FOR RELEASE: December 10, 2002

SUPPLY CHAIN PRACTICES IN 2003

Manufacturing

In response to a special question regarding supply chain optimization, 74 percent of purchasing and supply executives plan to take new steps in 2003 to improve their supply chain management practices. Better inventory management is at the top of their list. Improved supplier relationships is the second choice for manufacturers. Technology improvements is next, followed by E-commerce and focus on global sourcing as issues of concern by purchasers.

1. Better inventory management
2. Supplier relationships and alliances
3. Technology Improvements
4. E-commerce
5. Focus on global sourcing

Non-Manufacturing

Responding to a special question regarding supply chain improvements in 2003, 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 electronic commerce and e-procurement, as the number one means of improvement. Following that preference, members indicated other initiatives as listed below:

1. Electronic commerce and e-procurement
2. Technology improvements
3. Procurement consolidation and strategic sourcing
4. Supplier consolidation
5. Reorganization and process improvements

INVENTORY-TO-SALES RATIO

Manufacturing

Purchasers continue to reduce their purchased inventories as has been consistently reported for the last 13 years in the monthly Manufacturing ISM Report On Business®. In this forecast, 37 percent expect to reduce their purchased inventory-to-sales ratio during 2003. This compares to 8 percent who expect the ratio to grow and 55 percent who predict no change.

Non-Manufacturing

Of the 41 percent of non-manufacturing purchasers who answered this question, 23 percent anticipate reducing their purchased inventory-to-sales ratio during 2003. An additional 11 percent expect their ratio to rise and 66 percent see no change.

Predicted Change in Purchased Inventory-to-Sales Ratio
	Manufacturing			Non-Manufacturing
	For 2002 Predicted Dec 2001	Balance of 2002 Predicted May 2002	For 2003 Predicted Dec 2002	For 2002 Predicted Dec 2001	Balance of 2002 Predicted May 2002	For 2003 Predicted Dec 2002
Greater	14%	15%	8%	12%	11%	11%
Same	52%	47%	55%	63%	71%	66%
Smaller	34%	38%	37%	25%	18%	23%
Diffusion Index	40%	38.5%	35.5%	43.5%	46.5%	44.0%

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 2001, respondents expect only slight improvement as only 13 percent expect "good" holiday sales. Over half (72 percent) expect them to be "average," while 15 percent expect them to be "poor."

Non-Manufacturing

The outlook for holiday retail sales for 2002 is slightly brighter than manufacturing respondents' estimation. In assessing prospects for sales in their geographic areas, only 17 percent of non-manufacturing members predict sales will be "good," while 22 percent expect them to be "poor," and 61 percent expect them to be "average."

Expectations for Holiday Sales
	Manufacturing			Non-Manufacturing
	Dec 2000	Dec 2001	Dec 2002	Dec 2000	Dec 2001	Dec 2002
Good	42%	10%	13%	46%	15%	17%
Average	54%	61%	72%	50%	58%	61%
Poor	4%	29%	15%	4%	27%	22%

ECONOMIC CONCERNS

Manufacturing

The weak economy is the number one concern of purchasers in the year ahead. They are also concerned about labor and benefit costs, terrorism / threat of war, energy costs and supply, and materials shortages.

Economic Concerns

1. Weak economy
2. Labor and benefits costs
3. Terrorism / threat of war
4. Energy costs and supply
5. Material shortages

Non-Manufacturing

The number one economic concern of non-manufacturing purchasing executives in late 2002 is labor and benefit costs. That is closely followed by weak economy/recession. Other concerns include: energy costs, inflation, and terrorism and the threat of war.

Economic Concerns

1. Labor and benefit costs
2. Weak economy / recession
3. Energy costs
4. Inflation
5. Terrorism / threat of war

OUTLOOK FOR THE NEXT 12 MONTHS

Manufacturing

Members' companies remain optimistic about the next 12 months, but less so when compared to their May 2002 responses. The 46 percent who report a better outlook is significantly less than the 68 percent response received in May 2002. The 38 percent who report that the outlook is the same is up from the 23 percent reported in May 2002, and the 16 percent who indicated the outlook is worse is higher than the 9 percent reported in May 2002.

Non-Manufacturing

The outlook for the next 12 months for non-manufacturing survey members remains positive, but to a lesser degree than in May 2002. The proportion who project the next 12 months to be better is 51 percent (64 percent in May), the proportion who report that the outlook is the same is 35 percent (25 percent in May), and the proportion who indicated a worse outlook is 14 percent (11 percent in May).

