Ralph G. Kauffman, Ph.D., C.P.M.
Ralph G. Kauffman, Ph.D., C.P.M., Univ. of Houston-Downtown, Houston, TX 77002, 713-221-8962, firstname.lastname@example.org
Norbert J. Ore, C.P.M.
Norbert J. Ore, C.P.M., Chesapeake Corp., Richmond, VA 23227, 804-915-2677, email@example.com
Abstract. Brief background and history of the development of the NAPM Report On Business® is presented. Both the manufacturing and non-manufacturing versions of the report are described as to content and development. A brief description of diffusion indexes is provided. Also discussed is how the two reports originally came to exist and the exceedingly high reputation of the manufacturing survey among economists and other users. The monthly process to gather data and produce reports is described, and suggestions and examples are provided on how to use the report data in the development of purchasing strategy.
Introduction. The National Association of Purchasing Management (NAPM) has collected information on business conditions in the manufacturing sector of the U. S. economy since the early 1920s. Since 1931 NAPM has published business survey data on a regular basis except for four years during World War II. The Purchasing Managers Index, which is the composite index of the NAPM business survey, (now known as the Manufacturing NAPM Report On Business®), has become one of the most widely known and watched indicators of business activity in the United States. The survey's concept has been applied in the United Kingdom and other countries by NAPM counterpart organizations. Because the NAPM data spans numerous business cycles, economists find it useful in studying long-term economic trends.
While the NAPM manufacturing data has been very useful to purchasers and economists, it only tells part of the story of economic activity. In recent years manufacturing has comprised slightly less than 20 percent of the total Gross Domestic Product (GDP). In terms of business activity as measured by total purchases, wages and salaries, and other payments, manufacturing has been estimated at about 33 percent of the total (Hoagland, 1993). Because of the large amount of economic activity outside of manufacturing and also because a recent survey indicated that only slightly over half of NAPM members (53.7%) identified themselves as being from the manufacturing sector, NAPM decided in 1996 to develop a survey of the non-manufacturing sector. This paper will review the contents, purpose, and processes involved in both surveys.
The Manufacturing NAPM Report On Business®, What is it? The Manufacturing NAPM Report On Business® is released each month on the first business day of the month. It is thus one of the first available indications of business conditions in the preceding month. From 1948 through May 1971 the NAPM manufacturing report has included monthly change indexes for Production, New Orders, Inventories, Employment, and Prices. Beginning in 1971 several additional series were added: Supplier Deliveries in June 1971, New Export Orders in January 1988, Imports in October 1989, and Backlog of Orders in January 1993. Also, in the early 1980s the Purchasing Managers Index (PMI) was developed by the U. S. Department of Commerce and NAPM. The PMI consists of a weighted average of the seasonally adjusted NAPM indexes (weights in parentheses) for Production (.25), New Orders (.30), Employment (.20), Supplier Deliveries (.15), and Inventories (.10). The weights were determined to reflect the maximum relationship between the included NAPM indexes and Gross National Product. After development, the PMI was back-calculated for prior years. The monthly indexes for all series except Backlog of Orders are seasonally adjusted using seasonal adjustment factors that are revised annually by the U. S. Department of Commerce.
In addition to the ten indexes, the monthly manufacturing report also includes lists of commodities that participants have reported as being either in short supply, or up or down in price from the preceding month. Also available is information on Buying Policy - lead time for production materials, capital goods, and maintenance, repair, and operating (MRO) items. In addition to monthly reports, a semi-annual forecast survey is conducted in April and November of each year. The results of the semi-annual forecast are normally released at the annual International Purchasing Conference and on the second Tuesday in December.
The Non-Manufacturing NAPM Report On Business®, What is it? The Non-Manufacturing NAPM Report On Business® is released each month on the third business day of the month. It is thus also an early indicator of business conditions in the preceding month. The NAPM non-manufacturing report was patterned after the NAPM manufacturing report because of that report's long-running success and to enable comparisons to be drawn between the two sectors. Since its inception in July 1997, the NAPM non-manufacturing report has included monthly change indexes for Business Activity, New Orders, Backlog of Orders, New Export Orders, Inventory Change, Inventory Sentiment, Imports, Prices, Employment, and Supplier Deliveries. The Business Activity index provides similar information to the Production index in the manufacturing survey. The Inventory Change index provides the same type information as the Inventory index in the manufacturing survey. The Inventory Sentiment index is unique to the non-manufacturing report and indicates how purchasers feel about their current level of inventory in view of current business conditions. Until there are a number of years of data available, it will not be meaningful to develop a weighted composite index similar to the manufacturing Purchasing Managers Index. Also, until at least three years of data are available, it will also not be possible to calculate seasonal adjustment factors for the non-manufacturing indexes.
In addition to the ten indexes, the non-manufacturing report also includes lists of commodities that participants have reported as being either in short supply, or up or down in price from the preceding month. In addition to monthly reports, a semi-annual forecast survey is conducted in April and November each year. The results of the semi-annual forecast are normally released at the annual International Purchasing Conference and on the second Tuesday in December.
