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62nd Semiannual Economic Forecast (continued)

FOR RELEASE: December 11, 2001

SUPPLY CHAIN PRACTICES IN 2002

Manufacturing

In response to a special question regarding supply chain optimization, 78 percent of purchasing and supply executives plan to take new steps in 2002 to improve their supply chain management practices. E-commerce is at the top of their list. Better inventory management is the second choice for manufacturers. Improved supplier relationships is next, followed by supplier consolidation and technology improvements as issues of concern by purchasers.

  1. E-commerce
  2. Better inventory management
  3. Improved supplier relationships
  4. Supplier consolidation
  5. Technology Improvements
Non-Manufacturing

Responding to a special question regarding supply chain improvements in 2002, 73 percent of members stated that they plan to take steps in the new year to improve their supply chain management practices. Members indicate a strong preference for application of technology (e.g. automation, ERP, EDI, new software) to the conduct of supply chain activities as the number one means of improvement. Following that preference members indicated other initiatives as listed below:

  1. Increased use of technology
  2. Electronic commerce
  3. Inventory initiatives
  4. Supplier consolidation
  5. Increased use of contracts with suppliers

INVENTORY-TO-SALES RATIO

Manufacturing

Purchasers continue to reduce their purchased inventories as has been consistently reported for the last 12 years in the monthly Manufacturing ISM Report On Business®. In this forecast, 34 percent expect to reduce their purchased inventory-to-sales ratio during 2002. This compares to 14 percent who expect the ratio to grow and 52 percent who predict no change.

Non-Manufacturing

Of the 38 percent of non-manufacturing purchasers who answered this question, 25 percent anticipate reducing their purchased inventory-to-sales ratio during 2002. An additional 12 percent expect their ratio to rise and 63 percent see no change.

Predicted Change in Purchased Inventory-to-Sales Ratio
  Manufacturing Non-Manufacturing
  For 2001
Predicted
Dec 2000
Balance
of 2001
Predicted
May 2001
For 2002
Predicted
Dec 2001
For 2001
Predicted
Dec 2000
Balance
of 2001
Predicted
May 2001
For 2002
Predicted
Dec 2001
Greater 11% 8% 14% 15% 16% 12%
Same 50% 52% 52% 67% 71% 63%
Smaller 39% 40% 34% 18% 13% 25%
Diffusion Index 36% 34% 40% 48.5% 51.5% 43.5%

Note: A diffusion index above 50 percent would indicate an increase in the inventory-to-sales ratio; below 50 percent, a decrease in the ratio.


EXPECTATIONS FOR HOLIDAY RETAIL SALES

Manufacturing

Each year, we ask purchasers to assess prospects for holiday sales in their geographic area. Compared to 1999 and 2000, prospects do not appear very bright as only 10% expect "good" holiday sales. Over half (61 percent) expect them be "average," while 29 percent expect them to be "poor."

Non-Manufacturing

The outlook for holiday retail sales for 2001 is not as bright as it was either one or two years ago. In assessing prospects for sales in their geographic areas, only 15 percent of non-manufacturing members predict sales will be "good," while 27 percent expect them to be "poor," and 58 percent expect them to be "average."

Expectations for Holiday Sales
  Manufacturing Non-Manufacturing
  Dec 1999 Dec 2000 Dec 2001 Dec 1999 Dec 2000 Dec 2001
Good 58% 42% 10% 64% 46% 15%
Average 42% 54% 61% 36% 50% 58%
Poor 0% 4% 29% 0% 4% 27%


ECONOMIC CONCERNS

Manufacturing

The weakening economy/recession is the number one concern of purchasers in the year ahead. They are also concerned about labor and benefit costs, energy costs, effects of terrorism, and consumer confidence.

