Demand Forecasting Using a Hybrid Model Based on Artificial Neural Networks: A Study Case on Electrical Products

Abstract

Purpose: This work aims to evaluate demand forecasting models to determine if using exogenous factors and machine learning techniques helps improve performance compared to univariate statistical models, allowing manufacturing companies to manage demand better. Design/methodology/approach: We implemented a multivariate Auto-Regressive Moving Average with eXogenous input (ARMAX) statistical model and a Neural Network-ARMAX (NN-ARMAX) hybrid model for forecasting. Later, we compared both to a standard univariate statistical model to forecast the demand for electrical products in a Colombian manufacturing company. Findings: The outcomes demonstrated that the NN-ARMAX model outperformed the other two. Indeed, demand management improved with the reduction of overstock and out-of-stock products. Research limitations/implications: The findings and conclusions in this work are limited to Colombian manufacturing companies that sell electrical products to the construction industry. Moreover, the experts from the company that provided us with the data also selected the external factors based on their own experiences, i.e., we might have disregarded potential factors. Practical implications: This work suggests that a model using neural networks and including exogenous variables can improve demand forecasting accuracy, promoting this approach in manufacturing companies dealing with demand planning issues. Originality/value: The findings in this work demonstrate the convenience of using the proposed hybrid model to improve demand forecasting accuracy and thus provide a reliable basis for its implementation in supply chain planning for the electrical/construction sector in Colombian manufacturing companies.