Supply Chain Analytics, Supply Chain Management, Supply Chain Data Analytics

Supply Chain Management

1. Classification
Validation and testing
Association rule and evaluation
Week 12

2. Classification

3. Classification

4. Classification

5. Classification
-Classification methods seek to classify a categorical outcome into one of
two or more categories based on various data attributes
-For each record in a database, categorical variable of interest (e.g.,
purchase or not purchase, high risk or no risk),and a number of additional
predictor variables (age, income, gender, education) are there
-For a given set of predictor variables, assign the best value of the
categorical variable
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6. Application

7. Application
Benefits to Supply Chain

8. Application

9. Application

10. ▪The model (classifier) is learned by finding patterns in training set
▪Performance on training set does not (necessarily) indicate
generalization power of the model
▪A validation set (a subset of training set) is used to learn parameters
and tune architecture of classifier and estimate error
▪For generalization of the model, validation set must be representative
of the input instances
▪Since test set is never used during training, it provides an unbiased
estimate of generalization error
Classification

11. Using Training and Validation Data
-Most data-mining projects use large volumes of data
-Before building a model, partition the data into a training data set and a validation data set
-Training data sets have known outcomes and are used to “teach” a data-mining algorithm
-To get a more realistic estimate of how the model would perform with unseen data, set aside a part
of the original data into a validation data set and not use it in the training process
-The validation data set is often used to fine-tune models
-When a model is finally chosen, its accuracy with the validation data set is still an optimistic estimate
of how it would perform with unseen data
-Data miners often set aside another portion of data, which is used neither in training nor in
validation. This set is known as the test data set
-The accuracy of the model on the test data gives a realistic estimate of the performance of the
model on completely unseen data
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12. Classification: Training-Validation split

13. Cross validation

14. Evaluation metrics

15. Evaluation metrics

16. Overfitting
-The phenomenon when model performs very well on training data
but does not generalize to testing data
-The model learns the data and not the underlying function
-Model has too much freedom (many parameters with wider
ranges)
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17. Classifier types

18. K-nearest neighbor

19. Decision tree
-Fundamentally, an if-then rule set for
classifying objects
-Builds model in the form of a tree
structure
-To classify a test instance x traverse the
tree from root to leaf
-Take branches at internal nodes according
to results of their tests
-Predict the class label at the leaf node
reached
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20. Classification methods
-In this database, the categorical variable of interest is the decision to
approve or reject a credit application
-The remaining variables are the predictor variables
-Code the Homeowner and Decision fields numerically. Homeowner
attribute “Y” as 1 and “N” as 0; similarly, Decision attribute “Approve” as 1
and “Reject” as 0
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21. Example
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22. Example
-To develop an intuitive understanding of classification, consider only the
credit score and years of credit history as predictor variables
-The large bubbles represent the applicants whose credit applications were
rejected; the small bubbles represent those that were approved
-There appears to be a clear separation of the points
-When the credit score is greater than 640, the applications were approved,
but most applications with credit scores of 640 or less were rejected
-Thus, a simple classification rule: approve an application with a credit
score greater than 640
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23. Example
-Another way of classifying the groups is to use both the credit score and
years of credit history by visually drawing a straight line to separate the
groups
-This line passes through the points (763, 2) and (595, 18). Using a little
algebra, it can be calculated the equation of the line as
years = −0.095 × credit score + 74.66
-Therefore, a different classification rule can be obtained: whenever
years + 0.095 × credit score ≤ 74.66,
the application is rejected; otherwise, it is approved.
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y = mx + c
m = (y2 – y1)/(x2 – x1)
x-x1 = m(y-y1)

