Purchasing Managers Index: What Does It Mean?

There is a really useful tool called the Purchasing Managers Index for those of you who have never heard of it. You will see it referred to in many commercial papers, investment features, and regular news reports on television and the internet. 

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I had heard of Purchasing Managers Index for years and never really paid any attention to it but have now seen the real value whilst working in a buying role for a major global pharmaceutical company.  

  • This index was created in 1948 by the Institute of Supply Management and is compiled from data sourced from senior executives at over four hundred private sector companies and over forty economies worldwide.
  • It is only available by subscription to IHS Markit and was created to look at specific indicators in the manufacturing sector and has been expanded to the services sector.
  • The survey is carried out monthly and looks at qualitative indicators that have changed from the previous month
  • The output returns a single number showing the health of a particular sector or economy. The data provides an indicator of where markets and economies are headed and uncovers real-time opportunities. 
  • A figure above 50 denotes expansion in business activity whereas a figure below 50 identifies a contracting sector. 
  • The rate of expansion can be judged by comparing the number month on month to understand if the economy or sector is expanding at a faster or slower rate than before. 
  • We all know that making decisions based on macro-economic data is extremely useful, however, data that is compiled monthly is both in real-time and factually based which is even more powerful in its timeliness.   

So Why is Purchasing Managers Index Useful for Commercial and Procurement People? 

Let us take you through one example and then hopefully you can see. For example, you are looking to make some major purchases in the Global Electronics Sector and the index is showing that the sector is contracting now. 

When do you think you would want to place that order or even time your negotiation? I would say look at the trends, as most trends tend to be cyclical and raise that order when it is in the downward trend, perhaps heading to what you perceive as the bottom of the cycle. 

When the sector has contracted for some time, orders are low, historical orders have been played out and the companies need new orders. You will see the sales teams being targeted for massive growth, companies will be screaming for your business and you will have maximum leverage for any new purchases that are not already known or planned for by your suppliers. 

Purchasing Managers Index helped me make decisions that were pan-European when the market was contracting and had been for some time. I ran a European Tender and allocation of the business was done at that time. Imagine your supplier in the middle of a contracting economy can announce publicly that it has doubled its business with you. If that business was say 10% of the company’s revenue, how would it affect their share price?  

So don’t forget if you want to make that big order in a specific sector make sure you track the industry and make those orders just at the right time…