Forecasting: A New Crystal Ball

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.