An Explainable Machine Learning Model for Material Backorder Prediction in Inventory Management

Abstract

Global competition among businesses imposes a more effective and low-cost supply chain allowing firms to provide products at a desired quality, quantity, and time, with lower production costs. The latter include holding cost, ordering cost, and backorder cost. Backorder occurs when a product is temporarily unavailable or out of stock and the customer places an order for future production and shipment. Therefore, stock unavailability and prolonged delays in product delivery will lead to additional production costs and unsatisfied customers, respectively. Thus, it is of high importance to develop models that will effectively predict the backorder rate in an inventory system with the aim of improving the effectiveness of the supply chain and, consequentially, the performance of the company. However, traditional approaches in the literature are based on stochastic approximation, without incorporating information from historical data. To this end, machine learning models should be employed for extracting knowledge of large historical data to develop predictive models. Therefore, to cover this need, in this study, the backorder prediction problem was addressed. Specifically, various machine learning models were compared for solving the binary classification problem of backorder prediction, followed by model calibration and a post-hoc explainability based on the SHAP model to identify and interpret the most important features that contribute to material backorder. The results showed that the RF, XGB, LGBM, and BB models reached an AUC score of 0.95, while the best-performing model was the LGBM model after calibration with the Isotonic Regression method. The explainability analysis showed that the inventory stock of a product, the volume of products that can be delivered, the imminent demand (sales), and the accurate prediction of the future demand can significantly contribute to the correct prediction of backorders.