9/4/25, 10:01 AM How Generative AI Improves Supply Chain Management

Supply Chain Management

How Generative AI Improves Supply
Chain Management
by Ishai Menache, Jeevan Pathuri, David Simchi-Levi and Tom Linton
From the Magazine (January–February 2025)

Alana Paterson

Summary. Over the past few decades, advances in information technologies have
allowed firms working to optimize their supply chains to move from decision-
making on the basis of intuition and experience to more automated and data-
driven methods, which has increased... more

Companies face a variety of complex

challenges in designing and optimizing
their supply chains. Increasing their
resilience, reducing costs, and improving
the quality of their planning are just a few
of them. Over the past few decades,
advances in information technologies have allowed firms to move
from decision-making on the basis of intuition and experience to
more automated and data-driven methods. As a result, businesses Privacy - Terms

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have seen efficiency gains, substantial cost reductions, and

improved customer service.

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Unfortunately, business planners and executives still need to

spend considerable time and effort to understand the
recommendations coming out of their systems, analyze various
scenarios, and conduct what-if analyses. Updating the supply-
chain-management tools’ mathematical models to reflect changes
in the business environment is time-consuming as well. To
address these issues, planners and executives have had to pull in
data science teams or the technology providers to explain results
or make changes in the system.

Recent advances in large language models (LLMs), a type of

generative AI, are now making it possible to perform these
activities without such support, reducing the time to make
decisions from days and weeks to minutes and hours and
dramatically increasing planners’ and executives’ productivity
and impact. In this article we’ll explore how LLMs can be used to
generate insights from data that will give executives a better
understanding of the state of their supply chains, answer what-if
questions, and update supply-chain-management tools in order
to take into account the current business environment. We’ll also
highlight the challenges that companies must overcome to adopt
LLMs and the opportunities for expanding their applications in
the future.

The experiences we will share are drawn mostly from Microsoft’s

employment of an LLM-based system to manage the supply of
servers and other hardware to more than 300 data centers around
the world in support of its cloud services. Microsoft piloted its

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LLM-based system from March 2023 to October 2023 before fully

deploying it in November 2023. Since then, the system has had a
notable impact on efficiency and productivity, measured by
incident response time and speed in making decisions, and those
gains are expected to increase as the system is refined even more
over time. The capabilities that we discuss are not dependent on
the use of a Microsoft product, though; a wide variety of the high-
quality LLMs available today could be used to achieve them.

Now let’s explore the benefits that LLMs can provide.

[ 1]
Data Discovery and Insights

Consider a classic supply chain with a certain number of suppliers

of raw materials, factories for producing products, and retailers
that sell those products. With an LLM a planner can ask in plain
language questions such as “How much raw material of type T
does supplier S have today?” or “What is the cheapest option for
shipping items from factory F to retailer R?” The LLM can
translate those questions into data science queries that in turn are
fed into the company’s data repository (for example, a SQL
database) and then provide an answer in a complete sentence.
Significantly from a privacy perspective, the LLM can be utilized
as a cloud service, which means that propriety data does not need
to be transferred to a third-party LLM.

Beyond serving as a tool to understand the current state of a

company’s supply chain, the LLM can be used to explain
decisions made by the supply chain system and provide
additional insights, such as information about trends. For
example, a planner could ask questions about recent trends
—“Which factory was the most productive last week?” or “What
was the number or percentage of instances last month when the
total shipping cost exceeded $50,000?” In what follows, we

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provide concrete examples from early adopters of LLMs for data

discovery and insights.

Tracking shifting demand. Cloud computing is a multibillion-

dollar business that requires providers such as Amazon,
Microsoft, Google, and others to make large investments in
building data centers, equipping them with hardware, and
operating them so that their capacity is readily available. They
must constantly satisfy the growing demand for those services
while minimizing hardware and operational costs. To that end,
cloud service providers periodically make hardware-deployment
decisions that take into account many cost considerations, such
as shipping and the depreciation of hardware, and operational
considerations, such as hardware compatibility, inventory, and
personnel available to carry out server deployments.

