Assessing the Profit Impact of ARIMA and Neural Network Demand Forecasts in Retail Inventory Replenishment

Abstract

This study investigates the integration of demand forecasting and inventory replenishment strategies to enhance retail profitability. A deterministic optimal replenishment model is utilized to analyze the predictive performance of various neural network architectures and ARIMA models using real sales data. The predictive accuracy and subsequent influence on optimal firm profits over a multi-period planning horizon is assessed. The Integer Programming model devised optimizes daily replenishment across multiple retail routes, taking into account sales revenue, supply costs, inventory holding, sales loss, and transportation expenses. The study is distinctive in its dual assessment: it evaluates both the accuracy of forecasting methods and their direct impact on profitability through systematic inventory decisions. Neural network architectures selected for minimizing error in product sales predictions have 6% lower mean squared error compared to Akaike Information Criterion minimizing ARIMA models. For longer horizon predictions necessary in performance gap grows larger, e.g., with %60 difference for predictions 15 days ahead. Predictions reflect as 1.6% higher profits on average, when neural network predictions and more efficient longer planning horizons of the optimization model are preferred. Planning 30 days ahead, optimizing with neural network predictions elicits 2.3% higher profits compared to profits attainable based on ARIMA predictions. Our findings illustrate how different forecasting methods can affect firm profitability by shaping inventory replenishment strategies. By merging mathematical optimization with time series forecasting, this research provides a comprehensive evaluation of how advanced predictive technologies can enhance retail inventory practices and improve profitability.