Risk prediction models: How they work and their benefits

<p>One of my favorite consulting clients is an outdoor clothing retailer. It’s a highly seasonal business — summer and winter gear are different, obviously. But fashions, styles and popular color combinations change every year, too. The company’s buyers must make decisions about inventory well in advance to order for upcoming seasons. They obsess about ski jackets while you enjoy your summer vacation.</p>
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<p>Success isn’t just a question of getting the styles right. The buyers need to order enough products to meet customer demand, but not so much that the company gets stuck with expensive excess inventory. That’s where a risk prediction model can help.</p>
<section class=”section main-article-chapter” data-menu-title=”What is a risk prediction model?”>
<h2 class=”section-title”><i class=”icon” data-icon=”1″></i>What is a risk prediction model?</h2>
<p>Risk prediction models use statistical analysis techniques and machine learning algorithms to find patterns in data sets related to <a href=”https://www.techtarget.com/searchcio/feature/4-basic-types-of-business-risks-in-the-enterprise”>different types of business risks</a>. AI increasingly plays a role in their development, too. The models enable organizations in various industries to make data-based decisions about particular risks and business opportunities as part of <a href=”https://www.techtarget.com/searchsecurity/definition/What-is-risk-management-and-why-is-it-important”>risk management</a> initiatives.</p>
<p>In the case of the clothing retailer, a risk prediction model can analyze past sales data, customer demographics, market trends and other variables to forecast sales by product. The model assesses the risk of understocking or overstocking specific items, accounting for business uncertainty and calculating the probabilities of different outcomes.</p>
<p>This kind of sales forecasting model doesn’t specify <i>what</i> to order. Instead, buyers can see which items have a high risk of excess inventory. They can then adjust their purchasing plan accordingly to <a href=”https://www.techtarget.com/s

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