Economic Concerns

  1. Weak economy/recession
  2. Labor and benefits cost
  3. Energy
  4. Effects of terrorism/catastrophe/war
  5. Consumer confidence
Non-Manufacturing

The number one economic concern of non-manufacturing purchasing executives in late 2001 is economic weakness. That is followed by labor and benefit costs. Other concerns include: higher costs and inflation, concerns about the effects and possibilities from terrorism/catastrophe/war, and unemployment.

Economic Concerns

  1. Weak economy/recession
  2. Labor and benefit costs
  3. Higher costs/inflation
  4. Effects of terrorism/catastrophe/war
  5. Unemployment

OUTLOOK FOR THE NEXT 12 MONTHS

Manufacturing

Members' companies are significantly less optimistic about the next 12 months when compared to their responses for the past year. The 19 percent reporting satisfied/optimistic is the lowest number reported since December 1991. The 63 percent who report being concerned is up from the 29 percent reported in May 2001, and the 18 percent who indicated worried/pessimistic is lower than the 38 percent reported in May 2001.

Non-Manufacturing

Non-manufacturing survey members' organizations are less optimistic, but not as worried or pessimistic, about the next 12 months as they were in May 2001. The proportion who are currently optimistic is 31 percent (38 percent in May), the proportion who are concerned is 61 percent (42 percent in May), and the proportion who are worried or pessimistic is 8 percent (20 percent in May).

Outlook — Next 12 Months
  Manufacturing Non-Manufacturing
  Dec 2000 May 2001 Dec 2001 Dec 2000 May 2001 Dec 2001
Satisfied / Optimistic 35% 33% 19% 59% 38% 31%
Concerned 60% 29% 63% 38% 42% 61%
Worried / Pessimistic 5% 38% 18% 3% 20% 8%


INDUSTRY SPECIFIC QUESTIONS

Manufacturing

U.S. DOLLAR — Predicted Strength vs. Major Trading Currencies — in 2001

Purchasing and supply executives remain optimistic concerning the prospective strength of the U.S. dollar for 2002 relative to major trading currencies than they were in December 2000 for 2001. The average diffusion index for this forecast is 62 percent, compared to 64 percent for the May 2001 forecast. Of the seven currencies, none are expected to outperform the dollar; however, the British Pound and the Euro are expected to outperform other major currencies significantly when compared to the dollar.

U.S. Dollar Will Be: Euro Can.
$
British
Pound
Japanese
Yen
Mexican
Peso
Korean
Won
Tai.
$
Stronger than 36% 41% 22% 49% 61% 43% 37%
Same as 37% 47% 56% 28% 26% 40% 50%
Weaker than 27% 12% 22% 23% 13% 17% 13%
Diffusion Index 54.5% 64.5% 50% 63% 74% 63% 62%

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.

Non-Manufacturing

PROFIT MARGINS

Non-manufacturing purchasing and supply executives were asked about changes in profit margins that their organizations may have recently experienced or were expecting in the near future. Their response indicated that 17 percent experienced an increase in profit margins during the second and third quarters of 2001, while 43 percent found smaller profit margins and 40 percent had no change in margins during the same period. Looking ahead over the period November 2001 to April 2002, 26 percent expect improved profit margins, 23 percent expect lower profit margins, and the remaining 51 percent of members anticipate no change in their profit margins over that period of time.

Non-Manufacturing Profit Margins
  Apr 2001 thru Nov 2001
Reported Dec 2001
Nov 2001 thru Apr 2002
Predicted Dec 2001
Improved 17% 26%
No Change 40% 51%
Worse 43% 23%
Diffusion Index 37% 51.5%


Note: A diffusion index above 50 percent would generally indicate an increase in profit margins; below 50 percent, a decrease in profit margins.

Benefits of Applying Technology

Manufacturing

A special question was asked of purchasing and supply executives to determine their progress in achieving efficiency from the application of technology to supply management. While a few companies (5 percent) managed to move rapidly in this direction and are on the final leg, others are making excellent progress (18 percent) and appear to be receiving benefits from technology. The remaining 77 percent are less than three-fourths complete with the majority of those less than 50 percent finished. It appears that there is still significant efficiency to be gained in this area over the course of the next few years.

