How Germany’s Otto Uses Artificial Intelligence

Machine learning is trying to one-up just-in-time inventory with what can only be called before-it’s-time inventory. The Economist reports that German online merchant Otto is using algorithms to predict what you’ll order a week before you order it, reducing surplus stock and speeding deliveries:

A deep-learning algorithm, which was originally designed for particle-physics experiments at the CERN laboratory in Geneva, does the heavy lifting. It analyses around 3bn past transactions and 200 variables (such as past sales, searches on Otto’s site and weather information) to predict what customers will buy a week before they order.

The AI system has proved so reliable—it predicts with 90% accuracy what will be sold within 30 days—that Otto allows it automatically to purchase around 200,000 items a month from third-party brands with no human intervention. It would be impossible for a person to scrutinise the variety of products, colours and sizes that the machine orders. Online retailing is a natural place for machine-learning technology, notes Nathan Benaich, an investor in AI.

Overall, the surplus stock that Otto must hold has declined by a fifth. The new AI system has reduced product returns by more than 2m items a year. Customers get their items sooner, which improves retention over time, and the technology also benefits the environment, because fewer packages get dispatched to begin with, or sent back.