Scenario: Markdown avoidance optimization
IBM® Sterling Intelligent Promising allows you to optimize markdown avoidance with the help of AI-powered models. Your business goal is to keep just enough merchandise in the inventory to avoid markdown prices on the merchandise. You can create a parameter profile that optimizes markdown avoidance costs.
Example
In a scenario where an order can be shipped from multiple nodes and the Avoiding markdowns objective is prioritized, Optimization service considers a potential markdown to select a ship node. It then optimizes the order so that the initial investment results in larger savings from markdown avoidance.
| Shipping node | Distance between node and destination | Shipping cost | Processing cost | Load-balancing cost | Distance penalty | Stockout avoidance cost | Markdown avoidance cost | Total cost of optimization with inventory model | Total cost of optimization without inventory model |
|---|---|---|---|---|---|---|---|---|---|
| Node A | 891 miles | $4.90 | $3.50 | $.012 | $.0032 | $0 | $42.65 | -$34.2379 | $8.4154 |
| Node B | 221 miles | $4.33 | $3.25 | $.056 | $.0009 | $0 | $.59 | $7.0480 | $7.6367 |
- Total cost of optimization with inventory model = Shipping cost + Processing cost + Load-balancing cost + Distance penalty + Stockout avoidance cost - Markdown avoidance cost
- Total cost of optimization without inventory model = Shipping cost + Processing cost + Load-balancing cost + Distance penalty
If the inventory model was not used in this example, node B would likely be selected to fulfill the order since it is closer to the destination. However, the inventory model predicts a high possibility of a markdown at node A in the future. The predicted loss due to a markdown at node B is $0.59 compared to $42.65 at node A. To minimize the loss due to a predicted future markdown, node A is selected for shipping. As a result, the total cost of optimization at node A is -$34.2379 as compared with $7.0480 at node B.