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The link between Purchasing and Supply Management maturity models and the financial performance of international firms

Fábio Pollice (USP- Brazil) pollice.fabio@gmail.com

Afonso Fleury (USP- Brazil) acfleury@usp.br

Abstract In the last 40 years, Purchasing and Supply Management (PSM) has moved from a transactional role in materials management towards a more strategic role, aligned to long-term business requirements.

This evolutionary process can be represented by Maturity models: in the advanced stages of a maturity model, there is a broader scope in the activities which PSM is responsible for, and a deeper impact in the business performance.

However, traditional PSM performance indicators, like material cost savings, are not appropriated to evaluate its overall performance at the latest stages.

The combination of PSM Maturity Model and “Return on Capital Employed”(ROCE) allows to evaluate the benefit that the evolution through the more advanced stages of the PSM professionalism brings to the firm financial performance.

This paper details both models and discusses the methodology to be used to prove that companies with higher PSM maturity level will present superior financial results.

Key words: Purchasing Strategy, Supply Management, Maturity models, Performance

1. Introduction

The current business environment presents a strong competition in global markets, with cost pressures; focus on new products development with shorter lifetimes than ever; and a high customer and client’s expectations to have their needs and requirements satisfied.

In order to support these new challenges, Supply Chain Management has become more strategic at company level and Purchasing and Supply Management (PSM) are following this trend. In the past, PSM was considered a passive and administrative area. However, recently it has evolved as a strategic partner to the business, contributing to the total business performance.

This evolutionary process of PSM can be represented by Maturity models, which reflects the fact that PSM is becoming more mature as a business function and more integrated in the context of strategic plans.

The PSM maturity model developed by Van Weele and Rozemeijer considers 6 stages: transactional orientation, commercial orientation, purchasing coordination, process orientation, supply chain orientation and value chain orientation. The first three are more focused on the function itself and the last three define a cross functional approach. (Van Weele et al, 1998; Rozemeijer, 2000; Van Weele 2010).

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When a firm is positioned in the advanced stages of a maturity model, there must be benefits to the whole enterprise and the business performance is to be amplified. There is a broader scope in the activities which PSM is responsible for, and as a consequence of that, there is a deeper impact from PSM in the financial performance of a company. This brings competitive advantage to international firms playing a leadership role in global value chains.

It is fundamental that PSM strategies are aligned to the firm business strategies. It is also critical to evaluate the existing gap between the current maturity level the PSM organization has against the final stage that will attend the future demands from the company side.

Traditional PSM performance indicators like material cost savings are more related to the initial stages of a maturity model. They are not enough to evaluate PSM total performance at the latest stages of the maturity model, which are more focus on multifunctional activities, and external integration

The maturity model developed by Van Weele and Rozemeijer does not propose a broader performance indicator that would measure the total performance of the PSM organization in a company, in the final stages of the maturity model. However, these authors recognize that traditional measures are more relevant to less sophisticated operational modes. When applied to the final stages (5 and 6) of the maturity model, they tend to block the changes that are required in the way PSM operates. (Axelsson, Rozemeijer and Wynstra, 2006).

Through holistic metrics like Return on Capital Employed (ROCE), it is possible to evaluate in details all the impacts PSM can bring over the key managerial parameters of the organization: cost of goods and services, marketing and development costs, raw material inventories, cash (payment terms), or capital.

The combination of PSM Maturity Model and ROCE can make possible to evaluate if PSM evolution through the more advanced stages of the Maturity model reflects improvements in the financial indicators of international firms.

2. The strategic role of Purchasing and Supply Management In the last 40 years, Purchasing and Supply Management (PSM) has moved from a transactional role in materials and services management towards a more strategic role, aligned to long-term business requirements.

Until mid-1970, Purchasing area was seen as an area more administrative than strategic (Ansoff, 1968). That is, Purchasing had a passive role within the organization, with functional reporting lines to Finance and Operations.

Most of the activities related to Purchasing until this period were concentrated on materials management. There was an emphasis on managing the price of the material, through competition between various sources of supply. Buyer and supplier relationships were characterized by arm's length. (Monczka et al, 2005).

The oil crisis in 1973-1974 and the consequent lack of raw materials drawn attention to the importance of the Purchasing area. However, despite the crisis, there was no reaction to make the area more aligned to the strategic needs of companies (Farmer, 1974).

