Ralph G. Kauffman, Ph.D., C.P.M.
Ralph G. Kauffman, Ph.D., C.P.M., Assistant Professor of Management University of Houston-Downtown, One Main St., Suite 1017N, Houston, TX 77002, 713-221-8962.
John H. Hoagland, Ph.D., C.P.M.
John H. Hoagland, Ph.D., C.P.M., NAPM Professor Emeritus, Michigan State University, N-116 Business College Complex, East Lansing, MI 48824, 517-332-4460.
Abstract. Important improvements have been made in business and purchasing trends through the use of NAPM business survey data. More recognition of the relevance of supply chain activities to corporate and overall business trends is needed. Illustrations of how purchasing managers can apply these and other data to their particular supply chains are presented.
Historical Perspectives. For more than sixty years some of the very best monthly business trend data have been collected by the National Association of Purchasing Management (and its predecessor NAPA). Today, each month's release of NAPM business survey data is eagerly awaited and immediately flashed around the world, especially on financial news programs. The monthly survey findings are known to have been used for more than thirty years at the highest levels of our government and industry. Research findings resulting from studies of these business survey data have created significant improvements in our business trends.
Local or regional business surveys were started in the 1920s and then formalized nationally in the 1930s. Except for some omissions during World War II, the unique data have been collected and analyzed. Unfortunately, the monthly national statistics prior to 1948 seem to have been lost, but certain early regional data have been preserved.
In the 1950s, the purchasing research at Michigan State University determined that this survey data, and that collected by the publication Purchasing News, were truly unique and had often been misinterpreted because analysts had not recognized that the simple survey questions provided measures of change. The proper interpretation of NAPM business survey data continues to be a problem even today because measures of change are not directly comparable to normal measures of activity levels.
Measures of Change. The primary basis of NAPM purchasing business surveys is a series of three part questions asking responders to indicate whether an activity is up, same, or down this month when compared to the previous month. These data thus provide a direct measure of change.
Statistically, it has been determined that these data have the following advantages:
Importance of Purchasing and Supply Chains. The importance of purchasing and its impact on business trends has long been recognized in the research at Michigan State University. A significant contribution in analyzing the magnitude of business purchases culminated in the 1991 doctoral dissertation by Lt. Col. Michael E. Heberling, Purchases by American Businesses and Governments: Types and Dollar Magnitude by Industries.
Dr. Heberling's research showed that the magnitude of business purchases was noticeably greater than GDP (Gross Domestic Product). Note: GDP is concerned primarily with final consumption and not total business/economic activity. Unfortunately, the government collects and provides data on GDP but not on total business purchases. Thus, too often researchers have had to rely on GDP because of the lack of better data.
Removing Recessions. In the 1960s the Michigan State University research on purchasing trends and purchasing magnitudes lead to the realization that business cycle activity was determined by business purchasing activities. How and when industrial purchasing was done determined many major business trends.
More specifically it was determined that industry wide strikes and threats of strikes endangering iron and steel output had been the primary trigger of false expansions and recessions. The secondary trigger had been war or threat of war.
As knowledge of this research on the impact of strikes spread, the industry-wide labor/management bargaining in steel was changed. A major threat to important supply chain disruptions was removed. A major cause of business recessions was eliminated! Unfortunately, major war threats and/or oil embargoes still can cause major disruptions in supply chains and create recessions.
Anticipating Supplier Actions. To anticipate important supplier actions it is necessary to examine and to understand many of the relationships that exist in the usually extensive and complex supply chains.
One factor that may influence supplier actions is the actual or anticipated overall business conditions. Since NAPM business survey data are some of the very best business trend indicators it might be useful to convert supplier activity measures to monthly change data and then relate those to the NAPM monthly change measures of prices, deliveries, production, new orders, etc.
By knowing past and present relationships between supplier actions and various business trends, better forecasts of future supplier actions can be helpful in planning purchasing strategies and improving supply chain management.
It should be remembered, however, that some supply chain activities significantly influence overall business trends, as in the steel strike illustration. Also petroleum prices associated with the Gulf War were significant factors in the last recession of 1990-91. Past trends are frequently continued into the future unless changed by such things as technology relationships.
Anticipating supplier actions can be very important and should be approached in a variety of ways.
Application of NAPM Report On Business data to Analysis of Supply Chain Environments
A four-step approach will be used to illustrate application of NAPM Report On Business Data to supply chain analysis. This process includes identifying the key products and their suppliers in your supply chain, consulting the Report On Business and other sources of economic information, determination of likely situations you may face as a result of economic developments, and formulation of strategic and tactical response to the best advantage of your organization.
Step 1. Identify the key products and companies in your supply chain. Begin with your suppliers' suppliers, continue through your own company to your principal customers. Identify and chart the relationships between the industry groups and markets represented by members of your supply chain.
Step 2. Regularly read the NAPM Report On Business to identify changes and potential changes in the general economy and in your and your suppliers' and customers' industries. Also read and consult other sources of economic and industry information, e.g. your company management, suppliers' representatives, industry publications, and general business publications.
Step 3. Relate your own company, your customers, and your suppliers' industries to changes in the general economy. Determine likely relative impact on them from changes in the overall economy. Also determine likely impact on your company from changes in one or more industries in your supply chain.
Step 4. Determine strategy and tactics to best take advantage of, or minimize negative effects from, the anticipated changes in the economy or in elements of your supply chain.
Application Example Using a Hypothetical Company. Assume you are the purchasing manager for a firm that makes head- and tail-light assemblies for motor vehicles. The parts that are used include: steel housings that you stamp from cut sheet steel blanks purchased from a metals supply center, molded plastic parts purchased from a custom plastic molding company (you own and provide the molding dies which you purchase from a die maker), electrical parts (light bulbs, connectors, sockets, wire) purchased from electrical parts manufacturers. Your product is shipped to your customers in corrugated cartons The steel blanks and the plastic parts are custom items, the electrical parts and corrugated cartons are commodities.
