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A Comprehensive Guide to Applying Machine Learning in Supply Chain


Trinh Nguyen

Sep 12, 2023

The supply chain industry has taken on increased importance as the backbone of global commerce. It encompasses the entire process of delivering goods and services from the origin point to the end consumer. Efficient supply chain management will constructively optimize operations, reduce costs, and meet customer demands.

In fact, this initial industry is becoming extremely complex due to globalization, consumer demands, and efficiency requirements. To navigate these challenges, many organizations are turning to blockchain, data science, artificial intelligence, especially machine learning, and the Internet of Things (IoT) to transform supply chain management.

In this article, we’ll discuss the challenges supply chains are facing and how they overcome these difficulties with the help of machine learning. We’ll also go through machine learning use cases as well as outline steps to start implementing machine learning in supply chain.

Let’s get the ball rolling.

Major Supply Chain Challenges

Major Supply Chain Challenges

Logistics and supply chains are responsible for the smooth flow of goods from manufacturers to consumers. Despite its important role in meeting consumer demands and driving economic growth, the supply chain still faces multiple challenges.

Demand Volatility

The inherent volatility of consumer demand is one of the most challenging factors in a supply chain cycle. Market trends, consumer preferences, and external factors like economic conditions and global events can cause rapid and unpredictable fluctuations in demand.

This volatility prevents companies from accurately forecasting needs and planning inventory levels effectively. Consequently, businesses often grapple with stockouts, leading to dissatisfied customers or overstocking, resulting in increased carrying costs.

Inventory Management

You may not notice, but supply chain professionals often struggle to balance inventory levels. They must maintain adequate stock levels to meet demand without holding excessive inventory.

Overstocking ties up capital and storage space, while understocking can lead to lost sales and damage a company’s reputation. Managing inventory efficiently is crucial for optimizing costs and ensuring customer satisfaction.

Complex Networks

Globalization brings opportunities but also has led to increasingly complicated supply chain networks. Companies need to collaborate with multiple suppliers, manufacturers, and distributors across different geographical regions.

This complexity introduces challenges related to coordination, communication, and risk management. Supply chains should manage a vast and intricate network of partners while ensuring timely deliveries and quality standards maintenance.

Data Overload

The digital age has ushered in an era of data abundance. Every step in the supply chain generates a lot of data, from production and transportation to managing inventory and customer feedback.

Although data is a valuable resource, it can quickly become overwhelming without the right tools and strategies to harness the potential. Extracting actionable insights from this deluge of information is essential for informed decision-making.

Risk Management

Supply chain disruptions arise from various sources. Natural disasters, geopolitical events, and unexpected supply chain interruptions, just to name a few.

Effective risk management aims to ensure business continuity. You need to identify potential risks, develop contingency plans, and implement resilient supply chain strategies to minimize their impact.

What Is Machine Learning in Supply Chain?

Machine learning in supply chain means applying artificial intelligence to analyzing data, learning from it, and making predictions or decisions without being explicitly programmed. Machine learning algorithms can process historical, real-time, and external factors.

By leveraging machine learning, a subset of artificial intelligence, professionals can gain valuable insights into various aspects of the supply chain. For example, demand forecasts, inventory management, transportation optimization, supplier selection, and risk management.

7 Use Cases of Machine Learning in Supply Chain

Use Cases of Machine Learning in Supply Chain

Artificial intelligence and machine learning algorithms enable supply chain professionals to harness data science and automation power to optimize operations and improve decision-making. The following are common business use cases and how machine learning is revolutionizing the industry.

#1 Demand Forecasting

Accurate demand forecasting allows products to be available when and where they are needed.

Machine learning algorithms analyze historical sales data, market trends, seasonality, and external factors like weather to make more precise predictions. This reduces stockouts and overstocking, ultimately improving customer satisfaction and cost efficiency.