In the late '70s, Porter has identified Buyers and Suppliers as two of the five forces in his model of competitive advantage. Porter (1986) says that supplies are an essential part of the company, impacting the ability of the firm in achieving its strategic plans. From his seminal work onwards, the strategic importance of firms acting as buyers or suppliers, their bargaining

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power, and the understanding of the macro business environment began to receive greater attention from academics and managers.

The concepts related to purchasing strategic management emerged in the '80s, when the first alignment between the areas of Procurement and Corporate Strategic Planning started to occur (Speckman and Hill, 1980). Strategic management tools such as strategic sourcing and portfolio management started to be part of PSM critical processes..

One of the most widespread models for strategic sourcing was presented by Kraljic (1983), in a classic article in Harvard Business Review. Kraljic states that to ensure long term availability of critical materials at competitive costs, manufacturing companies need to manage the risks and complexities of global supply, as well as uncertainty and disruptions on supply, price and scales.

The model developed by Kraljic initially considered two critical factors in a matrix with four quadrants:

-Importance of the purchase: criteria for cost of materials / total cost, value, profitability profiles, among others.

-Complexity of supply market: monopoly oligopoly x, technology development, entry barriers, logistics cost, and complexity.

For each quadrant, different strategies are developed in order to minimize vulnerability to supply and maximize the potential purchasing power of manufacturing firms in question.

Still in the 80s, the concepts of lean manufacturing stared to be disseminated, based on the Toyota Production System (Womack et al, 1990). This model proposed forms of relationships between the company and its suppliers quite different from traditional Western models, which were based on contractual relationships between parties (arm's length) or vertical integration. Supplier selection was made considering the past suppliers performance on cost, delivery and quality, and also their ability to achieve the cost objectives targeted for new components (Dyer, 2000). Supply relationships became partnership and alliances, with strong leadership from Purchasing and Supply Management side in managing these relationships.

The 90s were very fertile in the academic field and also inside the companies.. Several important articles were published related to the importance of strategic alignment between the purchasing area and businesses plans (Freeman and Cavinato, 1990; Cavinato, 1996): development of new concepts and management tools such as TCO (Ellram, 1993, 1995), and strategic purchasing (Carter and Narasimhan, 1996; Carr and Smeltzer, 1997, 1999).

In the business environment, globalization became more intense and with it, competition among companies and their supply chains. The fighting for sources of raw materials at a more competitive cost, the development of suppliers in low cost locations and ability to manage this supply network have become part of the new routine of PSM. These activities are strongly supported by the interconnectivity brought by the Internet and advances in data management. As a consequence of that, the Purchasing and Supply Management has now new challenges to cope with, such as global buying opportunities, new and distant suppliers, additional complexity in the logistics network, exposure to different cultures, and mergers and acquisitions at suppliers side with a consequent shift of bargain power to the supplier side (Pollice, 2006; Pollice and Fleury, 2007).

In the 2000s, PSM approach reflected a greater emphasis on the importance of quality and the role of suppliers. The relationship between Buyers and Suppliers moved from a more confrontational approach (arm's length) to a more cooperative one. The new supply strategies encompass the development and improvement of the supplier base, the supplier's

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involvement in the early stages of product development, cross-functional teams for supplier assessment, supplier selection based on total cost, development of long-term relationships, improved connectivity through the use of shared web based portals and database (Monczka et al 2005; Webb and Hughes, 2009; Ellram and Stanley, 2008; Wynstra, Van Weel and Weggrmann, 2001; Petersen, Handfield and Ragatz, 2005; Ellram, 2002)

As a result of the economic crisis during 2008/2009, market volatility has brought a new variable in the demand-supply relations. The uncertainties generated by waves followed by economic growth and depression in a scenario of intense globalization, require new skills from PSM professionals. It becomes necessary to design and implement supply strategies that are robust to ensure supply at competitive costs but at the same time flexible enough to seize opportunities for short and medium term in all new supply management dimensions.

Within this new business environment, the strategic importance of Procurement and Supply Management and its contribution to business performance starts to receive more attention among scholars and executives (Ellram and Liu, 2002; Gonzalez-Benito, 2007 ; Narasimhan and Das, 2001; Schiele, 2007; Chen, Paulraj and Lado, 2004; Axelsson, Rozemeijer and Wynstra, 2006, Van Weele, 2010; Rudzki at al. 2006).

