FOR RELEASE: April 27, 2004

Contact:	Kristen Kioa
	ISM, Media Relations
	Tempe, Arizona
	(800) 888-6276, ext. 3015

Supply Chain Practices in 2004

Manufacturing

In response to a special question regarding supply chain optimization, 67 percent of purchasing and supply executives plan to take new steps in 2004 to improve their supply chain management practices. This is down from 80 percent in December 2003 and possibly signals a change of emphasis on this issue due to improved business conditions. Technology improvements, particularly new ERP systems, and more integration of e-commerce top the list for 2004. Better inventory management is second on the list. Supplier relationship management, next, includes more onsite visits, spend analysis, continuous improvement and supplier auditing/qualification. Supply base consolidation is next, followed by internal organizational changes rounding out the major issues of concern to supply managers.

1. Technology improvements and e-commerce
2. Better inventory management
3. Supplier relationships and collaboration
4. Supply base consolidation
5. Internal organizational issues

Non-Manufacturing

Responding to a special question regarding supply chain improvements in 2004, 68 percent of members stated that they plan to take steps during the current year to improve their supply chain management practices. Members' first choice is technology improvements, including automation and new software, to be applied to the conduct of supply chain activities. Following that preference, members indicated other initiatives as listed below:

1. Technology improvements including automation and software
2. New or increased application of e-commerce
3. Leveraging of the supply base through consolidation or centralization
4. Improvements in management of supplier relationships including alliances
5. Process improvements of various kinds

Inventory-to-Sales Ratio

Manufacturing

Purchasers continue to reduce their purchased inventories as has been the trend consistently reported for the last 14 years in the monthly Manufacturing ISM Report On Business®. In this forecast, 23 percent expect to reduce their purchased inventory-to-sales ratio during 2004. This compares to 16 percent who expect the ratio to grow and 61 percent who predict no change.

Non-Manufacturing

Of the 60 percent of non-manufacturing purchasers who answered this question, 12 percent anticipate increasing their purchased inventory-to-sales ratio during the balance of 2004. An additional 3 percent expect their ratio to drop and 85 percent see no change. This suggests continuing building of inventories to support the growth in business activity that has been reported in the monthly Non-Manufacturing Report On Business® thus far in 2004.

Predicted Change in Purchased Inventory-to-Sales Ratio
	Manufacturing		Non-Manufacturing
	For 2004 Predicted Dec 2003	For Balance of 2004 Predicted April 2004	For 2004 Predicted Dec 2003	For Balance of 2004 Predicted April 2004
Greater	14%	16%	20%	12%
Same	56%	61%	63%	85%
Smaller	30%	23%	17%	3%

Economic Concerns

Manufacturing

With upward pressure on prices evident, inflation as it relates to currencies, commodities and interest rates is the number one concern in the year ahead. Members are also concerned about energy costs, shortages of materials, the weakening/strengthening of the U.S. dollar, and the uncertainty of the geo-political climate. There are numerous reports of concern regarding steel prices and its availability.

Economic Concerns

1. Inflation
2. Energy costs
3. Shortage of materials
4. Weakening U.S. dollar
5. Effects of war and geopolitical concerns

Non-Manufacturing

The number one economic concern of non-manufacturing purchasing and supply executives in 2004 is energy price increases. Other concerns include: price increases other than energy; employment benefit costs, particularly healthcare costs; effects of war and geopolitical concerns; and the general state of the economy. When asked to list major economic concerns, the top five responses in order of importance are:

Economic Concerns

1. Energy price increases
2. Inflation and other price increases
3. Employment benefit costs, particularly healthcare
4. Effects of war and geopolitical concerns
5. General economic concerns

Outlook for the Next 12 Months

Manufacturing

Members' companies are just as optimistic about the next 12 months as they were in December 2003. In both instances, 70 percent reported a better outlook. The 20 percent who report that the outlook is the same is down from the 23 percent reported in December 2003, and the 10 percent who indicate the outlook to be worse is higher than the 7 percent reported in December 2003. The net effect is that manufacturers appear to be retaining the optimism that surfaced in December 2003.

Non-Manufacturing

Non-manufacturing survey members' organizations have exactly the same degree of optimism now that they had in December of 2003 and are more optimistic than in May 2003. The 64 percent who currently (and in December 2003) reported a better outlook is significantly higher than the 50 percent who had a positive outlook one year ago. Twenty-six percent expect no change in the outlook and 10 percent feel the outlook will be worse over the next 12 months.