Diffusion Indexes. The indexes in the monthly NAPM reports on both manufacturing and non-manufacturing business are indicators of month-to-month change in the level of activity and are called diffusion indexes. Diffusion indexes are so called because they indicate the degree to which the indicated change is dispersed or "diffused" throughout the sample population (Valentine and Ellis 1991). Diffusion indexes have leading indicator properties and are convenient summary measures that show the prevailing direction of change and the scope of change.
Survey respondents to both surveys indicate for each index question whether their activity for that question, e.g. New Orders, has increased, decreased, or remained the same from the previous month's level. Depending on the question, the choices may alternately consist of faster, slower, or unchanged and, for the non-manufacturing question on inventory sentiment, too high, too low, or about right. NAPM calculates diffusion indexes by adding the percentage of respondents who indicated an increase in activity to one-half the percentage who indicated no change. For the manufacturing report this index is then multiplied by a seasonal adjustment factor to result in the published index. The non-manufacturing indexes are not seasonally adjusted because not enough data is yet available to calculate seasonal adjustment factors.
An index above 50 indicates, that the activity is increasing, below 50 that it is decreasing, and exactly 50 indicates no change in the activity. The distance from 50 generally indicates the relative strength or weakness and rate of change of the activity from the previous month. For example, when a diffusion index is rising in its increase range (50 to 100 for NAPM indexes) increased activity is becoming more dispersed and it implies that the activity is increasing at an increasing rate (Bowers 1985).
The Manufacturing NAPM Report On Business®, Why Does it Exist? Although NAPM had collected some business conditions data in the 1920s, it was not until the early 1930s that it began collecting and publishing on a regular basis. By some accounts the regular reporting that began in 1931 was at the request of the federal government which at the time was looking for additional data on current business conditions. In the intervening almost seven decades, the manufacturing report has developed a distinguished reputation.
Many economists consider it to be the most reliable near-term economic barometer available. Alan Greenspan, the current Chairman of the Federal Reserve System, has said, "I find the surveys conducted by the purchasing managers (NAPM) to be an excellent supplement to the data supplied by various departments and agencies of government." Joseph E. Stiglitz, former chairman of President Clinton's Council of Economic Advisors, has said, "The Manufacturing NAPM Report On Business® has one of the shortest reporting lags of any macro-economic series and gives an important early look at the economy. It also measures some concepts (such as lead times and delivery lags) that can be found nowhere else. It makes an important contribution to the American statistical system and to economic policy." One key reason why the Manufacturing NAPM Report On Business® is so highly respected is that it is based on hard data and not on conjecture. Also, the data is never revised once released except for small adjustments in seasonal factors.
In January 1989, the NAPM Supplier Deliveries Index became a standard element of the Department of Commerce Index of Leading Indicators. (Note: Since January 1996 this index has been compiled by The Conference Board).
The Non-Manufacturing NAPM Report On Business®, Why Does it Exist? In 1992 and 1993 discussions occurred about the possibility of NAPM establishing a services or non-manufacturing survey similar to the respected manufacturing survey. Surveys from specific non-manufacturing industries were conducted by the Coalition of Service Industries at the time. The Coalition's surveys were reviewed and a special ad hoc committee took a firm position at the time in opposition to the development of a non-manufacturing industry survey. Their reasoning was that they did not want to disrupt the existing manufacturing survey and thought the first step for NAPM was to develop educational materials for the non-manufacturing sector. As a result, a symposium for the non-manufacturing sector was developed.
In 1996 a renewed effort was made to establish a non-manufacturing survey. The U. S. economy was growing and becoming more diversified. Various sectors within non-manufacturing were becoming more important. In addition, NAPM membership had become more diversified. A committee consisting of economists, government officials, and purchasing and supply practitioners was formed in mid-1996 to attempt to develop a non-manufacturing survey. The success of NAPM-New York in particular in implementing separate manufacturing and non-manufacturing indexes in their regional business survey provided an indication that useful additional information could be obtained. Because of the relative lack of data on non-manufacturing business in general, all members of the development committee endorsed the development effort. The objectives adopted by the committee for the non-manufacturing survey included:
Following a period of pilot data collection, data was collected for public release beginning in July, 1997. The first public release of data was in June 1998 at which time data from July 1997 through May 1998 was released. Since June 1998 data has been released monthly on the third business day of the month following the month to which the data pertains.
How the NAPM Reports On Business® are Generated. Both NAPM Reports On Business® are generated from monthly replies to questionnaires sent to over 350 purchasing executives for each survey. The two business survey committees are the largest committees in NAPM, committee membership is completely anonymous (only the committee chair and a support person at NAPM headquarters know the identity of committee members), and of course the committees never meet. Membership is for as long as the member wants to participate and is engaged in purchasing activity in either manufacturing or non-manufacturing industries. Some members of the manufacturing committee have participated for more than 20 years. The number of committee members from each business category within manufacturing and non-manufacturing is approximately proportional to the percentage of Gross Domestic Product (GDP) represented by each of 20 manufacturing business categories and 17 non-manufacturing business categories respectively. Efforts are also made to include a mix of company sizes and a broad geographic distribution of company locations in each survey. To prevent inflationary or deflationary influences, respondents are instructed to use unit measurements rather than dollars when responding to questions.