#2 Inventory Management

Optimizing inventory levels is a delicate balance. Machine learning models continuously monitor demand patterns, supplier lead times, and production schedules to adjust inventory levels and reorder points in real time. This dynamic approach minimizes carrying costs while ensuring product availability.

#3 Route Optimization

Transportation costs can significantly influence a company’s bottom line. Higher fees will directly increase a company’s expenses, such as shipping, freight charges, fuel, maintenance, and insurance. Plus, when transportation costs rise, companies may find it challenging to maintain their profit margins.

Machine learning algorithms analyze delivery locations, traffic conditions, and vehicle capacity to optimize transportation routes. This reduces fuel consumption, delivery times, and overall logistics expenses.

#4 Quality Control

Maintaining product quality is crucial, especially in the food and pharmaceutical industries. These businesses deal with products that directly impact human health and safety. Any compromise in quality can lead to severe consequences, including illness or even loss of life.

Machine learning-powered image recognition and sensor technology come in handy to detect defects or anomalies in real time. As a result, only high-quality products reach consumers.

#5 Supplier Management

Supplier performance creates a smooth supply chain. When suppliers consistently meet or exceed performance expectations, it leads to a reliable and uninterrupted flow of materials or products.

In this case, machine learning models assess supplier data, including delivery times, quality, and pricing, to identify potential issues or disruptions early. This proactive approach mitigates risks and maintains a reliable network of suppliers.

#6 Demand Sensing

Traditional linear supply chain forecasting models often struggle to adapt to sudden changes in demand. The main reason is they typically rely on historical data to make predictions. These models assume the future will follow patterns and trends similar to the past. However, differences in demand can disrupt these patterns, rendering the historical data less relevant or misleading.

When it comes to machine learning in supply chain, demand sensing provides immediate insights into demand fluctuations. This allows supply chain managers to make agile decisions and respond rapidly to unexpected shifts in the market.

#7 Warehouse Automation

The rise of e-commerce and consumer expectations for fast and accurate order fulfillment forces warehouses to handle larger volumes of orders. Besides, manual storage and retrieval of goods can be inefficient and require more space than necessary.

ML-driven robots and drones transform supply chain management and warehouse operations in particular. These autonomous systems are adopted to optimize the placement of goods, facilitate efficient picking and packing, and reduce human error. Not only will the warehouse increase efficiency, but it also reduces labor costs.

From Theory to Practice: Start Using Machine Learning for Supply Chain

Start Using Machine Learning for Supply Chain

Implementing ML in supply chain management can be a complex process that requires a machine learning pipeline with careful planning and execution. Follow these steps in a disciplined manner to get started with supply chain machine learning.

Step 1 – Collect and Prepare Data

The first step of implementing supply chain machine learning is to gather relevant data from various sources within your organization. This database contains historical sales information, inventory levels, and transportation records. Additionally, it’s highly recommended to get external data sources such as weather patterns, economic indicators, and market trends.

Quantity still matters, but we need to pay attention to quality. Inaccurate or incomplete data can lead to flawed predictions and decisions. Ensure that the data is accurate, complete, and well-structured.

Particularly, data integration tools and platforms are of indispensable necessity to facilitate the aggregation and harmonization of data. They take care of the basics of verifying a unified dataset for analysis.

Step 2 – Select Models

Once the dataset is ready, it’s time to pick machine learning algorithms and models. Common algorithms for supply chain applications will cover linear regression, decision trees, neural networks, and time-series forecasting models.

Then, tailor the chosen algorithm to your specific supply chain requirements. This may involve parameter tuning and feature engineering to improve model accuracy.

Step 3 – Train and Validate the Machine Learning Model

The next stage in the process is using historical data to train your machine learning models. You need to feed the algorithm with labeled data (input and corresponding output) to help it learn patterns and relationships.

During the training, employ cross-validation techniques to assess the model’s performance and prevent overfitting. They can verify the model’s ability to generalize effectively to unfamiliar data.

