While some may consider economics ‘the dismal science’, its importance in how we manage our supply chains cannot be understated. Yet, we seem to be more comfortable discussing Tom Brady’s quarterback rating or Chris Sale’s earned run average (sorry, I’m in Boston) than in understanding how the unemployment rate impacts labor costs, how housing starts impact the cost of building materials, or how the price of a barrel of oil impact the cost of plastics.
There are two major pillars of economics and both are important to those in the supply chain. Macroeconomics is the study of the economy in the aggregate. The money supply, gross domestic product, unemployment, and interest rates are all considered macroeconomics. Consider them the large steering currents of the economic Jetstream. Microeconomics is focused on the decisions of consumers and companies and includes supply and demand, production decisions, and the everyday tradeoffs that companies and individuals make every day, more like the daily and extended weather forecasts.
For example, the help wanted sign and extended wait for service at your neighborhood coffee shop might be the result of macroeconomic trends of high employment and low wages. Yet, your decision to spend your five dollars there or save it and make coffee at home to save up for a new tablet is a micro decision. And, we all see one major economic indicator every day on our way to work. We all take notice of the price of a gallon of gas at the local fill-up.
In this age of big data, there is an overabundance of economic statistics available at the touch of a key. The secret is in understanding the key economic drivers of your business, and those of your customers and suppliers. Only then can you craft a data driven procurement and supply chain strategy that is based on real data, trend analysis, and forecasting by experts.
While it is important to create a collection of meaningful and relevant data that is appropriate to your business, the following economic measures, and their sources, are a great place to start.
For procurement pros, the United States Bureau of Labor Statistics (BLS) is by far one of the most import government sites there is. Full of relevant information and data to help manage the supply chain, it is also the home of the Producer Price Index (PPI). According to the BLS, the PPI is a family of indexes that measures the average change in selling prices by domestic producers of goods and services. With the PPI, the perspective is from the seller’s side. The focus of data with the PPI is threefold: industry classification, commodity classification, and commodity based final demand, and intermediate demand (FD-ID). The BLS also offers publications around special commodity groups.
The Bureau of Labor Statistics also produces the Consumer Price Index (CPI). It looks at major groups of consumer expenditures such as food and beverages, housing, apparel, transportation, medical care, recreation, education, and other goods and services. According to the BLS, the CPI as an economic indicator is the most widely used measure of inflation and is used by many business executives and labor leaders to make economic decisions. The CPI, and sometimes the PPI, is used as objective indexes, or linkages, to adjust the cost of products and services in long-term purchase agreements.
In addition to the PPI and CPI, the Bureau of Labor Statistics also publishes major economic indicators such as the Employment Cost Index, the Employment Situation, Productivity and Costs, Real Earnings, and U.S. Import and Export Price Indexes.
Additional macroeconomic data comes from the United States Bureau of Economic Analysis. Their focus is on macroeconomic issues such as gross domestic product (GDP), personal income, balance of payments, international trade, and foreign direct investment. This data is used to make long-term decisions and to understand long-term global economic trends. Familiarity with the BLS, the BEA, and also the United States Department of Commerce and the United States Department of Labor, offer data and trends critical to the supply chain professionals.
The Report on Business (ROB), published by the Institute for Supply Management, is a one-stop shop for pertinent procurement related economic data. The ROB, focusing on the manufacturing and non-manufacturing sectors, assesses the state of the economy through the distillation of data from anonymous business survey committee members. The ROB, considered a leading economic indicator, has become quite popular over the years as an economic gauge that is relevant and current. Elements of the ROB include data on business activity, manufacturing production, new orders from customers, supplier deliveries, inventories, employment, and prices.
Far from the dismal science, economics is at the core of managing the global supply chain. Those that don’t pay attention to the key economic indicators in their own business, in their commodity areas, or with their critical suppliers, are at the mercy of market forces that comes to them as a surprise. You can be sure that your suppliers are paying attention to their own range of leading economic indicators.