24. Example
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25. Classifying New Data
-The purpose of developing a classification model is to be able to classify
new data. After a classification scheme is chosen and the best model is
developed based on existing data, use the predictor variables as inputs to
the model to predict the output
-Simple credit-score rule that a score of more than 640 is needed??
-If second rule having both the credit score and years of credit history??
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26. Discriminant analysis
-It is a technique for classifying a set of observations into predefined classes
-The purpose is to determine the class of an observation based on a set of
predictor variables
-Based on the training data set, the technique constructs a set of linear
functions of the predictors, known as discriminant functions, which have
the form:
-where the b’s are weights, or discriminant coefficients,
-the X’s are the input variables, or predictors, and c is a constant or the
intercept
-Weights are determined by maximizing the between-group variance
relative to the within-group variance
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27. Classifying Credit Decisions Using Discriminant Analysis
-The discriminant analysis procedure incorporates prior assumptions about
how frequently the different classes occur. Three options:
-According to relative occurrences in training data: This option assumes
that the probability of encountering a particular category is the same as the
frequency with which it occurs in the training data
-Use equal prior probabilities: This option assumes that all categories occur
with equal probability
-User specified prior probabilities. This option is available only if the output
variable has two categories
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28. Classifying Credit Decisions Using Discriminant Analysis
-The classification (discriminant) functions for the two categories. For
category 1 (approve the loan application), the discriminant function is
-L(1) = −137.48 + 32.295 × homeowner + 0.286 × credit score + 0.833 ×
years of credit history + 0.00010274 × revolving balance + 128.248 ×
revolving utilization
-For category 0 (reject the loan application), the discriminant function is
-L(0) = −157.2 + 30.747 × homeowner + 0.289 × credit score + 0.473 × years
of credit history + 0.0004716 × revolving balance + 167.7 × revolving
utilization
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29. Discriminant analysis
-Like many statistical procedures, discriminant analysis requires certain
assumptions, such as normality of the independent variables
-The normality assumption is often violated in practice, but the method is
generally robust to violations of the assumptions
-The lateron we will study a technique, called logistic regression, does not
rely on these assumptions, making it preferred by many analytics
practitioners
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30. Association Rule
-Association rule mining, often called affinity analysis, seeks to uncover
interesting associations and/or correlation relationships among large sets of
data. Association rules identify attributes that occur frequently together in
a given data set
-A typical and widely used example of association rule mining is market
basket analysis.
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31. Market basket analysis
-For example, supermarkets routinely collect data using bar-code scanner by
a customer for a single-purchase transaction
-Such databases consist of a large number of transaction records
-Managers would be interested to know if certain groups of items are
consistently purchased together
-They could use these data for adjusting store layouts (placing items
optimally with respect to each other), for cross-selling, for promotions, for
catalog design, and to identify customer segments based on buying
patterns
-Association rule mining is how companies such as Netflix and Amazon.com
make recommendations based on past movie rentals or item purchases
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32. MARKET BASKET ANALYSIS
•INPUT: list of purchases by purchaser
•do not have names
•identify purchase patterns
•what items tend to be purchased together
•obvious: steak-potatoes; beer-pretzels
•what items are purchased sequentially
•obvious: house-furniture; car-tires
•what items tend to be purchased by season

33. Market Basket Analysis
•Categorize customer purchase behavior
•identify actionable information
•purchase profiles
•profitability of each purchase profile
•use for marketing
•layout or catalogs
•select products for promotion
•space allocation, product placement

34. Market Basket Analysis
•Market Basket Benefits
•selection of promotions, merchandising strategy
•sensitive to price: Italian entrees, pizza, pies, Oriental entrees, orange juice
•uncover consumer spending patterns
•correlations: orange juice & waffles
•joint promotional opportunities

35. Market Basket Analysis
•Retail outlets
•Telecommunications
•Banks
•Insurance
•link analysis for fraud
•Medical
•symptom analysis

36. Market Basket Analysis
•Chain Store Age Executive (1995)
1) Associate products by category
2) what % of each category was in each market basket
•Customers shop on personal needs, not on product groupings

37. Possible Market Baskets
Customer 1: beer, pretzels, potato chips, aspirin
Customer 2: diapers, baby lotion, grapefruit juice, baby food, milk
Customer 3: soda, potato chips, milk
Customer 4: soup, beer, milk, ice cream
Customer 5: soda, coffee, milk, bread
Customer 6: beer, potato chips

38. Co-occurrence Table
Beer Pot. Milk Diap. Soda
Chips
Beer 3 2 1 0 0
Pot. Chips 2 3 1 0 1
Milk 1 2 4 1 2
Diapers 0 0 1 1 0
Soda 0 1 2 0 2
beer & potato chips - makes sense milk & soda - probably noise

39. Purchase Profiles
•Beauty conscious
•cotton balls
•hair dye
•perfumes
•nail polish

40. Purchase Profiles
•Each profile has an average profit per basket
•Kids’ fashion $15.24 push these
•Men’s fashion $13.41
•….
•Smoker $2.88 don’t push
•Student/home office $2.55 these

41. Market Basket Analysis
•Affinity Positioning
•coffee, coffee makers in close proximity
•Cross-Selling
•cold medicines, orange juice

42. Market Basket Analysis
•LIMITATIONS
•takes over ~18 months to implement
•market basket analysis only identifies hypotheses, which need to be tested
•neural network, regression, decision tree analyses
•measurement of impact needed
•difficult to identify product groupings
•complexity grows exponentially

43. Market Basket Analysis
•BENEFITS:
•simple computations
•can be undirected (don’t have to have hypotheses before analysis)
•different data forms can be analyzed