Big data analytics for supply chain demand forecasting

Term Paper
Business analytics
Instructor – Aditya Maheswari

Submitted by
Goutam Panigrahi
Roll – 2204107023
MSDSM – Batch 2
Abstract

Effective management of modern global supply chains depends on balancing demand and

supply by leveraging data analytics to generate intelligent forecasts and insights that capture

market uncertainties. This paper reviews applications of predictive analytics techniques,

especially machine learning algorithms, for demand forecasting across supply chain planning

and operations. A critical analysis highlights that while neural networks, time series and

regression models have been extensively used across industries, research gaps persist around

benchmarking different methods and assessing limitations arising from data unavailability and

quality issues. Emergent omni-channel distribution and direct-to-consumer business models

also need focus. Interestingly, predictive analytics adoption in closed loop supply chains to

enable circular economy practices is still nascent and offers scope for future studies.

Introduction

Supply chain management involves coordination of producers, distributors, transporters,

warehouses and retailers to deliver products and services that satisfy customer demand [1].

Effective supply chain strategies necessitate balancing supply-side capacities and inventory

holdings with demand to achieve twin outcomes of efficiency and responsiveness [2].

However, volatility and uncertainties in today’s dynamic markets poses challenges for supply

chain planning. Forecasting customer requirements is critical but complex due to fluctuations

arising from economic cycles, competition moves, promotions, innovations and evolving

consumption patterns [3]. Supply-demand mismatches propagate as bullwhip distortions

causing stockouts or excess stocks across supply networks. Poor demand predictions misguide

critical decisions around capacity planning, production scheduling and inventory management

leading to suboptimal allocation of expensive resources.

Advances in data capture, communication and computing have enabled leveraging analytics to

extract insights from voluminous supply chain data for fact-based decision making [4].

Specifically, machine learning provides intelligence to uncover complex patterns and

relationships between demand drivers and outcomes. Predictive analytics facilitates learning

from historical data to arrive at reliable forecasts that continuously adapt responding to

changing market landscapes [5]. However, despite growing research on applying big data

analytics in different supply chain contexts, a consolidated view specifically investigating

machine learning applications in demand forecasting is missing.

Accordingly, this paper examines the use of predictive analytics and machine learning

algorithms for enhancing demand forecasts to improve supply chain planning and inventory

control. The specific objectives are:

1. Provide an overview of supply chain data sources and demand analytics approaches

2. Critically review techniques adopted and supply chain contexts of application

3. Identify limitations impacting forecast accuracy

4. Highlight gaps in literature and outline future research avenues

The study contributes by consolidating dispersed research on employing predictive analytics

in supply chain demand forecasting. Managerial insights obtained should guide application of

appropriate machine learning methods for enhancing predictive capabilities across supply
chain tiers accounting for data and context specifics. The critical analysis also brings out niche

areas for advancing analytical rigor to push the frontiers of knowledge.

Supply Chain Data Sources

Information permeates modern supply chains as orders, inventory reports, invoices and

shipment notices flow both upstream from customers to suppliers and downstream from

production scheduling systems to logistics providers [6]. Table 1 summarizes the common

supply chain data generators. The volume, variety and velocity at which this unstructured and

semi-structured data gets created provides abundant opportunities for analysis [7]. However,

veracity issues due to inconsistencies, latency and bias can affect reliability.

Table 1: Supply Chain Data Sources

Data Source Type Volume Velocity Variety Veracity

Customer orders Structured High High Low High
Sales transactions Structured High High Medium High
Retail channel data Structured High Medium Low Medium
Inventory levels Structured High Medium Low High
Semi-
Procurement/Sourcing Medium Medium Medium Medium
structured
Production planning Structured High Medium Low High
Semi-
Logistics tracking High High Medium Low
structured
EDI/XML Messages Structured Medium Medium Low High
Social media Unstructured High High High Low
Call center records Unstructured Low Medium Medium Medium
Supplier ratings Unstructured Low Low Medium Medium
Market research Unstructured Low Low High Low

Tracking technologies like RFID and sensors coupled with internet-of-things provide fine-

grained monitoring of material, vehicle and product flows enabling analysis of streaming data
[8]. In contrast, scanner data, inventory records and ERP databases have lower velocities.