At Microsoft the demand for servers comes from internal business

groups that own different cloud offerings (for example, Azure
Storage, Azure Virtual Machines, and Microsoft 365). A demand is
specified via a request, which includes the type and number of
servers required, the region where the servers should be docked,
and the ideal dock date. Using those requests as inputs, the
supply chain team regularly generates a single demand plan.
Microsoft’s engineers periodically run a computerized
optimization tool to produce a fulfillment plan that assigns the
actual hardware from supply warehouses and specifies when they
will be shipped to the data centers. Microsoft planners oversee the
fulfillment plan. Their tasks include confirming that the
fulfillment plan meets the businesses’ needs and ensuring that
the servers have been deployed according to the fulfillment plan.
The deployed servers are typically utilized by the business group
for multiple years until they are decommissioned.

The LLM can be used to explain

decisions made by the supply chain
system and provide additional
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insights, such as information about

trends.

Planners also monitor changes in the demand plan, called the

demand drift, on a monthly basis to ensure that the revised plan
fulfills all customer requirements and falls within budget
guidelines. The task of evaluating the demand drift is
traditionally done by the planners, who often involve data
scientists and engineers from different business units in the
process. Once the changes are understood, the planners prepare
an executive summary to explain the changes for each region.

LLM-based technology now does all this. It automatically

generates an email report that details who made each change and
the reason for doing so. It also points out potential errors that
planners can review. For example, suppose that demand (the total
number of servers) in the new plan is lower than in the old. The
email can point to the exact reason the demand decreased—for
example, the introduction of a new, more-efficient generation of
hardware that allows fewer servers to be used. This LLM tool
allows planners to complete the demand-drift analysis on their
own in minutes; previously, it would take them about a week.

Enforcing contracts. In the automotive industry, original-

equipment manufacturers (OEMs) such as Ford, Toyota, and
General Motors have thousands of suppliers and multiple
contracts with each one. These contracts specify the details of the
price paid by the OEM, quality requirements, lead times, and the
resiliency measures suppliers must take to ensure supply. After
feeding the LLM data from thousands of contracts, one OEM was
able to identify price reductions it was entitled to for surpassing a
certain volume threshold. Its procurement team had overlooked
that opportunity because of the complexities and the number of
the contracts. The result was millions of dollars in procurement
savings.

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[ 2]
Answers to What-If Questions
An LLM allows planners to ask detailed questions. Here are a few
examples: “What would be the additional transportation cost if
overall product demand increased by 15%?” “What would be the
additional procurement cost if retailer R uses products only from
factory F?” “Can we fulfill all demand if we shut down factory F?”
“How much would the total cost of producing product P be
reduced if the cost of type M raw material were $1 less per unit?”

Here’s how an LLM can answer questions like these accurately

and efficiently. Many optimization tasks are written in the form of
mathematical programs, which take into account the structure of
the supply chain and all the business requirements and generate
effective supply chain recommendations. An LLM doesn’t replace
the mathematical model; rather, it complements it. Specifically, it
translates a human query into a mathematical code that is a small
change to the original mathematical model used to produce the
plan. For example, mandating that a retailer use products from a
particular factory can be done by adding a mathematical
requirement, or “constraint,” that prohibits other factories from
sending products to that retailer. This small change in the
mathematical model is then fed to the supply chain tool to
produce a modified plan, which is used only for comparison with
the existing one. As before, the output of the new mathematical
model is then passed through the LLM to produce the answer in
human language. (To learn about this approach of using an LLM
to obtain current information about the supply chain and to ask
what-if questions, you can find Microsoft’s open-source code and
benchmarks at [Link]/microsoft/OptiGuide.)

Consider how planners in Microsoft’s cloud service operation use

this capability to create a fulfillment plan that assigns servers to
be shipped from warehouses to data centers. For each request, the
main decisions consist of (1) the server type and the warehouse
that will be used to fulfill the demand, (2) the shipping date, and

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(3) the docking target of the servers (the specific data center and
the specific location within it). The goal is to minimize the total
cost of the multiple components, such as the shipping costs and
the estimated opportunity cost of delaying server deployments
beyond the ideal date.

