When to Use Purchasing Management Index (PMI)?
Purchasing Management Index (PMI) is based on five major indicators that include new orders, inventory level, production, supplier deliveries, and the employment environment. Each indicator has its roles and contributions to the PMI. Whenever the seasons change, it affects the PMI, thus it is then being adjusted.
1. The New orders include the goods, commodities or services that the costumer wants to avail or buy where in inventory level is the one that determines the status the industry and its product sales.
2. Production, which indicates the amount of goods, or commodities produced by the business.
3. Supplier deliveries, it depends on their ability to deliver, if they are fast or slow.
4.The other one is employment environment. It’s either in the urban or in the rural? What are its neighboring industries? That determines who will be the investors and the costumers.
5. It depends on the investors and the customers .
In reading the data gathered through the PMI, when it is over 50, it means that the manufacturing expands to another level and thus it shows growth in production. Whereas when anything is below 50, problems with the major indicators arises thus it directly affects the PMI.
For investors, PMI is a very important sentiment basis, not only for manufacturing but also the economy as a whole. Although manufacturing is not a big component of the gross domestic product (GDP), it tends to be either the start or the end. That is where PMI plays its important role.
How one managed the products, affects the overall result of the industry. It would be best that the PMI must be higher than 50 in for the business to see its growth and success.
Another point that could be considered as important factor in the PMI is the management team as well and the whole employees of the industry. The business lies in their hand actually. They are the main component of the business, aside of course from the owner of the business and the investors that come and go.
PMI is known for detecting inflation problems and also in the manufacturing. It has its strengths and weaknesses with regards to its result. With time, PMI may not be as strong as the CPI (Commodity Channel Index) in detecting inflation but since the information it gathered were released one day after the month, and it is just at the right timing. It is a good foreteller of future release but is very subjective to the data gathered. Whatever data it has, it is then the result of it.
Whenever there is an unexpected change in the PMI, it is usually followed by a quick reaction in stocks. This is where one of the major indicators which new orders plays its role. When there is growth in the new orders, it then predicts the manufacturing activity of the month. Should there be more new orders then they will expands the amount of products to be manufactured.