AI-Driven Demand Forecasting and Inventory Optimization in Supply Chain Management: Enhancing Efficiency and Reducing Operational Costs

Abstract

Background: In this study, the increased complexity of today supply chains and explain why conventional forecasting and inventory management techniques are inadequate in today's dynamic and uncertain market conditions. As globalization and data increase, AI has become a gamechanger in delivering better demand forecasting and inventory management, in turn driving a better operation and cost savings. Objectives: This study seeks to assess the performance of AI-based demand forecasting models combined with inventory optimization methods on improving the overall performance of the supply chain. Methods: A quantitative, data-driven methodology was employed, and secondary data were used, including historical demand, inventory levels, and other external data that included seasonality and economic indicators. Demand forecasting models: Advanced machine learning and deep learning models such as Long Short-Term Memory (LSTM), Random Forest and Gradient Boosting were used for demand forecasting. The results of the forecasts were fed into an inventory optimization system using reinforcement learning for dynamic decision-making. Standard deviations like Mean Absolute Error (MAE), Root Mean Square Error (RMSE) and Mean Absolute Percentage Error (MAPE) were used to measure the model's performance along with cost-performance analysis. Results: The accuracy of the prediction is significantly higher in AI-based models, especially the LSTM model, than the traditional models, which decreases the errors of the prediction and enhances its responsiveness. AI-powered inventory optimization resulted in significant savings on inventory holding and shortage/cost of order, and improved service levels and inventory stockout rates. The use of external data had yet further improved predictive performance. 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