Alana Paterson photographed offshore tankers and container ships for a story about the effects of ocean noise on
sea life.

When planners receive the output of the optimization tool, they

can confirm that it meets business needs and ensure that it is
executed accordingly. However, the underlying optimization
issues are so complex that it can be difficult, if not impossible, to
immediately understand the reasoning behind each decision.
Consequently, planners often reach out to the engineers and data
scientists who developed the optimization tool to obtain
additional insights. The planners and the engineers often need
multiple rounds of interactions in order to fully explore an issue
or a what-if scenario, which might result in a delay of days. Now
the LLM-based system allows planners to obtain in a few minutes
answers to questions such as “What is the percentage increase in
cost if we fulfill a specific order by the requested date versus
another date?” and “What would be the cost increase if we
deactivated a certain warehouse for one week?”

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[ 3]
Interactive Planning

Planners can use LLM technology to update the mathematical

models of a supply chain’s structure and the business
requirements to reflect the current business environment.
Further, an LLM can update planners on a change in business
conditions.

Let’s say planners have received real-time information that a

specific manufacturing facility is down for seven days owing to a
winter storm. To update the sales and operation plan (S&OP) to
account for the disruption without the assistance of an LLM, the
planners would have to engage the IT and data science teams to
make the necessary plan adjustments—a process that might be
time-consuming. With the aid of an LLM, however, planners can
directly ask the system to generate a new plan that avoids using
the disrupted facility. If the new plan will not be able to satisfy all
forecasted demand, the LLM-assisted planning tool will not only
generate an updated S&OP and the corresponding costs (for
example, procurement and transportation costs) but also identify
the demand that cannot be supplied and the impact on
profitability.

In the next few years LLM-based

technology will support end-to-end
decision-making scenarios.

The need to change the supply plan may also be driven by LLM-
based technology. For example, after analyzing shipment data
from a specific supplier, it may generate an alarm that the lead
time from the supplier has increased significantly over the past
few months. Further, the LLM-based technology will predict the
likely timing of the next shipment and will communicate that to

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the planner. Recognizing that the increase in delivery lead time

will adversely affect the service level in a specific region unless
corrective actions are taken, the planner may ask the LLM-based
system to rerun the planning tool with the new information and
generate a new plan. That plan, which the LLM conveys to
planners in plain human language, may call for expedited
shipments from the supplier or the transfer of inventory from a
warehouse the company has in a different region to the affected
region.

Using LLMs in the ways discussed here is still relatively new. We

envision that in the next few years LLM-based technology will
support end-to-end decision-making scenarios. For example,
users may be able to describe in plain language the decision-
making problem that they wish to solve. It could be a specific
production problem (given a complex network of manufacturing
facilities, where and when to produce a certain product) or an
inventory-allocation problem (given limited inventory at a
warehouse, how should it be allocated to various stores to meet
demand most efficiently). The technology today is capable of
generating such (mathematical) models and a recommendation,
but validating that the model correctly represents the business
environment is currently still a challenge.

[ 4]
Overcoming Barriers

As companies begin to adopt LLMs in supply chain management,

they will need to overcome a variety of obstacles to deploying
them effectively.

Adoption and training. Using an LLM to optimize supply chains

requires very precise language. For example, if a user asks, “Can
we utilize factory F better?” the word “better” can be interpreted
in multiple ways: lower costs, higher throughput, a more balanced
throughput over time, and so on. Each interpretation leads to
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different decisions. Therefore, it is crucial that the people using

the system are given training. Planners may need to be trained to
ask more-precise questions, and managers and executives may
require schooling in the capabilities and limitations of LLM-based
technology.
For those reasons, Microsoft is gradually deploying this new
technology, and the tool described earlier for answering what-if
questions supports only a set of common questions. The company
will monitor user interactions, accuracy, and fallback
mechanisms and then expand coverage over time. Planners have
received training about the technology and have been given the
set of questions that the tool currently supports.

