accurate
than for a day and forecasting for one month proved more
accurate than for a week. Indeed, when predicting aggregate
annual sales demand, we obtained average error values of only
2%. Keeping a weekly prediction interval provided the best
compromise between the accuracy of prediction and the
usefulness of the predicted information for Medicorp. The weekly
forecasts are useful for designing inventory management systems
for individual Medicorp stores, while the yearly forecasts are
useful for determining the performance of a particular item in a
market and the overall financial performance of the organization.
The neural network was trained with historic sales data using
two methods: the standard method and the rolling method. The
difference between these two methods is best explained with an
example. Assume that weekly sales data (in units sold) were 10,
20, 30, 40, 50, 60, 70, 80, 90, 100, etc. In the standard method,
we would present the data: “10, 20, 30” and ask the network to
predict the fourth value: “40”. Then, we would present the
network with “40, 50, 60” and ask it to predict the next value:
“70”. We would continue this process until all training data were
exhausted. On the other hand, using the rolling method, we
would present historic data as “10, 20, 30” and ask the network to
predict the fourth value: “40”; then, we would present the network
with “20, 30, 40” and ask it to predict the fifth value: “50”. We
would continue using the rolling method until all the training data
were exhausted.
The rolling method has an advantage over the standard
method in that it produces a greater quantity of training examples
from the same data sample, but at the expense of training data
quality. The rolling method can “confuse” the neural network
because of the close similarity between training samples. Using
the previous example for instance, the rolling method would
produce “10, 20, 30”; “20, 30, 40”; “30, 40, 50”. Each of these
training samples differs from another data set by a single number
only. This minuscule difference may reduce the neural network’s
ability to understand the underlying pattern in the data.
At Medicorp, some items sell infrequently. In fact, some of
the specialized drugs may sell only twice or thrice a year at a
particular store. This lack of sales data is a major problem in
training neural networks. To solve it, we used other methods for
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transformation of data, reuse, and aggregation of data. The one we
found most effective involved changing future data sets with some
known fraction of past data sets. If X[i]’ represents the ith changed
data set, X[i] represents the ith initial data set, X[i-1] represents
the initial (i-1)th initial data set and µ is some numerical factor,
then the new time series can be computed as X[i]’ = X[i] + µ *
X[i-1], X[0]’ = X[0]. The modified time series thus has data
elements that retain a fraction of the information of past elements.
By modifying the actual time series with the proposed scheme, the
memory of non-zero sales items is retained for a longer period of
time, making it easier to train the neural networks with the
modified time series.
As mentioned before, the policies at Medicorp are governed
by two competing principles: minimize drug inventories and
enhance customer satisfaction via high availability of items in
stock. As such, we calibrated the different inventory models using
two parameters: “undershoot” and “days of supply”. The number
of “undershoots” denotes the number of times a customer would
be turned away if a particular inventory model were used over the
“test” period. The “days-of-supply” statistic is the number of days
the particular item in the inventory is expected to last. By using
the latter parameter, one reduces the complexity and allows for
equitable comparisons across different categories of items. For
example, items in the inventory are measured in different ways: by
weight or by volume or by number. If one talked in terms of raw
amount, one would need to take into account different units of
measure. However, the “days-of-supply” parameter allows all
items to be specified in terms of one unit: days. The level of
popularity of the item gets factored into the “days-of-supply”
parameter. While maintaining a 95% probability of customer, the
MLP model reduces “days-of-supply” for items in the inventory
by 66%. On the average, the neural network “undershoots” only
three times (keeping the 95% customer satisfaction policy of
Medicorp).
Our models suggested that, as compared to the “three-weeks
of supply” thumb rule, the level of inventory needs to be
“reduced” for popular items and “increased” for less popular or
unpopular items. This inference appears counter-intuitive at first
glance. However, since fast moving items are already carried in
large amounts, and since they can be replenished at weekly
intervals, one can reduce the inventory level without adversely
impacting the likelihood of availability when needed. This is the
factor that permits significant reduction in the size of the total
inventory, and has been highlighted by a number of observers in
the popular press.
To summarize the effort, we developed the neural network
based data mining model for reducing the inventory at Medicorp
from over a billion dollars worth of drugs to about one-half billion
dollars (reduction by 50%) while maintaining the original
customer satisfaction level (95% availability level).
