Production, Manufacturing and Logistics Performance evaluation of purchasing and supply management using value chain DEA approach Haritha Saranga a, * , Roger Moser b a Production and Operations Management Area, Indian Institute of Management Bangalore, Bannerghatta Road, Bangalore 560076, Karnataka, India b European Business School, Wiesbaden 65201, Germany article info Article history: Received 10 June 2009 Accepted 23 April 2010 Available online 21 May 2010 Keywords: Data envelopment analysis Purchasing and supply management Performance drivers Performance outcomes Performance evaluation abstract Purchasing and Supply Management (PSM) today is increasingly becoming more important to senior management due to its potential to strategically influence both operational performance as well as finan- cial performance outcomes. However the cross-functional nature of many PSM activities has led to inad- equate data collection and performance measurement resulting in weak performance evaluation methodologies and mixed results. We address this gap in the current study, firstly by using an external assessment survey methodology that complements the internal perceptional measures of PSM perfor- mance, to collect data for a sample of over 120 firms across the globe with more than 3 billion US dollar turnover, representing seven industry sectors. Next, we develop a comprehensive performance measure- ment framework using the classical and two-stage Value Chain Data Envelopment Analysis models, which make use of multiple PSM measures at various stages and provide a single efficiency measure that estimates the all-round performance of a PSM function and its contribution to the long term corporate performance in each of these seven industry sectors. The relevance of this measurement methodology is demonstrated through an in-depth analysis of the distribution of efficiencies within and across indus- try sectors and through the estimation of target PSM performance levels. Ó 2010 Elsevier B.V. All rights reserved. 1. Introduction The ever increasing competitive pressures across the globe are forcing corporations to look internally and cut costs to survive the downturns through operational excellence. Today, one of the major components of cost is the purchasing spend, which on an average accounts for 40–70% of a firm’s sales volume (depending upon the degree of vertical integration in the industry), and hence offers large scope for the creation of competitive advantages (CAPS, 2009). Global corporations like Wal-Mart, Dell, HP, Nokia and Zara have demonstrated that it is possible to achieve industry leader- ship through the efficient and effective management of purchasing and supply practices, irrespective of the nature of the industry. Consequently, many companies are sourcing raw materials and other supplies in recent times from across the globe in pursuit of lower costs. As a result, the role of the Purchasing and Supply Man- agement (PSM) function has been widened significantly and its im- pact on corporate performance began to receive considerable attention from senior management as well as academia over the last few decades (Das and Narasimhan, 2000; Ellram et al., 2002; van Weele, 1984). The role of today’s PSM function has therefore transformed from a mere clerical activity to a competence with the capability to structure, develop and manage the supply base in alignment with corporate objectives (Das and Narasimhan, 2000). In order to develop these capabilities, organizations are following best prac- tices in recruiting and training employees in the PSM function, are establishing processes that enable cross-functional collaboration and are developing systems for supplier collaboration. These PSM activities drive the performance of the PSM function in terms of cost savings, better quality of products, or co-innovations with suppliers (Das and Narasimhan, 2000). However, the ultimate goal of a PSM function from the senior management perspective is the role it plays in improving the financial performance at the corpo- rate level. Therefore, the need for an alignment between purchas- ing strategies and corporate strategies cannot be overemphasized in the current economic scenario where firms are plagued by price pressures and margins are driven primarily through cost savings. However, as the PSM function plays more of a supporting role rather than directly adding value to products and services offered by the firm, measurement of the direct value addition made by this function to corporate performance has become a major challenge (Nollet et al., 2008). There is also the need to create a measurement system and an appropriate incentive structure that can motivate PSM employees towards corporate goals considering the indirect nature of their activities. 0377-2217/$ - see front matter Ó 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.ejor.2010.04.023 * Corresponding author. Tel.: +91 80 26993130; fax: +91 80 26584050. E-mail address: harithas@iimb.ernet.in (H. Saranga). European Journal of Operational Research 207 (2010) 197–205 Contents lists available at ScienceDirect European Journal of Operational Research journal homepage: www.elsevier.com/locate/ejor