Step 4 – Integrate to Your Systems

After training models, integrate the machine learning solutions into your existing supply chain management systems. This is when your IT department demonstrates its functionality to make sure data flows between systems run smoothly.

Still, you have to guarantee that your machine learning models can access and analyze real-time data, allowing for timely decision-making and adaptation to changing conditions.

Step 5 – Monitor and Improve Continuously

Last but not least, examine the quality of work with a robust monitoring system. It’s well thought out to track the performance of machine learning models instantly. This includes monitoring key performance indicators (KPIs) and model accuracy.

Feedback will strengthen the bonds between teams. Establish a feedback loop between supply chain professionals and data scientists. This enables adjustments and refinements to the machine learning models based on real-world supply chain dynamics.

In terms of model retraining, periodically retrain machine learning models with new data to keep them up-to-date and accurate. Supply chains are dynamic, and models should adapt accordingly.

Tips on Using Machine Learning in Supply Chain

As mentioned, successful implementation of machine learning in supply chain management requires a strategic approach and adherence to best practices. These are essential tips to help you maximize the benefits of machine learning.

Start Small and Focus

Roll out small-scale pilot projects to test the feasibility and advantages of machine learning in your specific supply chain processes. Beginning small lets you learn and iterate without committing significant resources upfront.

Furthermore, think of critical areas within your supply chain where machine learning can make the most impact. Whether it’s demand forecasting, inventory management, or route optimization, prioritize the processes that can benefit the most from data-driven improvements.

Invest in Data Quality

Take high-quality data into account because it’s the foundation of successful ML implementations. Invest in data cleansing, normalization, and validation processes to ensure your models are fed accurate and reliable data.

You can also establish data governance practices to maintain data quality over time. Create clear data collection, storage, and sharing guidelines, and involve relevant stakeholders in data management.

Collaborate Cross-Functionally

Effective collaboration empowers machine learning solutions to align with business objectives and are seamlessly integrated into existing processes. Prior to implementing, form multidisciplinary teams of data scientists, supply chain experts, IT professionals, and business leaders.

Bear in mind to foster open and clear communication among team members. Supply chain professionals should convey their domain expertise, while data scientists can explain the technical aspects of machine learning models and their implications.

Stay Informed and Adaptive

The machine learning field is rapidly evolving. This requires you to stay informed about the latest advancements, tools, and best practices. Supply chain professionals can attend conferences, workshops, and webinars to keep your team up to date.

On top of that, be prepared to adapt and iterate. Supply chain dynamics changes and machine learning models may need adjustments to remain effective. You must maintain an agile mindset that embraces change and improvement.

Regulatory Compliance

Depending on industry and geographical location, you must understand and comply with data privacy regulations, such as GDPR or HIPAA. Your machine learning practices need to align with legal and ethical standards for data handling.

Maintain transparency in how you use customer data. You can clearly communicate data usage and privacy policies to build trust with customers and partners.

Scalability and Long-Term Vision

Plan for scalability as soon as possible as you gain experience and see positive results from machine learning initiatives. Look at how you can expand machine learning applications to other areas of your supply chain for broader benefits.

Meanwhile, develop a long-term vision for the machine learning role in your supply chain. You’ll need to know ML’s ability to contribute to your strategic objectives and long-term sustainability.

Ready for Supply Chain Automation?

Machine learning potentially revolutionizes the logistics and supply chain industry by addressing its challenges and enhancing efficiency.

Organizations can leverage machine learning to optimize their supply chain operations and gain a competitive edge in the ever-evolving marketplace. You need to understand its importance, explore various use cases, and follow best practices to achieve this.

As one of the leading artificial intelligence consulting services in Vietnam, Neurond utilizes advanced technology and employs state-of-the-art machine learning techniques to deliver accurate and reliable results. We offer customization options, allowing your organization to tailor the models to your specific needs. This ensures that the insights derived are relevant and actionable.

Finding a machine learning consulting partner for your supply chain businesses? Look no further! Drop us a line via contact@neurond.com to kick off your machine learning projects.