The adage “too much, too little, just right” isn’t just for Goldilocks and her porridge. Balance is also critical in inventory management, the part of the supply chain responsible for analyzing what consumers will buy and making sure products are in stock at the right place and the right time.
Excess inventory can lead to markdowns or expired goods, but too little product can lead to shortages that impact a retailer’s brand image, customer satisfaction, and bottom line.
To prevent inventory from running out, big-box retailers such as Target, The Home Depot, and Walmart are using AI to predict when product amounts could dwindle. As a result, Target’s inventory availability has improved every year for the last four years, Prat Vemana, the executive vice president and chief information and product officer at Target, told Business Insider.
AI can help retailers proactively adjust stock before disruption strikes rather than reacting to changing conditions, said Ajoy Krishnamoorthy, the CEO of inventory-management platform Cin7. That’s especially critical today, Krishnamoorthy added, when factors like consumer behavior, inflation, and trade policy constantly impact supply chains.
“AI thrives in this environment,” Krishnamoorthy said.
From old methods to AI
Traditionally, companies procure inventory, manage logistics, and analyze consumer behavior in silos, said Vidya Mani, an associate professor of business administration focused on technology and operations management at the University of Virginia. Teams do individual research, then come together to develop a strategy and execute it.
“We no longer have that time,” Mani said. “By the time you finish doing it, the world will have changed on you.”
Before Target started using AI to predict stockouts, the retailer relied on software-based applications, which didn’t react or adapt to real-world changes as quickly as AI systems, according to Vemana. In fact, Target said in a blog post that it previously failed to catch half of its products that were out of stock because the technology they used thought that inventory existed when it actually didn’t.
Target changed how it managed inventory in 2023 with the introduction of Inventory Ledger, an internal tech system that tracks inventory changes across stores and uses AI to predict when products might be out of stock “even before it’s obvious to team members or systems,” Vemana said.
Today, Target uses AI-driven inventory management for more than 40% of its product assortment, which is more than double when it started two years ago, Vemana said.
With Inventory Ledger, algorithms pull in data like supply lead times, transportation costs, current inventory, and consumer demand. Some models are more accurate for frequently purchased categories, and others are better suited to discretionary purchases or clearance items, so Target uses both kinds. There are also models that detect items that are in the store but in the wrong aisle or shelf, Vemana said.
Target has a demand forecasting tool that “makes billions of predictions each week about how many units of each item we’ll need in stores and online,” Vemana said. Together, all of these technologies guide employees’ decisions about when, where, and how to reorder products and replenish stock.
“Combining traditional software with AI helps us make smarter, faster decisions about inventory management and keep our stores stocked more consistently,” Vemana said.
One of Cin7’s customers, ABC School Supplies, is also using AI to access real-time sales data, potential stock shortages, and supplier lead times, so it can “reorder proactively and avoid costly gaps in supply,” Krishnamoorthy said.
The AI-driven inventory management marks a big change from what ABC School Supplies did in the past. It used to copy and paste website orders into its system, make a pick-and-pack list on paper, walk that physical list over to the warehouse, and manually update inventory, Krishnamoorthy said
The Home Depot is also taking an AI-based approach to inventory. In 2023, the retailer rolled out a machine-learning-powered app called Sidekick, which guides store workers to restock shelves and find products on overhead shelves, among other features.
“It helps make sure products are on shelves for our customers, and it manages our on-hand accuracy, which feeds to our replenishment and selling platforms,” a spokesperson for The Home Depot said.
AI’s predictive power for inventory planning
Krishnamoorthy said that in retail, “AI is exploding” as businesses move away from static planning to dynamic forecasts that anticipate demand and prevent stockouts.
AI allows businesses to get more granular with their inventory data, avoiding stockouts at particular store locations or during peak times. Mani gave the example of cosmetics and how different stores will have varying product needs based on consumer demographics.
“AI can figure out those patterns of baskets that are bought frequently in these different clusters,” Mani said. “You don’t need to feed it that contextual information.”
Target is also working on technology that predicts which colors and sizes of seasonal items will sell, so it can stock those items in specific stores “to meet local demand,” Vemana said.
At Walmart, AI-based inventory management systems use algorithms to make sure stores in warmer states have the right amount of pool toys and colder states stock enough sweaters, according to a press release on the company’s website. If a particular item isn’t selling on the East Coast but it’s flying off shelves in the Midwest, algorithms flag that pattern so Walmart can reposition its inventory.
As retailers continue to develop and deploy AI tools, Mani predicts the technology’s use cases will advance over the next decade.
Mani said that in two to three years, AI will likely flag stockouts without a person needing to walk into a store to confirm. Five years out, AI could automatically reorder inventory when algorithms detect that stock is running low. And in 10 years, AI would understand how macroeconomic events (like inflation) will change future consumer purchase behavior patterns and adjust inventory plans accordingly.
“It will feed it into your rulemaking rather than reacting to the situation,” Mani said. “You’ll be living in a different world.”
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