Different authors pointed out the core activities related to this new Purchasing and Supply Management organization.

According to Ellram and Carr (1994), Purchasing and Supply Management has a key role in the success of corporate strategy through the selection and development of suppliers that can support its long-term strategy and strategic positioning of the company. Purchasing and Supply Management can still influence profitability through its involvement in the initial stages of the new product development process or through their ability to reduce material costs and provide cost estimates and availability of materials for future production requirements.

Monczka at al (2005) also point out strategic activities that are critical for the modern PSM agenda: insourcing / outsourcing, develop commodity strategy, establish and leverage world class supply base management, manage supplier relationships, integrate suppliers to product development, supplier integration into the order fulfillment management, supplier development and strategic cost management.

Through these strategic activities it is possible to define which activities are core and non-core; which supply strategies should be developed; how the company can build scale through different business units; and how suppliers effectively can be integrated to the business processes of the company. A key point is to develop a supplier base that is world class and to manage it actively.

The strategic importance of each of these activities varies depending on time and positioning in the maturity model. Earlier stages have more transactional focus, in which strategies are defined based on price and performance service levels required by the factories. It is only at the higher levels of the PSM maturity model that relationship management and focus on new product development (and new businesses) become key activities for Purchasing and Supply Management area.

3. Purchasing and Supply Management Maturity Model 3.Purchasing and Supply Management’s contribution has become fundamental in today's competitive scenario, and goes far beyond projects related to short term cost reduction. The

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pressure to achieve sustainable competitive advantages in the aspects relating to the supply of materials and services pushes the areas of PSM. In a globalized economy, purchasing scale and volume will not sustain bargain power from buying firms.

Value chain mapping enables buying companies to identify new businesses opportunities in their supply chain, increasing their bargain power. This leadership allows the buying company to define the parameters under which the other players of the value chain operate. Humphrey and Schmitz (2001) use the term governance to describe this situation.

The importance of leadership lies in defining the key parameters that will characterize the entire production process in the value chain: what to produce, how to produce, when to produce, how much to produce, where to produce and at what price.

Leadership brings competitive advantage for the leading company, who defines its own strategic position in the value chain in order to identify opportunities and achieve better return in areas of higher entry barrier and therefore the best rate of return, whether in product design, new technologies, power of brands or control over the final demand (Humphrey and Schmitz, 2001).

This new approach stresses the importance of managing supplier relationships, with discussions focused on growth and profit generation, replacing pressure on suppliers to obtain the lowest possible costs. Projects on cost improvements are to be balanced by assessments of the supply risk factors and aspects of value creation for both businesses.

As companies move into their business strategies, they will demand new requirements to Purchasing and Supply Management teams. This strategic alignment allows PSM to move into the final stages of the maturity model, and as a consequence, the establishment of new parameters that will influence their bargain power with suppliers.

Maturity models help establishing these parameters along the several stages of maturity that each organization faces, until reaching a certain end stage of excellence. Several authors developed conceptual models to reflect PSM evolution. Rozemeijer (2000) analyzed a series of maturity models, summarized below (figure 1):

Figure 1 : adaptaded from Rozemeijer (2000)

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The maturity model to be presented in sequence was initially developed by Van Weel et al (1998) and supplemented later by Rozemejier (2000). This model identifies six development stages over time, and points out the areas in which Purchasing and Supply Management may develop in terms of professionalism in a company (Figure 2).

The lowest level of maturity is about transactional orientation. Purchasing is defined as a passive operation where purchasing professionals are mere administrators of tasks. Here we have the classical company, departmentalized and bureaucratic. In this first stage, the fundamental activity of Purchasing and Supply Management lies in the search of suppliers that meet the required specifications and to ensure that the factory did not stop for lack of raw materials or components.

Figure 2: maturity model adapted from Van Weele (2010)

In step 2, commercial orientation, there is a more elaborate approach to commercial details, with bid techniques for competition among suppliers, comparing commercial proposals, and use of pre-qualified suppliers. PSM strategy is characterized by an emphasis on low unit prices and the impact of these savings in the company results. PSM starts to become an area of expertise. These specialized buyers are organized into different product groups, and focus on negotiating good contracts.

