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.