2.2 Steelcorp – Iron and Steel Company
The blast furnace is the heart of any steel mill. Inside the
blast furnace, the oxygen from the iron oxides is removed to yield
nearly pure liquid iron. This liquid iron, or pig iron, is the raw
material used in the steel plants. As with any product, the quality
of this pig iron can vary. The most important determinants of the
quality are (1) the amount and composition of any impurities, and
(2) the temperature of the hot metal when it is tapped from the
blast furnace [8]. The quality of the pig iron produced is
important in determining how costly it will be to produce steel
from the pig iron, as well as constraining what final types of steel
into which the pig iron can be made. Therefore, it is crucial that
hot metal temperature be maintained within an optimal range of
values [9]. A blast furnace is very difficult to model due to the
complex flow conditions with mass and heat transfer inside. For
many years, blast furnace operators have been aware of the fact
that there are no universally accepted methods for accurately
controlling blast furnace operation and predicting the outcome.
The Hot Metal Temperature and Silicon Content are important
indicators of the internal state of a blast furnace as well as of the
quality of the pig iron being produced. The production of pig iron
involves complicated heat and mass transfers and introduces
complex relationships between the various chemicals used.
This case study presents preliminary results from the use of
Artificial Neural Networks (ANNs) as a means of modeling these
complex inter-variable relationships. The research is based on
three months of operational data collected from the blast furnace
of “Steelcorp”. Steelcorp is one of Asia’s largest manufacturers
of iron and steel and has multiple blast furnaces operating in
tandem at multiple locations. Most of the blast furnaces are state-
of-the-art and automatically collect and store data at periodic
intervals on a number of input and output parameters for future
analysis.
There have been many attempts by researchers to use AI
techniques in order to predict different state variables of the blast
furnace based on measured conditions within the furnace.
However, modeling the relationships between various variables in
the blast furnace has been quite difficult using standard statistical
techniques [5]. The main reason is that non-linearities exist
between the different parameters used in pig iron (hot metal)
production. Production of hot metal in a blast furnace is the result
of complex chemical reactions that scientists have not been able to
model explicitly. Therefore, many have turned to neural networks
in order to predict various blast furnace parameters. For example,
Bulsari and Saxen [5] used feed-forward neural networks when
trying to classify the state of a blast furnace based on the
measurement of blast furnace temperatures. Bulsary et al [9] used
multi layered feed-forward artificial neural networks to predict the
silicon content of hot metal from a blast furnace. Several different
artificial neural network models were tried by Singh et al [7] in
order to predict the silicon content of hot metal using: coke rate,
hot blast temperature, slag rate, top pressure, slag basicity and the
logarithm of blast kinetic energy.
The raw data from the blast furnace was not
consistent/enough for direct use during modeling. Reasons for
this ranged from problems inherent to the data, such as missing or
very anomalous values, to more subtle flaws such as not taking
into account the effect of time lags in the production process.
Several steps were involved in preprocessing the raw data into a
dataset that would be suitable for training an artificial neural
network.
Extremely abnormal data values were adjusted to make the
data more consistent. Values that were more than two standard
deviations from the mean were modified so that they would be
two standard deviations away from the mean. In some cases a
minimum value for a variable was specified. If two standard
deviations below the mean is smaller than the minimum then the
data was adjusted to the minimum value. This process removed
any outliers from the dataset. A major problem with the original
data was inaccurate values of HMT for many of the data points.
HMT can be measured only approximately once every hour while
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the other data points were taken every five minutes. Linear
interpolation between measurements of HMT was used to
approximate values for the missing data points.
The raw data from the blast furnace contained a total of 9100
data points taken every five minutes. This five minute level data
may see some inputs changing rapidly from one value to another,
but since the temperature changes slowly over a longer period of
time these short term changes do not have a noticeably affect on
the output. Domain knowledge from Steelcorp indicated that an
effective unit for considering the data would be in blocks of one
hour. Therefore, groups of twelve data points were averaged to
create one data point, which represented one-hour block. While
hourly averaging of the data improved the predictive ability of the
network, it had a side effect of greatly reducing the number of
data points available for training the networks. The hourly
averaging reduced the number of data points to approximately
760. A moving window technique was used to deter this problem.
The moving window takes the first twelve data points and
averages them, but in the next step it shifts over by a five-minute
interval and averages the new data point with the previous eleven
data points. The window continues to slide one data point at a
time, until the end of the set is reached. This technique allowed
the use of almost the same number of data points as in the original
dataset.
The initial data contained 35 input parameters. Analysis of
the data revealed that some of the input variables were redundant
and others were not useful in predicting HMT or Silicon content.