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 50 percent, indicating that, on average, 50 percent of potential improvement is yet to be gained. This compares to 54 percent reported realization in May 2001, implying that as technology is applied, organizations gain additional knowledge of its possibilities and expand their estimates of its potential.

Benefits of Applying Technology
% Benefits
Realized to Date
Manufacturing
% of Responses
Non-Manufacturing
% of Responses
90-100 5% 4%
75-89 18% 21%
50-74 33% 35%
Less than 50 44% 40%


SUMMARY

Manufacturing
  • Operating rate is currently 77.5 percent of normal capacity.
  • Capital expenditures rose 5 percent in 2001.
  • Capital expenditures will decrease 14.4 percent in 2002.
  • Production capacity will increase 3.5 percent during 2002.
  • Prices manufacturers pay decreased 3.1 percent on a weighted average basis in 2001.
  • Overall 2002 prices will decrease 1.5 percent from 2001.
  • Labor and benefits costs will increase at a 2.3 percentage rate in 2002.
  • Manufacturing employment will decrease 0.5 percent in 2002.
  • The U.S. dollar is expected to remain strong versus major currencies.
  • Exports will continue to grow in 2002.
  • Imports will continue to grow in 2002.
  • Holiday retail sales as viewed by purchasers will be lower compared to 1999 and 2000.
  • Manufacturing revenues (nominal) down by 2.3 percent in 2001.
  • Manufacturing revenues (nominal) will be up by 3.2 percent in 2002.
  • Major concerns to manufacturers: Weak economy/recession, labor and benefits, energy costs, effects of terrorism, and consumer confidence.
  • Overall attitude of manufacturing management — decline in optimism — lowest in 5 years.
Non-Manufacturing
  • Operating rate is currently 83.1 percent of normal capacity.
  • Capital spending increased 0.6 percent in 2001.
  • Capital spending will decrease 3 percent in 2002 compared to 2001.
  • Production and provision capacity will increase 2 percent in 2002.
  • Prices paid increased 0.7 percent during 2001.
  • Prices paid will increase 0.5 percent in 2002.
  • Labor and benefit costs will increase 2 percent during 2002.
  • Non-manufacturing employment will be unchanged in 2002.
  • Exports by non-manufacturing industries will increase during 2002.
  • Imports by non-manufacturing industries will increase during 2002.
  • Holiday retail sales expected to be less strong than in 2000.
  • Non-manufacturing revenues (nominal) are up by 1.6 percent in 2001.
  • Non-manufacturing revenues (nominal) will be up by 7.6 percent in 2002.
  • Major concerns: economic weakness and recession, labor and benefit costs, and higher costs and inflation.
  • Non-manufacturing purchasers are less optimistic about the next 12 months.

*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 and Non-Manufacturing ISM Report On Business® are issued monthly and are considered by many economists to be the most reliable near-term economic barometers available. They are reviewed regularly by top government agencies and economic business leaders. The Manufacturing Report On Business®, 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. It has been issued by the association since 1931, except during World War II.

The Manufacturing and Non-Manufacturing ISM Report On Business® are published monthly by the Institute for Supply Management™. The Institute for Supply Management™, established in 1915, is the world's leading educator of supply management professionals and is a valuable resource for decision makers in major markets, companies, and government. In May 2001 the membership of ISM voted to change the association's name from the National Association of Purchasing Management to the Institute for Supply Management™ to reflect the increasing strategic and global significance of supply management. For further information, see the ISM Web site at www.ism.ws.

The full text version of the monthly 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 ISM Report On Business® featuring the December 2001 data will be released at 10:00 a.m. (ET) on Wednesday, January 2, 2002.

The next Non-Manufacturing ISM Report On Business® featuring the December 2001 data will be released at 10:00 a.m. (ET) on Friday, January 4, 2002.


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