Companies using predictive analytics to cut costs and improve deliveries

Clearly, there are benefits to be had from using analytics, but measuring the return on investment can be difficult in many cases. CFO Magazine looked at an example involving Mueller Inc., a housing materials manufacturer based in Texas. The company purchased a powerful predictive analytics platform from IBM, reportedly without any specific plans for using it. Subsequently, a study performed by an independent IT firm, Nucleus Research, determined that the investment generated a return of almost 250 percent.

Mark Lack, manager of strategy analytics and business intelligence for the Mueller, told the source that there are concrete examples of how the software saved the company money. He discussed how he used IBM's analytics platform to resolve customer complaints about custom steel pieces arriving at sites damaged. Lack noted that many of Mueller's deliveries are to outlying construction sites "that are in the middle of nowhere, and it's expensive to manufacture another piece, put it on a truck, and get it out there."

The company believed it had a major problem with its distribution system and was on the verge of making a large investment in new packaging machinery. Instead, Lack used IBM's SPSS software to test their assumption. The analytics project found that there were reports of damaged products in less than one out of every thousand deliveries and in 70 percent of those cases, it was the use of incorrect specs, rather than damage sustained during shipping, that was at issue.

The company was able to avoid a substantial expense by determining that the new packaging equipment was unnecessary. Forbes notes that many other companies are reaching similar conclusions about the value of using predictive analytics. An IDC study backed by IBM suggests that Mueller's experience is a good example of a typical ROI for predictive analytics projects. Average ROI for nonpredictive analytics was found to be about 90 percent.

'ROI claims are all over the map'

CFO contributor David McCann cautions that "ROI claims are all over the map" with analytics. He spoke with Richard Boire, founding partner of analytics firm Boire Filler Group, who said that he limits the scope of analytics projects to focus on "measures that are variable based on what I'm doing."

"For a promotional campaign, for example, I may be impacting the number of phone calls, e-mails, or direct-marketing packages that go out," Boire said, explaining that he would exclude fixed costs such as office space or staffing.

Elder Research CEO John Elder said that only about 50 percent of his clients calculate ROI effectively, and companies often "have to make educated guesses." But there is some good news.

"When you implement an analytics recommendation engine, you have a before and an after, and the incremental returns are much more measurable than is the case with many other things," Elder explained.

Dan Vesset, vice president of business analytics at IDC, emphasizes that whatever approach companies take to evaluate ROI, they must recognize that analytics is "not an end in itself."

"You need to follow through on it and change your marketing campaign, or the way you interact with customers, or stock your inventory, or whatever," Vesset said. "Companies can get too focused on just the data and analytics."