In order to discover which variables were the most important, a
sensitivity analysis was performed on all of the 35 input variables.
The way this was done was to calculate the correlation coefficient
between each input variable and the corresponding output
variable (HMT). The reasoning is that the higher the correlation
between a particular input and HMT, the more ‘important’ that
particular input variable must be in determining HMT. Therefore,
such a variable should be included in the dataset. Using
correlation relationships and information from the blast furnace
experts at Steelcorp, the number of input variables was narrowed
down from 35 to 11. These 11 variables were: total coke, carbon
oxide, hydrogen, steam, group 1 heat flux, group 2 heat flux,
actual coke injection, % oxygen enrichment, ore/coke ratio, hot
blast temperature (degrees C), charge time for 10 semi charges,
and the previous measured hot metal temperature (HMT).
Two distinct types of data sets were created in order to model
future silicon content. The first type of data set consisted of 38 of
the 39 input/output columns of the five minute interval HMT data
(the only column omitted was the time column). These variables
were used as the inputs in order to predict the lone output
variable, Si%, which is a column that was extracted from hot
metal chemistry data.
Since Si% was measured at a less frequent rate than the HMT
input variables, the addition of the silicon column as the output
column resulted in having large, contiguous regions of the output
variable that had the same, constant value. Therefore, linear
interpolation and hourly averaging were performed. In addition,
the usual practices of implementing the best lags for each input
column, filling of missing values with previous values, and
normalization of each column were also implemented. The second
type of silicon data set was processed in the same manner as
above, but, includes additional variables as inputs. Specifically,
the additional inputs used were taken from the Coke and Sinter
data sets, and include the following: Coke Ash, Coke V.M.,
C.S.R., C.R.I., RDI, CaO, SiO2, MgO, Al2O3, FeO and Fe.
To present some of the key results from the modeling
exercise, prediction results from modeling HMT 2 and 4 hours
into the future are shown below (Figures 1 and 2). Figure 1 shows
the graph of predicted Hot Metal Temperature, two hours ahead of
time, against the observed value. The network with the lowest
mean squared error (MSE) had 19 hidden nodes. A noticeable lag
is present which indicates that the most important variable (as far
as the model is concerned) for predicting future HMT is the
previous known HMT.
Figure 1: HMT 2 Hours Solid - Predicted Dashed -Actual
Figure 2: HMT 4 Hours Solid - Predicted Dashed - Actual
Similar analysis was performed for modeling silicon content.
Preliminary results from the modeling are shown in Figures 3 and
4. From Figures 1-4 and comparing the absolute error values from
the analyses, our results indicate that the addition of coke and
sinter as inputs did not provide any clear advantage in terms of
predicting silicon content. One interesting point to notice is that,
unlike in the HMT case, there is no deterioration in the quality of
silicon predictions as the prediction horizon increases. In
addition, the predictions do not seem to "lag" the actual values.
This is a problem that we had with HMT estimation. This means
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that the networks are not focusing on just the previous silicon
value when predicting into the future.
Figure 3: Silicon Content 2 Hour Network with coke and
sinter as inputs Solid - Predicted Dashed – Actual
Figure 4: Silicon Content 4 Hour Network with coke and
sinter as inputs Solid - Predicted Dashed - Actual
The research group is currently looking at other artificial
intelligence techniques such as genetic algorithms and pattern
matching to control the conditions in the blast furnace. A
prediction can indicate the future condition of the blast furnace
based on the current conditions. This is extremely useful when the
blast furnace operator can alter the current conditions in order to
keep the future conditions within desirable range. In order to
perform the task, the relationships between the variables being
controlled and the variables affecting them must be known. But
some characteristics of the problem make it difficult: 1) each
variable being controlled is affected by a large number of
variables, 2) the relationships between the variables being
controlled and the variables affecting them are non-linear, and 3)
these non-linear relationships change over time. The first step
towards controlling the conditions in a blast furnace involves
finding out which input variables are most influential in
producing an output. Our analysis uses HMT as the output
variable.
Since we have been able to train networks that can predict
HMT with a relatively high degree of accuracy, we now will find
what kind of importance the neural network itself assigns each
input variable when predicting HMT. The neural network will
provide us with some insight into which variables we should pay
special attention to when trying to predict and control HMT. We
calculate the derivative of the output (HMT) with respect to each
input variable using the formulas demonstrated by Takenaga et al
[9] for the case when one hidden layer is present in the neural
network. We have extended their work to the case of neural
networks with two hidden layers. Since the weights of the network
are fixed, each derivative will be a function of the weights and the
input values at the given time. The derivative of the output with
respect to a given input variable depends on the value of that
input variable as well as the values of all the other input variables
at that time. This means that the derivative of HMT with respect
to an input variable will vary over time. This approach is expected
to give us insights into which variables may be more influential in
predicting HMT when compared to others.
