A Robot Will Do the Stock Taking

Posted on 20th June 2017

Welcome to the Business Empathy Forum and thank you for your visit. In this post I highlight a recent article in ‘The Economist’ from the frontier of artificial intelligence in business. Otto, a German e-commerce firm, has figured out how to use AI to predict inventory levels and dramatically reduce product returns.

A New Job for AI in the Workplace

We know that Amazon has leveraged Big Data and for years now, analyzing information to understand preferences, recommend products, and personalize websites for customers. Now Otto is blazing a trail by moving beyond the customer management function to leverage AI to directly reduce costs. “Its conventional data analysis showed that customers were less likely to return merchandise if it arrived within two days. Anything longer spelled trouble: a customer might spot the product in a shop for one euro less and buy it, forcing Otto to forgo the sale and eat the shipping costs. But customers also dislike multiple shipments; they prefer to receive everything at once. Since Otto sells merchandise from other brands, and does not stock those goods itself, it is hard to avoid one of the two evils: shipping delays until all the orders are ready for fulfillment, or lots of boxes arriving at different times.”

Rather than rely on marginal improvements in human forecasting of inventory needs, Otto leverages a deep-learning algorithm that can analyze billions of past transactions and hundreds of variables to predict what customers are going to buy in the following week. This type of analysis would be far beyond human capabilities. “The AI system has proved so reliable – it predicts with 90% accuracy what will be sold within 30 days – that Otto allows it automatically to purchase around 200,000 items a month from third-party brands with no human intervention. It would be impossible for a person to scrutinise the variety of products, colours and sizes that the machine orders.” Please note: the AI system automatically makes about 200,000 purchases per month, with no human intervention. That is news, ladies and gentlemen.

The efficiency gains and bottom-line impact are significant for the business, and there is also a positive environmental impact related to better inventory forecasting: “Overall, the surplus stock that Otto must hold has declined by a fifth. The new AI system has reduced product returns by more than 2m items a year. Customers get their items sooner, which improves retention over time, and the technology also benefits the environment, because fewer packages get dispatched to begin with, or sent back.”

An encouraging insight from this example is that the use of AI doesn’t necessarily imply that human jobs will be lost. There is a much concern these days about robots and AI ‘replacing’ the human workforce, but this Otto story shows AI making existing processes – and people – more efficient. We’ll keep an eye on this trend.

Good luck, and until next time…