TIME
Global Business/Forecasting A New
Crystal Ball Special software helps
smaller firms predict demand and cut costs BY LAIRD
HARRISON
Monday,
Apr. 22, 2002 Bob Howard knew his company had a problem
when he found himself dreading the good times. His firm, Sioux Chief
Manufacturing of Peculiar, Mo., makes water-hammer arresters, which
stop pipes from clanging. When demand periodically surged, the
350-person company was overwhelmed trying to handle the workload.
"We had to do a lot of overtime, pull people off other departments,
beg customers to take partial delivery of orders," says Howard, 61,
Sioux Chief's materials manager. "It cost us money."
Finally Sioux Chief's managers sat down to figure out how to
avoid such crises. Demand for arresters--and for many of the 7,000
other products the company makes--is affected by the weather, the
economy and changes in building codes. What Sioux Chief really
needed was a fortune-teller--and now Howard has that job. His
crystal ball: a $4,995 Forecast Pro software program from Business
Forecast Systems, based in Belmont, Mass. These days Howard's
prophecies help everyone at Sioux Chief stay sane.
Big businesses have used sophisticated statistical software
programs for years. But with the sizzling speed of new desktop
computers, the calculations that used to take 10 Ph.D.s weeks to
complete can be accomplished in a few minutes by a purchasing
manager with a bachelor's degree. As a result, smaller companies are
catching on.
Manufacturers aren't the only businesses that can profit from
forecasting software. Internet companies use it to predict when
their sites will get the most hits so their servers don't crash.
Credit-card companies calculate who is likely to default. And
looking at such factors as employees' ages, salaries, number of
years on the job, how often they have changed jobs in the past and
opportunities in their fields, human-resources departments predict
which employees are most likely to quit.
Forecasting can even save lives. Analyzing variables from claims,
patient surveys and lab tests, health plan Hawaii Medical Associates
of Honolulu identifies which of its 40,000 diabetic members are most
likely to end up in the hospital. A consultant's software program,
Enterprise Miner from SAS Institute, based in Cary, N.C., sometimes
finds patterns that don't appear in any medical textbook. "Someone
with high cholesterol, diabetes and one hospitalization may not be
at the same risk as a person with the same profile on a certain type
of medication," says medical director Richard Chung, "but the
program would find that." The health plan then mails these patients
pamphlets about diabetes as well as reminders about the need for
tests or has a nurse phone them to offer advice. "The cost of
hospitalization has fallen dramatically," says Chung, who estimates
that his company saved more than $10 million in its first year of
using the $100,000 software.
Specialized forecasting software comes equipped with an
assortment of statistical tools and can be set to apply techniques
automatically that normally only an expert statistician would know
about. The software manufacturers offer consultation at an added
cost, but many customers are able to use the programs right out of
the box.
The results can be dramatic. Because Sioux Chief doesn't sell
very many of any one model of drain, Howard found it hard to
establish trends that would predict demand for these products. Using
Forecast Pro, he can bring to bear such statistical methods as
Poisson distribution for sales of small quantities and Croston's
model for intermittent sales. These tools have made Sioux Chief's
projections so accurate that the company has been able to cut in
half the amount of copper tubing it keeps on hand to make products
like couplings and adapters. "That's probably $100,000 we don't have
tied up in inventory," says Howard.
Joe Collado, 43, used to use a spreadsheet to calculate the
number of fixtures that Murray-Feiss, a lighting manufacturer based
in New York City, should order from its factories in China. The
calculations were complicated because each of the company's 1,500
products has a different life cycle--chandelier styles, for example,
stay in fashion for about seven years, while most lamp styles are
history in just 12 months--and the firm constantly introduces new
models. For the past year, Collado has used the $595 ForecastX
Wizard by John Galt, based in Chicago. That program has special
functions for life cycles and new products. "With a few keystrokes,
you can do in seconds what used to take hours," says Collado.
Though the software programs are catching on, informal surveys
suggest that most companies still rely on the rudimentary
forecasting functions in spreadsheet programs. "Probably the worst
thing someone can do is use Excel and trend lines for forecasting,"
says Len Tashman, a professor emeritus at the University of Vermont,
who advises businesses about forecasting. Good software programs can
scan the data and select a predictive model that the average manager
wouldn't even know about. To benefit from any forecasting programs,
a company must collect data going back several years--covering
general trends in sales and how they have been affected by price,
promotions, competition, weather and other key factors--so that the
programs can find correlations and patterns emerge. One drug
company, using Forecast Pro, was startled to discover that sales of
its osteoporosis medication followed a seasonal pattern. On
investigating, the company found that retirees from cold northern
climates liked to stock up at their local pharmacies before
wintering in Florida, information of value to both its marketing and
its production departments.
Another, simpler kind of software that small businesses use to
forecast the financial effects of their decisions is known as
"financial analytics." These programs take data about a company's
income and expenses, assets and cash flow to calculate how changing
one variable can affect many others. One such program, sold by
ACCPAC of Pleasanton, Calif., for $1,000 and released this year in
the U.S. under the name CFO, helped show John Angove, owner of the
Angove Proprietary Vineyard in Renmark, Australia, how costly it was
to produce even a little more wine than he could sell. That
revelation led him to reduce his inventory 10% and save $55,000 a
year. Says Angove of the software: "It's a pretty powerful bit of
gadgetry."
Before his company started using Forecast Pro, says Sioux Chief
product-group director Mike Meagher, managers relied on their own
informal forecasts. Today the company uses Forecast Pro's numbers as
its official outlook, and purchasers base their orders on the data,
resulting in cost savings. Now, when big orders roll in
unexpectedly, the good times feel much better.
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