Outlook — Next 12 Months
	Manufacturing			Non-Manufacturing
	May 2003	Dec 2003	April 2004	May 2003	Dec 2003	April 2004
Better	54%	70%	70%	50%	64%	64%
Same	35%	23%	20%	27%	26%	26%
Worse	11%	7%	10%	23%	10%	10%
Diffusion Index	71.5%	81.5%	80%	63.5%	77%	77%

Industry Specific and Special Questions

U.S. DOLLAR — Predicted Strength vs. Major Trading Currencies — Balance of 2004

Manufacturing

Purchasing and supply executives are less optimistic concerning the prospective strength of the U.S. dollar for the balance of 2004. The average diffusion index for this forecast is 50.9 percent, compared to 53 percent for the December 2003 forecast. Of the seven currencies, the U.S. dollar is expected to be weaker than the Euro, the British Pound, the Korean Won, and the Taiwan $.

U.S. Dollar — Predicted Strength vs. Major Trading Currencies — Balance of 2004
U.S. Dollar Will Be:	Euro	Can. $	British Pound	Japanese Yen	Mexican Peso	Korean Won	Taiwan $
Stronger than	39%	32%	32%	38%	37%	27%	29%
Same as	19%	42%	35%	26%	39%	43%	41%
Weaker than	42%	26%	33%	36%	24%	30%	30%
Diffusion Index	48.5%	53%	49.5%	51%	56.5%	48.5%	49.5%

Note: A diffusion index above 50 percent would predict a generally stronger U.S. dollar; below 50 percent, a generally weaker U.S. dollar, with the distance from 50 percent indicative of the predicted strength or weakness.

Benefits of Applying Technology

Manufacturing

A special question was asked of purchasing and supply executives to determine their companies' progress in achieving efficiencies from the application of technology to supply management. Approximately 80 percent of respondents indicate they are less than three-fourths complete in achieving benefits from applying technology. It is obvious from this data that there is still significant improvement to be gained from the application of technology.

Non-Manufacturing

Survey respondents were asked a special question concerning the realized proportion of potential supply chain efficiencies that could ultimately be gained from applying technology to their supply chain. The average response from non-manufacturing members was 56 percent, indicating that, on average, 44 percent of potential improvement is yet to be gained. While 31 percent of respondents have achieved at least 75 percent of their expected potential benefit, the remaining 69 percent still have significant benefits to gain.

Benefits of Applying Technology
% Benefits Realized to Date	Manufacturing % of Responses	Non-Manufacturing % of Responses
Less than 50	40%	29%
50-74	40%	40%
75-89	18%	25%
90-100	2%	6%

Increasing Spending

A special question was asked to see if respondents' companies are increasing spending in various areas as business conditions improve. The following percentages of respondents plan to increase spending for the purposes listed below:

Reasons to Increase Spending	Manufacturing Percentage	Non-Manufacturing Percentage
Expanding capacity due to high capacity utilization	49%	41%
Expanding capacity due to high sales growth	49%	45%
Replacing IT	40%	57%
Replace other capital goods	47%	52%
Incorporate new technology	53%	71%
Temporary tax incentives	11%	3%
Favorable financing	15%	20%
Improved balance sheet position	19%	22%

Decrease Spending

If respondents planned to decrease spending, or planned to keep spending the same, the factors behind their decisions are as follows:

Reasons to Decrease Spending or Keep Spending the Same	Manufacturing Percentage	Non-Manufacturing Percentage
Recently completed significant expansion	32%	31%
Capacity utilization is currently low	38%	23%
Sales growth is low/expected to be low	48%	29%
No need to replace IT	53%	55%
No need to replace other capital goods	51%	38%
No need to incorporate new technology	54%	38%
A need to fund health care, pension, other non-capital projects	50%	40%
Outsourcing	39%	33%
Unfavorable financing	19%	24%
Worsening balance sheet	27%	35%

Summary

Manufacturing

• Operating rate is currently 85.6 percent of normal capacity.
• Capital expenditures will increase 6 percent in 2004.
• Production capacity will increase 5.2 percent during 2004.
• Prices paid will increase 6.7 percent by the end of April 2004 compared to November 2003.
• Prices will increase 0.9 percent from the end of April 2004 to the end of 2004.
• Labor and benefits costs will increase at a 2.4 percentage rate in 2004.
• Manufacturing employment will increase 4 percent in 2004.
• The U.S. dollar is expected to maintain its relative position versus major currencies.
• Exports will continue to grow in 2004.
• Imports will continue to grow in 2004.
• Manufacturing revenues (nominal) are expected to increase by 9.7 percent in 2004.
• Major concerns to manufacturers: inflation, energy costs, shortage of materials, weakening U.S. dollar and the effects of war/geopolitical concerns.
• Overall attitude of manufacturing management — near record optimism though slightly lower than December 2003.