Variety arises due to multiple tier-1, tier-2 suppliers across global networks. Unstructured

public data from social media, reviews and forum discussions provides voice-of-the-customer

insights. Integrating and analyzing such heterogeneous data facilitates holistic insights for

improved decision making.

Demand Forecasting Approaches

Demand forecasts estimate future customer order volumes over target planning horizons to

align supply chain capacities and inventory holdings [9]. Statistical techniques like weighted

moving averages have limitations dealing with promotions, stock keeping unit (SKU)

proliferation and short product lifecycles [10]. Computational advances have enabled

employing machine learning algorithms leveraging big data to uncover hidden multivariate,

non-linear demand interdependencies missed by traditional models.

Table 2 summarizes commonly used predictive analytics techniques for demand forecasting.

Broadly, there are two categories:

1. Supervised Learning: Labelled historical demand data allows training predictive

models mapping input conditions to corresponding realized demand. Time series analysis

detects temporal patterns, trends and seasonality. Regression modeling relates causal factors

like price, promotions, GDP growth to demand. Neural networks can model complex nonlinear

relationships between inputs and outputs.

2. Unsupervised Learning: Where input-output relationships are unclear, unsupervised

algorithms can sift through unlabeled data to uncover intrinsic structures among demand
patterns. Clusters of customers with similar behavior can be identified using segmentation

techniques. Association rule mining reveals interesting affinities and sequences in purchase

data.

Reinforcement learning allows models to incorporate decision outcomes to dynamically

improve predictions. While data-driven algorithms provide intelligence to adjust forecasts

responding to market changes, uncertainties from unmodeled factors can reduce accuracy. In

practice, hierarchical forecast reconciliation and expert judgment adjustments are still

employed. Optimization, simulation and prescriptive analytics can further bolster supply chain

resilience.

Table 2: Machine Learning Techniques for Demand Forecasting

Technique Logic Advantages Limitations

Handles Needs
Analyze time-
time stable long-
Time Series indexed demand
dimension term
data for trends
well patterns

Explains
Presumes
Map causal input-
Regression linear
factors to demand output
behaviors
correlations

Tailored
Quality
Group similar forecasts
Clustering affected by
demand patterns for
outliers
segments

Model nonlinear
Neural Adapts to Complex
demand
Networks volatility architecture
interdependencies

Incorporate
Reinforcement decision Dynamic Data
Learning outcomes to training hungry
improve
Review of Predictive Analytics Applications

Examining research on predictive analytics adoption for demand sensing and shaping

highlights the findings in Table 3 indicating author, technique, performance metrics, and

industry application. There is significant research using neural networks, regression analysis

and classical time series models across various sectors including retail, automotive, electronics

and industrial components, demonstrating improved accuracy over Naïve or moving average

benchmark methods. Villegas et al. [11] even explored using consumer science hedonic

regression approaches typically used for sensory acceptance testing to predict demand trends

for fast moving consumer goods. Da Veiga et al. [12] assessed multiple methods on a Brazilian

food retailer dataset, finding that the hybrid Holt-Winters ARIMA model outperformed

individual methods and simple averages across different product categories. Thomassey’s [13]

case study in apparel forecast Watson’s exponential smoothing, concluding it is valuable for

short lifecycle products with temporary sales spikes.

However, there is limited work around predictive analytics catering to emergent omnichannel

environments encompassing brick-and-mortar, online and hybrid routes-to-market with

intertwined substitution effects. The shift towards direct-to-consumer business models among

digital savvy brands also demands focus evaluating upside revenue forecasts and downside risk

assessments of business plan projections. Additionally, though inventory optimization has

received attention in literature, approaches aligning new product introduction, ramp-down and

flexibility in supply chain strategy response to demand sensing are underexplored from

analytical perspectives.
Surprisingly, Table 3 also highlights negligible research on leveraging predictive analytics

capabilities specifically for enabling circular economy initiatives through closed loop supply

chains to recover, refurbish and reuse products after end-of-use. Advances in IoT devices and

product traceability allow collecting field data to assess reliability, durability and reuse value

streams for sustainable resource efficiency [14]. This can inform optimal remanufacturing

make/buy decisions, inventory holdings of recoverable modules and cores, and profitability

from aftermarket and reconditioned equipment sales leveraging analytical insights [15, 16].

