Transcript Slide 1

ISQA 451 Business Forecasting
Dr. Alan Raedels C.P.M.
Summer 2010 Week 5
Forecasting Availability and Price
ISM Report on Business
• What is it?
• How does it work?
What are the Reports on Business?
• PMI (Purchasing Managers’ Index)
– Survey of over 300 manufacturing companies covering
.manufacturing NAICS.
– Respondents are selected based upon importance of
the NAICS to GDP and by region.
– Published monthly since 1931 except during WW II.
– Respondents are asked a series of questions which
require a response of higher, same or lower.
– Respondents are also asked to comment on
commodity prices and availability.
– Inside Supply Management also provides information
on price and labor trends and international markets.
What are the Reports on Business?
• NMI (Non-manufacturing Index)
– Survey of over 300 non-manufacturing companies covering nonmanufacturing NAICS.
– Respondents are selected based upon importance of the NAICS
to GDP and by region.
– Published monthly since 1997.
– Respondents are asked a series of questions which require a
response of higher, same or lower.
– Respondents are also asked to comment on commodity prices
and availability.
What information is available?
• Results are reported as a diffusion index .. Indexes reported:
PMI
Mfg Production
Mfg New Orders
Mfg Inventory
Mfg Supplier Deliveries
Mfg Employment
Mfg Backlog of Orders
Mfg New Export Orders
Mfg Imports
Mfg Prices
Mfg Customers’ Inventories
NMI
Nmfg Production (Business Activity)
Nmfg New Orders
Nmfg Inventory
Nmfg Supplier Deliveries
Nmfg Employment
Nmfg Backlog of Orders
Nmfg Export Orders
Nmfg Imports
Nmfg Prices
Nmfg Inventory Sentiment
Additionally, Buying Policy is reported for Capital Expenditures,
Production and MRO in average days.
Example Up in Price List
Manufacturing
Aluminum (11)
Butadiene Products;
Caustic Soda (3);
Copper* (3);
Corrugated Containers (3);
Galvanized Coils;
Nylon Products;
Paper; Paper Products;
Plastics (5);
Plastic Resins (5);
Polypropylene (6);
Pulp (2);
Stainless Steel (2);
Stainless Steel Products (2);
Steel (11);
Steel Products (5); and
Sulfuric Acid (3).
Non—manufacturing
Beef (2);
Plastic Film (3);
Brass Fittings;
Plastic Products;
Carbon Pipe (2);
Plastic Resins;
Copper;
Pork Products;
Corrugated Products (3);
Refrigerant;
Cotton Products;
Seafood;
Dairy;
Steel; & Steel
Products (4).
Diesel Fuel; #2
Diesel Fuel (3);
Drywall;
Fuel (5);
Gasoline (7);
Lumber & Wood Products (2);
Paper (4);
Pharmacy Products;
Example Down in Price List
Manufacturing
Aluminum Products; and
Copper*.
Non-Manufacturing
• No commodities are reported down in
price
Example Short Supply List
• Manufacturing
– No commodities are
reported in short
supply
• Non-manufacturing
– No commodities are
reported in short
supply
How to use the information?
• Plot company and industry information and compare with
relevant NAPM indexes
– For example, plot major commodity price such as
aluminum, zinc, DRAMS and compare with PMI or
Price indexes.
• Look at macroeconomic trends and evaluate general
direction of the economy.
– For example, inflation and Producer Prices versus
NAPM Price Index.
• Look at what is going on in other areas of the country.
• Read the Pricing and Trends pages in Inside Supply
Management.
Additional Information Sources
• Kaufman, Ralph G., “Making the NAPM Report on
Business Work for You,” NAPM Insights, October 1994,
pp. 62-64.
• Helsmoortel, Martin L., “Using Key Economic Indicators,
NAPM Insights, January 1995, pp. 30-32.
• Raedels, Alan R., “Tracking Inflation’s Effect on Prices,”
NAPM Insights, January 1995, pp. 6-7.
• Using the NAPM Report on Business to Forecast
Purchase Trends, CD-ROM, NAPM 1996.
Knowledge required to complete
the forecast
• Total market capacity vs current and expected
demand.
– Capacity additions announced?
• What forces are competing for the required
materials?
– What other products use the same materials
• What economic factors will affect availability
– Financial stability of suppliers
– Global and political events that may affect availability
–
Source: “Painting a Clear Picture,” Purchasing Today, June 1996, Vol.7 No. 6, p. 4
When Forecasting
• Track and record changes in market
conditions.
• Read and review a variety of published
indexes and forecasts of market
conditions.
• Review the ISM Report on Business.
• Track your historical needs.
• Discuss market conditions with your
suppliers.
–
Source: “Building an Effective Forecast,” Purchasing Today, February 1997, Vol. 8, No.2, p.43
R&B Composite Indices
a
Change
from
Previous
Month**
Series
Index
April
Series
Index
March
Current
Direction
EI
55.9
56.2
Unchanged
5
Unchanged
New Orders
59.4
62.2
Unchanged
9
Unchanged
Production
61.4
60.2
Increasing
9
Increasing
Employment
51.0
50.6
Neutral
2
Unchanged
Supplier
Deliveries
54.7
52.0
Unchanged
7
Unchanged
Trend*
(Months)
Forecasting Price
• Hedging
• Price indexes
– Producer price indexes
– ISM price index
Hedging
• Copper sells for $0.25 per lb. with year
Future price of $0.30 per lb.
• Your firm has just won a contract to
deliver a quantity of electric motors which
will require 10,000 lbs of copper in six
months. If the price of copper goes up
your firm will lose a bundle. What actions
would you take to prevent the loss?
HEDGING
• Hedging requires equal and opposite
actions on the spot and futures markets.
• If the price goes up to $0.30 /Ib in six
months and the futures price is $0.35 lb
would take the following actions:
Spot Mkt
Futures Mkt
Today: Sold @ $0.25
Bought @ $0.30
6 mths: bought @ $0.30 Sold @ $0.35
Net:
-$.05/lb
+$0.05/lb
Hedging
• This illustrates a perfect hedge. In reality,
the price of the future begins to approach
the spot price.
• The alternative is to buy it now and carry
in inventory for six months at a cost of
$0.05/lb. (40% of purchase price).
Producer Price Indexes
• Find a PPI that fits the commodity.
• Plot the actual price history of the item or
product family. Analyze the relationship
between the actual price and the PPI.
• Develop a forecasting model for the
relationship.