We hear about it nearly every month – the Institute for Supply Management’s (ISM) manufacturing index. It’s one of those metrics your leadership may or may not be tuned into.
Just this morning, the October index was released and came in at 50.8 percent, holding steady over the last few months. View the news here. Some manufacturers follow the index closely, as the supply managers who answer the institute’s survey are their everyday customers. Their perceptions of the market matter.
But for those of you who don’t live and die by what this group of people has to say. We thought we’d provide some insights on what you can learn from the index, and more importantly, how you can model it for your own metrics.
First, the facts about the index:
Released monthly, this report tracks the overall manufacturing activity that took place in the previous month and uses an index with values between 0 and 100. If the index falls below 50, this indicates a potential economic recession due to a drop in manufacturing ordering activity. On the flip side, if the value is above 50, activity has increased and may be a sign of economic growth.
Throughout the past few months alone, the manufacturing industry’s index has held steady, quickly dropped and then just last month, rose above 50 again. In addition to consumer spending and the overall state of the financial market, the index can also be affected by natural disasters and government involvement. The Institute collects data through a survey of purchasing and supply executives nationwide and across a variety of SIC codes. The respondents are asked to report only on the current month’s data.
Depending on the product you manufacture, you may or may not see these ordering habits reflected in your own orders. And if you do, you may see a time delay. If your organization trends to the ISM, it is an important metric to watch for predicting your future volumes. If your organization doesn’t follow these trends, we recommend that you take a look at this methodology for developing a snap shot view of your business.
Key measurements should revolve around supply management as well as production levels, inventory and investments. And while hard data is always critical – real materials quantities, hours expended, and dollars spent – you may also discover that a survey in some circumstances may be appropriate. A group of questions with quantifiable, multiple-choice answers can help you build your own index.
To be successful and sustainable, every manufacturing company needs to have a clear vision and roadmap; therefore capturing metrics like this is crucial. Once you have this data at your fingertips, you will be able to forecast trends and pinpoint areas of improvement. Whether it’s planning ahead to protect the company from over-hiring during a dip in activity or gauging the effectiveness of a tool or strategy, your internal metrics and indices allow you to focus on the right things for a more efficient and productive manufacturing environment.