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Sep 19

“The New Normal” – What the August PMI Manufacturing Index Contraction Means for Your Factory Floor

The August 2019 PMI contraction means supply chain problems | Liquidity Services

By now, you’ll have read the Institute for Supply Management’s August 2019 manufacturing report on business. The headline? The ISM Manufacturing Index has fallen below 50%. After months of falling demand and increased expenses due to global uncertainty, U.S. manufacturing market has officially begun to contract.

But what does this contraction mean for your business, particularly your potentially idle factory lines?

Factory Production and Employment Decrease by Almost Four Percent

Factory orders were down across the board, with a 3.6% decrease in orders between July and August. Nine of the eighteen tracked industry verticals report decreases in production, including:

  • Apparel
  • Leather & Allied Products
  • Paper Products
  • Petroleum & Coal Products
  • Transportation Equipment
  • Primary Metals
  • Electrical Equipment
  • Applicances & Components
  • Plastics & Rubber Products
  • Fabricated Metal Products
  • Machinery

This substantial decline in production parallels the 4.3% decrease in employment from the previous month. These both lead to mothballed factory lines and warehouses without the manpower required to operate them, with the hope of reopening when the situation improves.

Facing Trade War and a Possible Brexit, Industry Leaders Uncertain of Supply Chain

Almost more telling than the statistics were the participant quotes chosen by the ISM Manufacturing Index authors.

“Incoming sales seem to be slowing down, and this is usually our busiest season,” said one respondent in the Furniture and Related Products industry.

A respondent in Chemical Products – long one of the industries leading manufacturing expansion – said they sensed an “undercurrent of fear and alarm regarding […] a potential recession.”

Why all the uncertainty and doubt? Trade tensions between the United States and China, as well as the United Kingdom’s possible “hard Brexit” from the European Union, have destabilized formerly reliable export and import markets.

Lowering PMI Could Signal a Recession – Impacting Global Supply Chains

The contraction of the ISM Manufacturing Index is a red flag that a U.S. economic recession could be on the horizon. While it’s only just hit “contraction” levels in August, the manufacturing index has been declining for months – down from a high of nearly 60% in September 2018.

This downturn will likely not be a temporary problem that can be weathered through short-term solutions. Stockpiling perishables before the next Brexit date and temporarily mothballing foreign facilities will not be enough, as economic tensions show little signs of easing.

This contraction signals a “new normal,” and supply chains need to be prepared.

Ultimately, supply chain managers need to decide if they want to gamble on the contraction as a short-term problem, or if they believe the contraction is here to stay.

Leveraging the “New Normal” Through Supply Chain Management Ahead of Recession

Consider the cost of idle factory equipment. On the one hand, having equipment ready to go when orders come back means a faster response time and competitive bidding for potential contracts.

However, equipment doesn’t run itself – and more than four percent of the workforce has shrunk across the board. Manufacturers will need to find, rehire, and onboard experienced employees before they can start producing on a new contract. That process may take months, even if the equipment is ready to be used.

Mothballing also costs the company in real dollars through taxes, insurance, wasted space and maintenance costs – even if it’s not being used. There’s also opportunity cost to consider. Supply chain managers should consider if they should use outdated equipment or upgrade their technology once demand returns.

Ultimately, savvy supply chain managers know that in this environment, they need to optimize operations while eliminating excess costs. They can do this through internal asset redeployment to still-operating facilities, while recovering funds through surplus sales. Both tactics lift the bottom line, keeping the business competitive despite rising costs.