Predicting demand for new products in fashion retailing using censored data

• Demand of new products is predicted based on censored historical demand. • Four approaches are explored to convert previous product sales into demand. • A predictive model with three sequential stages is developed. • The methodology is validated using real data from a European fashion retailer. • The method with the Expectation-Maximization algorithm showed the highest potential. In today’s highly competitive fashion retail market, it is crucial to have accurate demand forecasting systems, namely for new products. Many experts have used machine learning techniques to forecast product sales. However, sales that do not happen due to lack of product availability are often ignored, resulting in censored demand and service levels that are lower than expected. Motivated by the relevance of this issue, we developed a two-stage approach to forecast the demand for new products in the fashion retail industry. In the first stage, we compared four methods of transforming historical sales into historical demand for products already commercialized. Three methods used sales-weighted averages to estimate demand on the days with stock-outs, while the fourth method employed an Expectation-Maximization (EM) algorithm to account for potential substitute products affected by stock-outs of preferred products. We then evaluated the performance of these methods and selected the most accurate one for calculating the primary demand for these historical products. In the second stage, we predicted the demand for the products of the following collection using Random Forest, Deep Neural Networks, and Support Vector Regression algorithms. In addition, we applied a model that consisted of weighting the demands previously calculated for the products of past collections that were most similar to the new products. We validated the proposed methodology using a European fashion retailer case study. The results revealed that the method using the Expectation-Maximization algorithm had the highest potential, followed by the Random Forest algorithm. We believe that this approach will lead to more assertive and better-aligned decisions in production management.