The Institute for Supply Management (ISM) Production and Manufacturing Index (PMI) is a rather important barometer of supply chain and manufacturing activity, and has been particularly closely watched by economists and the Wall Street investment community for a good many years. Of late, the U.S. stock market has incurred immediate swings after a positive or not so positive report of PMI. We at the Ferrari Consulting and Research Group track the ISM PMI in our reporting of global supply chain trending within our quarterly newsletter for clients and subscribers.
Our readers may well be aware that this week, ISM suffered a very embarrassing incident involving the publishing of the May PMI. The original reported PMI index had to be corrected three separate times because of calculation errors, creating confusion and consternation among Wall Street players.
According to a published report by Bloomberg, ISM initially reported that the PMI had dropped to 53.2 in May from a reported 54.9 in April, signaling a discernable contraction in activity that immediately pushed stocks lower. That number was later verbally corrected by the index’s chief economist, who indicated that the number was actually 56.0 in May, indicating a significant expansion. The organization then published a corrected PMI release indicating the May index was 55.4.
According to Bloomberg as well as other business media reports including financial news network CNBC, the initial reporting error was attributed to software, the second was attributed to applying the wrong seasonal adjustment to the May data, and the final number was clarified after sub-indexes “were inaccurately averaged in haste.”
While we certainly were not an on the ground witness to the behind the scenes ISM response to the initial published PMI for May, we speculate that when the crap hit the fan, there was a lot of scurrying and pressures to come up with the correct adjusted number on a manual basis.
A spokesperson for ISM issued a statement indicating the institute “will be manually calculating each index, each factor, each aspect of the (ISM) report, comparing it with the figures the system produces.” Our readers who manage and interact with complex supply chain planning software or are primary participants in an ongoing sales and operation planning (S&OP) process may well cringe or resonate with the above statement. It either reflects a lack of confidence in software results or evidence that what the software has calculated is perhaps manually adjusted in an all-too-frequent basis.
While the PMI index reflects a very important and highly visible index, this week’s admitted embarrassment provides important reminders for cross-functional supply chain teams. To gain the benefits of smarter data and more predictive decision-making capabilities, all members of the organization have to be able to be confident in software results. Having manual overrides or backup calculation processes to double-check results takes additional time and effort, and ultimately fosters an overall lack of confidence in technology.
From our lens, the learning from this week’s ISM incident is twofold. An analytics mindset is a belief that leveraged use of software and smarter data is an important supply chain organizational core competency that needs to be nurtured and developed. Analytics professionals need to also have a mindset to double-check a result with intuition and old fashion, gut-feel- is the software providing a reasonable result. If such software or automated processes are not calculating or producing an accurate result, than efforts need to be directed at fixing or adjusting the business rules and assumptions that drive such software.
Checks and balances are always important. Reverting to manual based processes and spreadsheet calculations takes precious additional process time from the need for a more timely response and erodes overall confidence in advanced analytical technology.