3. CONCLUSIONS
With the advent of electronic commerce, the rapid growth of
business databases has overwhelmed the traditional, interactive
approaches to data analysis and created a need for a new
generation of tools for intelligent and automated discovery in
data. The paper presented preliminary data from research efforts
currently underway in MIT Sloan School of Management in
strategic data mining towards that end. Prototype based on these
tools was successful in reducing the total level of inventory by
50% in Medicorp, while maintaining the same level of probability
that a particular customer’s demand will be satisfied.
The paper also highlighted many interesting challenges
within the context of providing neural network based data mining
tools for Inventory control. In neural network based data mining,
the most difficult problems were encountered at the data
preparation stage. The problem of too few and relatively irregular
timing of data points was addressed in multiple ways.
Linearization was used to overcome the erratic frequency with
which the input variables were measured. The concept of “moving
windows” was used to boost the number of data points reduced by
the use of linearization. Both methods are good at resolving the
problems they are intended for, but distort the way the input
parameters are represented in the modeling stage. This is a side
effect which one has to cope with, in situations involving missing
and/or infrequent data.
In the modeling stage, different neural network algorithms
were experimented with, along with different input-hidden-output
node configurations, different randomizing algorithms and
different learning rates. The variations on the number of nodes
and the different algorithms did not produce very different results,
indicating that these factors are not important. Even though in
general, Time-Delay family of neural networks are more powerful
networks in time series analysis because of their ability to capture
time-dependencies in the data set, in this case, they did not
outperform simple Feed-Forward neural networks. For both the
case studies, time-dependencies of the data set were explicitly
defined and compensated in the modeling stage.
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4. CHECKLIST FOR POTENTIAL
BENEFICIARIES
Based on our experience with many data mining projects, we
have the following suggestions to offer for using data mining
techniques for electronic commerce related applications:
Have a clearly articulated business problem and then
determine whether data mining is the proper solution technology.
It might be tempting to use data mining to solve every business
problem related to databases - but some problems are unsuited to
data mining. A question such as "What were my sales from Web
customers in Massachusetts last month?" can be best answered
with a database query or on-line analytical processing tool. Data
mining is about answering questions such as: “What are the
characteristics of my most profitable Web customers from
Massachusetts?” “How do I optimize my inventory for the next
month?” In the electronic commerce space, data mining can be
used effectively to increase market share by knowing who your
most valuable customers are, defining their features and then
using that profile to either retain them or target new, similar
customers.
Have business division(s) be intimately involved in the
endeavor from the beginning. Data mining is gradually evolving
from a technology-driven concept to a business solution-driven
concept. Earlier, information technology consumers were eager to
employ data mining technologies without much regard to its
incumbent business processes and organizational disciplines. Now
business divisions, rather than technology divisions, are
spearheading the data mining efforts in major corporations.
Understand and deliver the fundamentals. At the heart of
any data mining effort, there must be a business process. No
amount of technology firepower can take its place. The
fundamentals of the business must be incorporated seamlessly in
the data mining effort. For example, it may be important to keep
in mind that Web customers are different from non-Web
customers; therefore, any data mining results derived from
analyzing an entire customer base may not be applicable to a web-
customer base. In fact, data mining tools can be used to model the
differences in the two types of customer bases thereby creating a
more effective experience for the customer.
Have your technology folks be involved too. Software
vendors are responding to the technology-to-business migration
by growing emphasis on one-button data mining products.
Vendors can repackage data mining tools, enhancing their
graphical user interface and automating some of their more
esoteric aspects. However, it still falls on the analyst to acquire,
clean, and feed data to the software; make dynamic selection of
appropriate algorithms; validate and assimilate the results of the
data mining runs; and generate business rules from the patterns in
the data. Most of the operational complexity, time consumption
and potential benefits of data mining lie in performing these steps
and performing them well.
5. ACKNOWLEDGMENTS
The authors would like to thank various members of the Data
Mining research group at the Sloan School of Management for
their help in building training data for the ANNs and testing
various ANN models. Proactive support from the top management
of Medicorp and Steelcorp throughout the research is greatly
appreciated.
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