The monthly process is the same for both surveys. Each month the support person at NAPM headquarters mails or faxes the appropriate questionnaire to each member of the two committees. (Note: efforts are underway to determine the feasibility of collecting the data via e-mail at the respondent's option). The respondents complete the questionnaire by answering questions on each index and add any comments they wish and return it to the support person who enters the response data into a computer program. The program computes the percentage responses and all of the indexes and compiles commodities indicated in short supply or up or down in price. The results from the program and all of the questionnaire comments are sent to the two respective committee chairs. The chairs review and analyze the data and comments and prepare the monthly reports. The reports are transmitted back to NAPM headquarters where they are put into press release and Purchasing Today formats for printing, distribution, and posting on the NAPM Home Page. On the release days (first business day of the month for manufacturing and third business day for non-manufacturing), headquarters sends the reports to the news media and other interested parties and the chairs conduct media interviews as scheduled by headquarters. The reports are also posted on the NAPM Home Page at that time. A similar process is used for the semi-annual forecast surveys.
How to Use the NAPM Report On Business® Data To Develop Purchasing Strategy. Three challenges or types of issues in purchasing strategy that have been identified include: interpretation and support of corporate objectives, utilization of purchasing and supply functions and issues in corporate strategy, and selection of specific strategies to be employed (Ellram and Carr 1994, Leenders and Fearon 1997). Data in the NAPM business reports and other economic data can be applied to all three areas. Several general references that discuss use of NAPM data in purchase planning and strategy development include Bretz (1990), Kauffman (1994), and the NAPM CD-ROM, Using the NAPM Report On Business® to Forecast Purchase Trends.
Purchasing can use NAPM data to assess potential effects of the current and near future economic climate on achievement of corporate objectives. The Purchasing Managers Index and other indexes provide insight into what the economy is currently doing and what it is likely to do in the near future. Because the NAPM data is national, local data such as collected by a number of NAPM affiliates must also be taken into account. For example, consider a situation where a corporate objective of a manufacturer is to reduce employment costs, and the NAPM manufacturing employment index and other indicators are saying that manufacturing employment is increasing at a rapid rate and the current labor market is tight. In this climate an employment cost reduction tactic of offering lower salaries to new hires would likely result in not being able to hire qualified personnel.
Purchasing can also use NAPM data to relate purchasing and supply functions and issues to corporate strategy. For example NAPM data can be used to assess general economic conditions and their potential impact on particular purchase markets. Again, local data and data pertaining to particular supply markets and individual suppliers must also be considered and evaluated. For example, consider a company in a rapidly growing industry that needs additional production capacity to meet demand. The firm might be debating whether to add capacity by temporary means such as additional shifts or subcontracting, or by more permanent means such as constructing additional buildings. NAPM data such as the Purchasing Managers Index, the manufacturing production index, the non-manufacturing business activity index, the new orders indexes for both surveys, along with other data on general economic conditions and on supply and demand conditions in the company's particular markets can be helpful in assessing whether conditions are likely to result in continued long-term rapid growth in demand for the company's products (suggesting justification for permanent capacity increase) or to result in a slower or no growth future (suggesting justification for temporary capacity increase).
Purchasing can use NAPM data to assist in selection of particular purchasing strategies to be employed. NAPM data can be used to assess the economic climate. In the area of purchase price strategy, for example, the NAPM data provides a guide to industrial prices in general and to particular prices that have recently been moving up or down. Data that is more product-specific can be obtained from, for example, the Federal Government's Producer Price Index. Consider, as a particular pricing strategy example, a company that is trying to determine a pricing strategy for a major raw material or component. In particular, they are trying to determine whether to lock in a price long-term or to make only a short-term price commitment. The NAPM price indexes along with other price data can indicate recent history and current price trends. If the trends are up and general economic conditions, as indicated by the Purchasing Managers Index and other indicators, are strong perhaps a lock-in strategy is best. On the other hand, if trends are down and economic conditions appear to be weakening, perhaps a short-term or spot commitment on price would be best.
Bowers, D. A., An Introduction to Business Cycles and Forecasting, Addison-Wesley, 1985
Bretz, R. J., "Forecasting with the Report On Business®," NAPM Insights, August 1990, 22-25
Ellram, Lisa M., and A. Carr, "Strategic Purchasing: A History and Review of the Literature," International Journal of Purchasing and Materials Management, Spring 1994, 9-18
Hoagland, John H., "Forecasting Business Trends," 78th Annual International Purchasing Conference Proceedings, National Association of Purchasing Management®, May 1993
Kauffman, Ralph G., "Make the NAPM Report On Business® Work For You," NAPM Insights October 1994, 62-64
Leenders, M. R., and Harold E. Fearon, Purchasing and Supply Management, 11th ed., Irwin, 1997
Using the NAPM Report On Business® to Forecast Purchase Trends, CD-ROM, National Association of Purchasing Management, Tempe AZ, 1996
Valentine, L. M., and D. F. Ellis, Business Cycles and Forecasting, South-Western, 1991