ISQA 451 Business Forecasting

1. ISQA 451 Business Forecasting Dr. Alan Raedels C.P.M. Summer 2010 Week 5 Forecasting Availability and Price

2. ISM Report on Business • What is it? • How does it work?

3. 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.

4. What are the Reports on Business? • NMI (Non-manufacturing Index) • Survey of over 300 non-manufacturing companies covering non-manufacturing 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.

5. What information is available? • Results are reported as a diffusion index .. Indexes reported: PMI NMI Mfg Production Nmfg Production (Business Activity) Mfg New Orders Nmfg New Orders Mfg Inventory Nmfg Inventory Mfg Supplier Deliveries Nmfg Supplier Deliveries Mfg Employment Nmfg Employment Mfg Backlog of Orders Nmfg Backlog of Orders Mfg New Export Orders Nmfg Export Orders Mfg Imports Nmfg Imports Mfg Prices Nmfg Prices Mfg Customers’ Inventories Nmfg Inventory Sentiment Additionally, Buying Policy is reported for Capital Expenditures, Production and MRO in average days.

6. 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); Brass Fittings; Carbon Pipe (2); Copper; Corrugated Products (3); Cotton Products; Dairy; Diesel Fuel; #2 Diesel Fuel (3); Drywall; Fuel (5); Gasoline (7); Lumber & Wood Products (2); Paper (4); Pharmacy Products; Plastic Film (3); Plastic Products; Plastic Resins; Pork Products; Refrigerant; Seafood; Steel; & Steel Products (4).

7. Example Down in Price List Manufacturing Aluminum Products; and Copper*. Non-Manufacturing • No commodities are reported down in price

8. Example Short Supply List • Manufacturing • No commodities are reported in short supply • Non-manufacturing • No commodities are reported in short supply

9. 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.

10. 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.

11. 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

12. 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

13. R&B Composite Indices

14. Forecasting Price • Hedging • Price indexes • Producer price indexes • ISM price index

15. 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?

16. 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

17. 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).

18. 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.