Purchasing Manager's Index Survey
The monthly survey of business condition, published under the title of "Current Business Trends," first debuted in Kalamazoo in February of 1979, and was expanded to Grand Rapids in 1988. At present, the survey encompasses 45 purchasing managers in the Greater Grand Rapids and 25 in Kalamazoo. For both surveys, the respondents are purchasing managers from the region's major industrial manufacturers, distributors, and industrial service organizations. .
Patterned after in nationwide survey conduced by the Institute for Supply Management, the strength of the survey is its simplicity. Each month, the respondents are asked to rate eight factors as "SAME" or stable, "UP" or improving/rising, OR "Down" as in declining/falling. The eight factors are:
(1) NEW ORDERS. As the name implies, this index measures new business coming into the firm, and signifies business improvement, or business decline. When this index is positive for an extended period of time, it implies that the firm or organization will soon need to purchase more raw materials and services, hire more people, or possibly expand facilities. Since new orders are often received weeks or even months before any money is actually paid, this index is our best view of the future.
(2) PRODUCTION. As new orders come in and materials arrive at the loading dock, production schedule are posted to meet the customer's needs. Although production schedules respond to demand, they also respond to seasonal factors such as holidays as well as bad weather, materials shortages, or other external influences.
(3) EMPLOYMENT. The employment index measures the expansion and contraction of the firm's entire workforce, including office and production personnel. Many firms will remain stable for long periods of time, until significant economic events result in new hires or layoffs.
(4) PURCHASES. This index reflects the dollar amount of the goods and services purchased by a firm or organization, as well as the level of activity in the purchasing office itself.
(5) PRICES. As the name implies, this index measures industrial inflation, and depicts the direction of the prices for major commodities and services purchased by the firm or organization.
(6) LEAD TIMES. When the demand for commodities exceeds current supplies, lead times grow longer. Longer lead times may also lead to price increases, and falling lead times may lead to price cuts. Longer lead times also add to the stress on the supply chain, as well as the stress on supply chain personnel.
(7) PURCHASED MATERIALS INVENTORIES. Although on-site inventory has become a dirty word in recent years, at least some quantity of raw material and MRO supplies must still be kept on hand. When shortages or price increases are anticipated, inventories may be increased to protect the firm or organization from shutting down because of lack of materials. For some firms and for some commodities, inventories are accumulated for seasonal usage.
(8) FINISHED GOODS INVENTORY. Although some firms and organization maintain no inventory of finished goods, some firms "build to stock" in anticipation of future sales. It is obvious a bad sign if a firm's sales are falling and finished goods inventories are rising.
For each of these eight elements, the responses are tabulated and converted to percentages. A diffusion index is then calculated by subtracting the percentage of "DOWN" responses from the number of "UP" responses. Obviously, if the number of UPs exceeds the number of DOWNs, then the resulting index number will be positive. Whereas it is certainly good news when the indexes such as NEW ORDERS, PRODUCTION, and EMPLOYMENT are positive and therefore rising, it is conversely bad news when LEAD TIMES and PRICES are rising.
The survey also contains several standard open-end questions. First, the respondents are asked to list commodities that are in short supply. The second question calls for the respondent to list any commodities or services that are rising in price. These two lists my be similar, but are usually not identical. During periods of significant industrial inflation, both of these lists may grow very long. A third question asks for a list of all major commodities and services that are falling in price. Last but not least is a space for open-ended comments, allowing the survey participant to describe the marketplace as they see it. In order to keep the comments candid, the respondents themselves and their firms are not identified.