Outlook — Next 12 Months
	Manufacturing			Non-Manufacturing
	Dec 2001	May 2002	Dec 2002	Dec 2001	May 2002	Dec 2002
Better	19%	68%	46%	31%	64%	51%
Same	63%	23%	38%	61%	25%	35%
Worse	18%	9%	16%	8%	11%	14%
Diffusion Index			65%			68.5%

INDUSTRY SPECIFIC QUESTIONS

Manufacturing

U.S. DOLLAR — Predicted Strength vs. Major Trading Currencies — in 2003

Purchasing and supply executives remain optimistic concerning the prospective strength of the U.S. dollar for 2003. The average diffusion index for this forecast is 61.9 percent, compared to 64.4 percent for the May 2002 forecast. Of the seven currencies, none are expected to outperform the dollar; however, the Euro, Taiwan $, and Pound are expected to be the strongest of the major currencies against the dollar.

U.S. Dollar Will Be:	Euro	Can. $	British Pound	Japanese Yen	Mexican Peso	Korean Won	Taiwan $
Stronger than	34%	41%	28%	46%	59%	45%	33%
Same as	42%	44%	58%	35%	25%	42%	48%
Weaker than	24%	15%	14%	19%	16%	13%	19%
Diffusion Index	55%	63%	57%	63.5%	71.5%	66%	57%

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 27 percent experienced an increase in profit margins during the second and third quarters of 2002, while 35 percent found smaller profit margins and 38 percent had no change in margins during the same period. Looking ahead over the period November 2002 to April 2003, 42 percent expect improved profit margins, 16 percent expect lower profit margins, and the remaining 42 percent of members anticipate no change in their profit margins over that period of time.

Profit Margins
	Non-Manufacturing
	Apr 2002 through Sep 2002 Reported Dec 2002	Nov 2002 through Apr 2003 Predicted Dec 2002
Better	27%	42%
Same	38%	42%
Worse	35%	16%
Diffusion Index	46.0%	63.0%

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 (23 percent) and appear to be receiving benefits from technology. The remaining 72 percent are less than three-fourths complete, with the majority of those 50 to 75 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 49 percent, indicating that, on average, 51 percent of potential improvement is yet to be gained. This compares to 51 percent reported realization in May 2002, 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	23%	18%
50-74	37%	36%
Less than 50	35%	42%

SUMMARY

Manufacturing

• Operating rate is currently 79.2 percent of normal capacity.
• Capital expenditures declined 6 percent in 2002.
• Capital expenditures will increase 4.6 percent in 2003.
• Production capacity will increase 3.7 percent during 2003.
• Prices manufacturers pay decreased 0.6 percent on a weighted average basis in 2002.
• Overall 2003 prices will increase 1.8 percent from 2002.
• Labor and benefits costs will increase at a 2.6 percentage rate in 2003.
• Manufacturing employment will decrease 0.6 percent in 2003.
• The U.S. dollar is expected to remain strong versus major currencies.
• Exports will continue to grow in 2003.
• Imports will continue to grow in 2003.
• Holiday retail sales as viewed by purchasers will be slightly improved over 2001.
• Manufacturing revenues (nominal) are up by 1.1 percent in 2002.
• Manufacturing revenues (nominal) will be up by 5.4 percent in 2003.
• Major concerns to manufacturers: Weak economy, labor and benefits costs, terrorism / threat of war, energy costs and supply, and material shortages.
• Overall attitude of manufacturing management — continued optimism, significantly better than December 2001.

Non-Manufacturing

• Operating rate is currently 83.9 percent of normal capacity.
• Capital spending decreased 2.6 percent in 2002.
• Capital spending will decrease 0.4 percent in 2003 compared to 2002.
• Production and provision capacity will increase 4.6 percent in 2003.
• Prices paid increased 0.5 percent during 2002.
• Prices paid will increase 0.9 percent in 2003.
• Labor and benefit costs will increase 1.1 percent during 2003.
• Non-manufacturing employment will increase 0.2 percent in 2003.
• Exports by non-manufacturing industries will increase during 2003.
• Imports by non-manufacturing industries will increase during 2003.
• Holiday retail sales expected to be slightly improved over 2001.
• Non-manufacturing revenues (nominal) are up by 0.9 percent in 2002.
• Non-manufacturing revenues (nominal) will be up by 5.7 percent in 2003.
• Major concerns: labor and benefit costs, economic weakness and recession, energy costs, inflation, and terrorism / threat of war.
• Non-manufacturing purchasers are more optimistic about the next 12 months than they were one year ago.

*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 ISM 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. 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 2002 data will be released at 10:00 a.m. (ET) on Thursday, January 2, 2003.

The next Non-Manufacturing ISM Report On Business® featuring the December 2002 data will be released at 10:00 a.m. (ET) on Monday, January 6, 2003.

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