Table 3: Review of Literature on Predictive Analytics in Demand Forecasting

Study Technique Metrics Application Area

KNN,
Nikolopolous, 2016 [17] MAPE Auto spare parts
Regression
Thomassey, 2010 [13] SES, Croston MAD Apparel retail
Gaur et al., 2015 [18] KNN MAE Retail SCM
Amirkolaii et al., 2017 [19] ANN (BP) MSE Aerospace spares
SVM, ANN, CPG retail
Chen et al., 2007 [20] NRMSE
GA optimization
Chi & Ersoy, 2007 [15] ELM, WNN MABE Remanufacturing
Blackhurst et al., 2018 [16] Automotive
Bias, Error
APS remanufacturing
Ramos et al., 2015 [21] ARIMA,SES sMAPE Retail analytics
Tourism demand
Choi et al., 2014 [22] meta-learning RMSE
sensing

Though fuzzy systems, genetic algorithms and support vector machines have shown promising

results, hybrid enriched models blending statistical, machine learning and optimization

approaches should be researched further to exploit individual strengths while mitigating

limitations [23]. Meybodi [24] observes that lack of benchmarks on common public datasets

inhibits comparative assessment of the plethora of algorithms proposed. Very few studies test

across alternative competitive methods or large samples. Availability of processed curated data

repositories can facilitate standardized evaluations across techniques and contexts.

Discussion: Gaps and Future Research Directions

Predictive analytics adoption for demand sensing and shaping planning in supply chain

programs have gained prominence owing to big data proliferation. However, some issues merit

highlighting:

Difficulties in Algorithm Selection: The array of choices among predictive modeling methods

poses selection challenges. There are no clear guidelines mapping particular demand contexts

or product characteristics to appropriate techniques. Development of an application decision

matrix can structure algorithm choices based on data availability, variability, seasonality and

completeness. Model selection protocols considering economics of required sampling, break-

even forecasting improvements, and ecosystem compatibility also need research.

Uncertainties Affect Accuracy: Machine learning depends heavily upon available training data.

However, unknown latent demand drivers, Bass model amplification effects during product

diffusion, outliers and structural breaks where relationships change can affect reliability [25].

Combining data-driven forecasts with expert judgments to adjust outlier predictions within

confidence intervals is prudent. Prescriptive analytics capabilities can help assess uncertainties

and supply chain resilience through computational scenario analysis methods [26].

Aftermarket Remanufacturing Planning: Growing environmental regulations prioritize product

stewardship and circular economy principles to recover and reuse products after end-of-use.

However, variability, uncertainty and lack of real-time item-level traceability data across

reverse logistics hampers accurate predictive analytics for aftermarket spare parts planning,
used product valuation and remanufacturing optimization [27]. Sensor monitoring advances

provide opportunities to address analytical challenges around assessing core return

volumes/quality, cannibalization, asset recovery value optimization and remanufacturing

scheduling [28].

Omnichannel Distribution Trends: Proliferation of online, mobile, spreadship and pop-up

alternatives result in intertwined substitution effects altering purchase incidence, customer

journey complexity and cross-price elasticities that legacy demand sensing systems cannot

holistically capture [29]. Though initial attempts at developing multi-channel demand models

have been proposed, significant research integrating econometric perspectives with data

science methods has potential to enhance performance attribution, inventory positioning and

pricing optimizations. Reimagining demand analytics itself from ad-hoc statistical forecasting

towards continuous probabilistic predictive intelligence powered by reinforcement learning

merits exploration [30].

In summary, burgeoning solution ecosystems like AI/ML model marketplaces, data lakes and

visualization tools heighten urgency for analytical competencies around predictive analytics to

shape demand planning disciplines. Keeping abreast with leading edge data science

innovations can equip supply chain practitioners navigate technological disruptions in

hypercompetitive business environments.

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