Alana Paterson

Dell Technologies also recognizes the importance of upskilling its

workforce to use LLMs in its supply chain. The company’s early
experience with using AI through a partnership with a supply-
chain-application provider has created both a hunger for what is
possible and an urgency to prepare people to manage AI.
“Training our human workforce to ask the right questions of
generative AI is proving to be more of a challenge than the
technology itself,” Sasha Pailet Koff, a senior vice president, told
one of us (Tom). She added: “Developing leaders who can manage
generative AI versus a human workforce is critical. Only then can
companies choose the right application workflows best suited for
AI decision-making.”

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Verification. LLM technology may occasionally produce a wrong

output. Thus, a general challenge is to keep the technology
“inside the rails”—namely, identify mistakes and recover from
them. Companies are currently dealing with this challenge by
providing the LLMs with rich domain-specific examples that
increase the accuracy of their outputs and adding mechanisms for
identifying ahead of time queries that the technology does not
support. For instance, if a nonsupported question is asked, the
LLM-based system provides a default answer such as
“Unfortunately, I cannot help with this question; here is the list of
supported questions.” Naturally, the difficulty of verifying
accuracy will increase with the complexity of the output. For
example, suppose we let the LLM generate an entire
mathematical program to create an optimized fulfillment plan
from scratch. How would the system verify that it is correct? And
how can we ensure that the program will produce an optimal plan
in a reasonable amount of time? These are still open questions
that require further research.

New workforce roles. As LLM technology leads to a high degree of

automation, the role of executives and planners will change.
Instead of engaging in a time-consuming decision-making
process that is prone to human errors, planners will be able to
apply LLM technology to generate more insights into, and to
explain the recommendations of, their supply-chain-planning
technology. This will lead to a higher level of user trust and
significant adoption of the tools’ recommendations. Similarly, in
procurement, employees will need to spend much less time
generating new contracts; LLMs will be able to design contracts
for a specific product category and provide information about the
past performance of various suppliers to help executives choose
the appropriate one.

Put another way, a workforce that uses LLM-based tools will be

able to shift its focus from day-to-day repeated tasks to value-
added activities, such as thinking strategically about various
supply chain activities or collaborating internally across function

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areas and externally with suppliers and customers. For example,

demand planners can collaborate with trade planners (who are
responsible for marketing, pricing, and discounting) to
understand the impact of trade on the demand forecast. In our
experience, that sort of collaboration does not currently exist in
most organizations. The challenge, of course, is to ensure that
leadership breaks down the walls that exist between functional
areas and modifies business processes to enable collaboration.

...
Despite these challenges, we are confident that LLM-based
technology will transform supply chain management in the near
future—enhancing its efficiency, resiliency, productivity, and
accuracy. It will complement today’s supply chain technologies,
allowing planners to interact directly with their supply chain
tools without the need for data scientists or engineers. Firms will
be able to automate a significant number of supply chain
processes and even create new ones, such as by integrating the
trade and forecasting processes. Indeed, that integration would
result in a closed-loop supply-chain-management system, where
the trade, supply chain, and finance functions collaborate to
develop a supply plan that adheres to all business and financial
objectives and requirements. Within a few years LLM-based
technology could truly revolutionize supply chain management.

A version of this article appeared in the January–February 2025 issue of Harvard

Business Review.

IM
Ishai Menache is the partner research
manager of the machine learning and
optimization group at Microsoft Research.

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Jeevan Pathuri is a general manager and the

partner director of software engineering in
Microsoft’s cloud supply chain group.

David Simchi-Levi is the William Barton

Rogers Professor at the Massachusetts Institute
of Technology, the head of the MIT Data
Science Lab, and an Accenture Luminary.

Tom Linton is a senior adviser to McKinsey &

Company and was previously the chief
procurement and supply chain officer at Flex.

Read more on Supply chain management or related topics Business

management, Generative AI, Decision making and problem solving and
Analytics and data science

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