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Purchasing Managers Index (PMI)

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Introduction

The Institute for Supply Management (ISM), formerly known as the National Association of Purchasing Management (NAPM), and was founded in 1915 by a number of purchasing agents in New York City and Buffalo. At that time a number of regional purchasing organizations were being formed, such as the Purchasing Agents Association of Cleveland, and in 1916 the National Association was made up of eight local associations with 250 members. In 2002 the membership of the NAPM decided to change the name of the organization to the Institute for Supply Management to reflect the broader work that their members perform. Today the ISM is the largest supply management association in the world, made up of 163 local associations, representing over 40,000 supply chain professionals.

Purchasing Managers Index

The ISM releases the Purchasing Managers Index (PMI) on the first business day of each month at 10 a.m. Eastern Standard Time and is a key near-term indicator used by financial analysts and economists. The PMI is of high importance to the financial markets and will almost always affect share prices based on the movement of the index. Economists believe that the PMI is the single best snapshot of the condition of the factory sector and helps predict industrial production. The PMI does have nine sub-indices that include the following.

  • New Orders: reflects the levels of new orders from customers.
  • Production: measures the rate and direction of change, if any, in the level of production.
  • Employment: reports the rate of increase or decrease in the level of employment.
  • Vendor Deliveries: reveals if deliveries from vendors are faster or slower.
  • Inventories: reflects the increases and decreases in inventory levels.
  • Customer Inventories: rates the level of inventories the organization's customers have.
  • Backlog of Orders: measures the amount of backlog of orders, whether growing or declining.
  • New Exports Orders: reports on the level of orders, requests for services, and other activities to be provided outside of the US.
  • Imports: measures the rate of change in materials imported.
  • Prices: reports whether organizations are paying more or less for products or services.

The first PMI report was published in 1948 and now has expanded to include manufacturing and non-manufacturing. The non-manufacturing PMI is published on the third business day of each month. In addition the ISM publishes a semi-annual economic forecast in May and December.

The PMI is derived from a questionnaire that is sent out each month to members of the ISM Business Survey Committee. The responses are obtained via the internet and will pertain to only the current month. The ISM aims to obtain a response rate of eighty percent each month to guarantee an accurate snapshot. The questions on the PMI survey ask the respondent to say whether the situation is either better, same or worse conditions than previous months for five key areas; new orders, production, employment, vendor deliveries, and inventory levels. The PMI is then calculated from these five equally weighted elements.

Diffusion Index

The Purchasing Managers Index is in fact a diffusion index. It measures the degree to which a change in something is dispersed or diffused in a particular group. The index shows which trend more prevalent; better, same or worse. The questions on the PMI survey ask respondents to report on the five elements based on their data for the month. The PMI will then show the month on month change. If there was no change, e.g. things were the same; the index would have a value of 50. If the things were getting worse the index would show a value of below 50, and it things were better the index would be greater than 50.

Example of PMI

If a survey came back with ten percent indicating things were better, sixty percent saying things were the same, and thirty percent saying things were worse, the index would be calculated using the following formula

INDEX = (A * 1) + (B * 0.5) + (C * 0)

  • A = Percentage number of responses indicated things were better than last month
  • B = Percentage number of responses indicated things were the same as last month
  • C = Percentage number of responses indicated things were worse than last month

In our example the calculation would be as follows

INDEX = 10 + (60 * 0.5) + 0 = 40

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