Chris Langbein used regression analysis
to
forecast monthly working capital needs at ConocoPhillips. With a
standard deviation
of monthly working capital net balance running close to a billion
dollars, the ability to reduce this uncertainty
using Langbein's models will lead to substantial savings through the
reduction of the amount of cash carried to cover the monthly
fluctuations.
Langbein immediately recognized that this month's working capital
amount should be the starting basis for predicting next month. With
this insight, he set about looking for (and finding) predictors of
change in working capital.
"I was asked to build a model that could predict key cash flows. In
fact, my bosses told me that they weren’t sure that it could be
done, but thought it would be a good test for a summer internship.
Little did they know what they got themselves into, for I had the
entire DAO toolbox at my disposal."
"The model successfully predicted the future month’s working capital
to within a standard deviation much smaller than the billion dollars
of natural monthly standard deviation."
