Dynamic Model Selection Based on Demand Pattern Classification in Retail Sales Forecasting

Abstract

Many forecasting techniques have been applied to sales forecasts in the retail industry. However, no one prediction model is applicable to all cases. For demand forecasting of the same item, the different results of prediction models often confuse retailers. For large retail companies with a wide variety of products, it is difficult to find a suitable prediction model for each item. This study aims to propose a dynamic model selection approach that combines individual selection and combination forecasts based on both the demand patterns and the out-of-sample performance for each item. Firstly, based on both metrics of the squared coefficient of variation (CV2) and the average inter-demand interval (ADI), we divide the demand patterns of items into four types: smooth, intermittent, erratic, and lumpy. Secondly, we select nine classical forecasting methods in the M-Competitions to build a pool of models. Thirdly, we design two dynamic weighting strategies to determine the final prediction, namely DWS-A and DWS-B. Finally, we verify the effectiveness of this approach by using two large datasets from an offline retailer and an online retailer in China. The empirical results show that these two strategies can effectively improve the accuracy of demand forecasting. The DWS-A method is suitable for items with the demand patterns of intermittent and lumpy, while the DWS-B method is suitable for items with the demand patterns of smooth and erratic.