Non-Manufacturing

• Operating rate is currently 85.4 percent of normal capacity.
• Capital spending will increase 4.9 percent in 2004 compared to 2003.
• Production and provision capacity will increase 4.2 percent in 2004.
• Prices paid have increased 3.3 percent from the end of 2003 to the present.
• Prices paid will increase an additional 1.2 percent during the balance of 2004.
• Prices paid will increase 4.5 percent during all of 2004.
• Profit margins are expected to be higher during the remainder of 2004.
• Labor and benefit costs will increase 2.7 percent during 2004.
• Non-manufacturing employment will rise by 1.9 percent during the balance of 2004.
• Exports by non-manufacturing industries will increase during the second half of 2004.
• Imports by non-manufacturing industries will increase during the second half of 2004.
• Non-manufacturing revenues (nominal) will rise by 6.3 percent in 2004.
• Major concerns: energy price increases, inflation and other price increases, employment benefit costs particularly healthcare, effects of war and geopolitical concerns, and general economic concerns.
• Non-manufacturing purchasers have the same level of optimism now as in December 2003 and are much more optimistic now than they were in May 2003.

*Miscellaneous items include: a preponderance of jewelry, toys, sporting goods, and musical instruments.

**Other Services include: hotels, rooming houses, camps, and other lodging places; personal services; automotive repair, services, and parking; miscellaneous repair services; educational services; social services; museums, art galleries, and botanical and zoological gardens; membership organizations; engineering, accounting, research, management, and related services; and miscellaneous services.

In addition to the forecast, the Manufacturing ISM Report On Business® is issued monthly and is considered by many economists to be the most reliable near-term economic barometer available. It is reviewed regularly by top government agencies and economic business leaders. The report, compiled from responses to questions asked of more than 350 purchasing and supply executives across the country, tracks industrial production, new orders, inventories, supplier deliveries, employment, buying policies, and prices. The report has been issued by the association since 1931, except during World War II.

Covering the non-manufacturing sector, ISM debuted the Non-Manufacturing ISM Report On Business® in June 1998. The Non-Manufacturing ISM Report On Business® is released on the third business day of each month, and is based on data received from purchasing and supply executives from 17 different non-manufacturing industries across the country. The report covers business activity, new orders, backlog of orders, new export orders, inventory change, inventory sentiment, imports, prices, employment, and supplier deliveries. A weighted composite index similar to the PMI is not available at this time for this report.

The Manufacturing and Non-Manufacturing ISM Reports On Business® are published monthly by the Institute for Supply Management™, the largest supply management research and education organization in the United States. ISM is comprised of 179 affiliates with more than 47,000 members in the United States.

As the oldest and largest supply management institute in the world, the mission of the Institute for Supply Management™ (ISM) is to lead supply management. By executing and extending its mission through education, research, standards of excellence, influence building and information dissemination — including the renowned monthly ISM Report On Business® report — ISM continues to extend the global impact of supply management. ISM's membership base includes more than 43,000 supply management professionals in 75 countries. Supply management professionals are responsible for trillions of dollars in the purchases of products and services annually. ISM is a member of the International Federation of Purchasing and Materials Management (IFPMM).

The full text version of the reports is posted on ISM's Home Page at www.ism.ws on the first and third business day of every month after 10:10 a.m. (ET).

The next Manufacturing Report On Business® featuring the April 2004 data will be released at 10:00 a.m. (ET) on Monday, May 3, 2004.

The next Non-Manufacturing ISM Report On Business® featuring the April 2004 data will be released at 10:00 a.m. (ET) on Wednesday, May 5, 2004.

• Semiannual slides  (Powerpoint)
• The Economic Outlook  (Powerpoint)
• Wesbury's Economic Presentation  (Powerpoint)

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