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Now Duraflame personnel access color-coded charts online that help them determine how many logs they can expect to need in Atlanta in January or in Denver in November. The model, created by Planalytics, tracks Duraflame's historical sales against weather data for the same time period and then makes projections from long-range weather forecasts. The formula is a lot more complex than the simple deduction that cold weather equals sales. Regional buying habits, for example, are taken into account. In Jacksonville, Fla., fire logs sell when temperatures dip into the 60s. In San Francisco, people buy when it's rainy. And in hardy Chicago, the mercury has to drop below 39[degrees]F for folks to gather round the hearth. "Before, it was tough to know whether a shift of 4[degrees] in temperature made any difference in sales," says Chris Caron, Duraflame's vice president of marketing. "Now we know it can make a tremendous difference." And the company has saved several hundred thousand dollars, Caron notes.
"Business practices that have evolved in the past decade make intelligent use of weather data a necessity," says Mike Smith, president of WeatherData, a commercial meteorology firm in Wichita, Kans. Smith cites the development of just-in-time inventory--a system in which businesses keep little or no overstock on hand. Instead, they place orders as needed, relying on speedy delivery to meet demand. The practice saves on storage costs and expensive markdowns, but it leaves companies at the mercy of delivery systems and the weather that can, literally, derail them. When a huge airline hub like Chicago is slowed down by inclement weather, companies feel it across the country.
Smith's company provides tailored forecasts to several transportation clients, including General Motors and Union Pacific. WeatherData helps GM determine when a storm is serious enough to warrant a plant shutdown, a costly decision not taken lightly. For the railroad, WeatherData makes a forecast "13 feet wide and 30,000 miles long," Smith says.
While some businesses hedge their bets with the help of private weather firms, others guard against Mother Nature's whim with a financial tool--the weather derivative. Created little more than 2 1/2 years ago, weather derivatives are now a $5 billion industry. They are essentially futures contracts ensuring that if certain meteorological conditions unfavorable to sales occur, the company that purchased the contract will be paid without having to prove any losses. And in some cases, companies actually pay the issuer of the derivative if weather ends up being favorable to sales. Either way, the company gets a guaranteed revenue stream that provides a buffer against climatic vagaries.
Lynda Clemmons, vice president at Enron, a Houston energy concern that buys and sells weather derivatives, says the concept emerged when companies' needs weren't being met by traditional insurance. "Insurance companies were saying, 'We can help you if a hurricane blows down your factory but not if it's 6[degrees] warmer this winter and your revenue drops,'" Clemmons says. The deregulation of the energy industry in 1995 meant that a new category of highly weather-sensitive businesses was suddenly forced to make a profit and became very interested in a product that could protect it from weather risks.