Analysis - Step 1. Set up the relationship between your firm and the other firms in your supply chain. Identify and include the industry group to which each belongs. For this example, the industries and material flows between them is shown in Figure 1. The Standard Industrial Classification number for each is also indicated.
Step 2. Using the October 1996 NAPM Report On Business from the November 1996 Purchasing Today as an example, a variety of information concerning the industries identified in Figure 1. was found.
For each index, industry groups with the highest rate of increase in October versus September are listed. Industries in the supply chain in Figure 1. that were in the group of industries with the greatest increase over September for each index were:
Production: Production increased at the greatest rate for: Rubber and plastic products; Fabricated metals; machinery, except electrical; paper; chemicals; petroleum products; and primary metals
New Orders: New orders increased at the greatest rate for: Rubber and plastic products; petroleum products; paper; chemicals; and stone, clay, and glass products
Backlog of Orders: Backlog of orders increased at the greatest rate for: Stone, clay, & glass products; and paper
New Export Orders: New export orders increased at the greatest rate for: Paper; Petroleum products; Electrical & electronic equipment; and Machinery, except electrical
Prices: Prices paid for materials increased at the greatest rate for: Chemicals; and Transportation equipment Supplier Deliveries: Supplier deliveries were reported slower for Transportation equipment; Primary metals; and Fabricated metals
Inventories: No industries reported increases
Employment: Employment increased at the greatest rate for: Rubber and plastic products; and Fabricated metals
Imports: Purchase of imports increased at the greatest rate for: Rubber & plastic products; Fabricated metals; Transportation equipment; Electrical & electronic products; and Machinery, except electrical
Note that the only item reported in short supply in October was bearings, polyethylene and steel were reported up in price, and corrugated shipping containers and copper were reported down in price.
In general, the Report indicated that the manufacturing sector as represented by the Purchasing Managers Index was growing but at a very slow rate and slower than in September. In particular, for manufacturing overall, production grew at a faster rate than in September, but new orders grew at a slower rate. Backlogs of orders and inventories of materials contracted at faster rates, prices paid decreased, and supplier delivery performance was slightly slower than in September. Manufacturing industry groups that were in the top ten in rate of growth and are in our example supply chain were: rubber and plastic products; petroleum products; fabricated metals; chemicals; glass, stone, and aggregate; and paper. One general conclusion from this data would be that the manufacturing economy is in a period of slow, steady growth with few material shortage potentials, and little price increase pressure affecting our supply chain except possibly plastic materials and steel.
Step 3. One way to identify potential relative differences in how changes in the general economy affect different industries is to use Coefficients of Percent Change in Real GDP (Cahn, 1994). These coefficients indicate the amount by which the real output of each industry has historically changed relative to changes in real (inflation-adjusted) Gross Domestic Product (GDP). For example, the coefficient of 3.44 for Primary metal industries means that when the growth rate of real GDP increased or decreased by 1%, the real output of the Primary metals industry increased or decreased by 3.44%. (For coefficients for manufacturing industries, see NAPM Insights, October 1994, page 64. For a copy of the complete list of coefficients, contact the first author of this paper). For the industries in the example supply chain, these coefficients are (ranked by coefficient):
||Coefficient of Percent Change In Real GDP
||Motor vehicles and equipment
||Primary metal industries
||Rubber & misc. plastic products
||Machinery, except electrical
||Fabricated metal products
||Stone, clay, & glass products
||Paper & allied products
||Chemicals & allied products
||Electrical & electronic equipment
||Petroleum & coal products
This analysis shows a wide range of difference across the membership of this supply chain in historical reaction to changes in the general economy. Note that your own industry and that of your customers has the largest historical relationship with GDP, i.e. if the growth rate of real GDP increased 1%, the real output of your industry increased 5.15%. Note also that all of your 1st 2nd and 3rd tier suppliers have coefficients greater than 1, meaning that their real output has changed by a larger percentage than has real GDP. Remember that these coefficients work in both directions - increasing conditions or decreasing conditions.
Of course, this is only a general indication of what has happened in the past at industry level. You must consult with your company planning function or your management to determine how your company relates to the general economy in both timing and magnitude - do changes in your company activity lead, coincide, or lag the general economy? Are changes in your level of activity proportional to, smaller than, or larger than changes in the general economy? The same determination must be made for all key members of your supply chain by consulting with their representatives and management.
Step 4. Possible strategic and tactical actions that you should consider: long-term contracts to lock in price and service factors while the economic situation is relatively quiet in most of your supply chain. Include escape clauses in contracts in case business activity slows and the potential for price reduction occurs during the contract term.
This also may be a good time to develop partnership or alliance relationships where they may be advantageous and you do not have them, and where conditions are conducive to long-term sole-source supply.
In preparation for future changes in economic conditions, either growth or contraction, examine the relationships between the particular firms that supply you directly and those that supply your suppliers. Try to determine their particular sensitivity to changes in their buying and selling markets. Look for areas of vulnerability, e.g. if your supplier is a minor customer of one of their suppliers, in times of strong growth your supplier may not be able to obtain sufficient supply or may experience large price increases. Where feasible, work with such suppliers to assure that they have plans that can be put into place to protect their supply and prices and, in turn, your supply and prices. You may also want to develop contingency plans for possible supply shortages and price increases by cultivating relationships with alternate suppliers.
Refer to the monthly NAPM Report On Business and other business publications and data sources including specialized television networks and the Internet to keep abreast of changes and developments that may affect you, your suppliers, or their suppliers.