Predictions

Predictions

Copyright 2008, Traffic World, Inc.

One of the most significant areas of study in logistics management in recent years has been in forecasting. The ability to accurately assess demand and to target resources, after all, is the Holy Grail for shippers and logistics providers alike.

But while retailers struggle to figure out where consumers are going and transportation providers are trying to assess where shippers will be, there''s a growing belief in the business world that the best answers may be closer than most companies believe.

Those answers aren''t really in software programs aimed at quantifying patterns of past behavior and predicting future actions, nor in the far-removed experts who analyze markets. The growing study in what is called "prediction markets" suggests better forecasting for many businesses may come from the resources within the companies themselves, the employees who are working directly with new products and services and interacting daily with buyers, sellers and customers in the field.

Described in a recent roundtable discussion of The McKinsey Quarterly, the online journal of the McKinsey & Co. consulting firm, prediction markets suggest internal trading markets in which information is the commodity and accurate forecasts are the prize.

The idea was outlined by business writer James Surowiecki in his book The Wisdom of Crowds, in which he described how under the right circumstances, as he told McKinsey, "the collective judgment of a large group of people will generally provide a better picture of what the future might look like than anything one expert or even a small group of experts will come up with."

That''s not a secret to anyone familiar with point spreads in football games or the stock market, but the idea is a tough sell in a high-stakes business environment.

Yet companies, including retailer Best Buy and Google, have been sold on the idea. One division of Best Buy says it got into prediction markets in a big way when its early experiments showed nearly perfect accuracy in forecasting sales, with results far better than the company''s experts.

The experts tell McKinsey that technology and consumer retail companies are the prime candidates for greater use of prediction markets, but shippers as well as their transportation and logistics providers have every reason to pay attention to the principles.

That''s especially true now, as the business of handling and moving goods stumbles through a downturn and businesses on both sides of the shipping equation look to position themselves for recovery. Those companies are faced with truly pressing questions of whether the shifting markets today are merely part of the natural ebb-and-flow of cyclical business or signs of truly fundamental change in the ways some businesses operate.

Right now, most business leaders say some of the changes they see are fundamental; few, for instance, will bet that fuel prices will fall below $3 a gallon.

But other questions are up for grabs.

Will equipment on order be of any use this fall, or next spring? Should fleets built up over years be dismantled? Are lower rates today worth the risk of losing carrier service tomorrow?

The answers, some believe, are closer than you think.