The third step emphasizes a model in which the buying company exerts tight control over the purchasing volumes, number of suppliers and items purchased. Sourcing strategies begins to be integral part of the PSM activities, aiming to capture the benefits of internal coordination and synergies. Besides price and costs, the role of Purchasing and Supply Management is recognized as an important contributor to the quality of products purchased. Purchasing and Supply Management now recognizes the importance of non-productive items (indirect procurement).

These three initial stages have in common a functional approach, in which Purchasing and Supply Management works with relative independence or isolation (Axelsson, Rozemeijer and Wynstra, 2006).

In sequence, steps 4-6 are characterized by a radical change in the purchasing organization, which becomes much more process oriented. The company is more modern and systemic.

Step 4 is focused on solving problems between functions, in order to reduce the total cost, not just the unit cost of purchasing the component. Purchasing and Supply Management becomes more process-oriented and seeks to organize the PSM function around the internal customers. The strategic importance of Purchasing and Supply Management are finally recognized and the area becomes involved in core / non-core strategic issues and also make or buy decisions

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Stage 5 is characterized by extension of the activities with focus on supply chain and in working with supply partners in the development of new products and production planning. PSM focuses on the effects that supply chain has on other areas and company resources.

The final stage focuses on delivering value to the customers and end users. Suppliers are required to contribute towards the growth of company revenues (top line), by generating new business opportunities, in addition to contributing to the company's profitability (bottom line). The strategy of Purchasing and Supply Management is diluted in the overall business strategy and both upstream as downstream chains are integrated by information systems. There is an entrepreneurial culture.

According to Axelsson, Rozemeijer and Wynstra (2006), not always there is a natural progression along the maturity model from left to right (stages 1-6). Sometimes organizations can "go back" one or more stages, depending on changes in macroeconomic conditions (external factors) or even in the corporate business strategy (internal factors).

One of the most significant barriers that impede progress along the maturity resides in the way PSM performance is measured and results are communicated. Traditionally PSM's main performance indicator is cost reduction, which measurement is relatively straightforward, since the prices of purchased products are easy to measure and compare. However this is a measure more related to early stages of the maturity model.

Ellram (2006) argues that because Purchasing and Supply Management controls most of the costs of the company, there is a strong pressure in the cost reduction arena. And the easiest measurement for cost reduction is on price reduction. Also Van Weel (2010) mentions that in general, the value added by Purchasing and Supply Management is the result of savings generated by cost improvement programs.

4. Performance measurement in Purchasing and Supply Management

As mentioned earlier, to reach the end stages of the maturity model and success in managing the supply chain, it becomes necessary functional integration between key business processes within the enterprise and throughout the network of organizations that are part of the supply chain.

The question of how to measure and evaluate the performance of purchasing has no easy answer. Each organization defines its performance indicators and metrics, not necessarily aligned to the strategic requirements of the company.

The traditional performance indicators are oriented to measure parts of PSM: cost, delivery, quality and inventory. These indicators are focused on operational and tactical issues, within the activities undertaken by Purchasing and Supply Management, typically stages 1 and 2 of the maturity model.

The more advanced stages of maturity model demands indicators that go beyond the management of low unit prices. It is an approach oriented to reducing total cost and its efforts will add value not only to the buyer firm but also to their partners. The modern management in Purchasing and Supply Management requires new performance indicators, which are more integrated to business outcomes and which are aligned to the new approaches that the final stages of maturity model offers.

To achieve long term business results, from financial performance point of view, some factors become critical:

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-Growth: this accesses the speed at which turnover grows year by year;

-Profitability: this demonstrates the profit after deducting cost of goods sold and operating expenses;

-Capital employed: this shows how much revenue is generated for every dollar invested in plant and equipment, warehouses, inventories, receiving from clients and payments to suppliers;

-Cash generation and financial flow: which are key to support Growth and Capital investment, resulting a positive cycle;

The relationship between financial performance and business performance of the supply chain has been demonstrated by others (Time and Time-Williams, 2000; Pohen and Lambert 2001; Rudzki et al 2006; Pressuti and Mawhinney 2007). This is a relative recent discussion. The involvement of the supply chain was more focused on the aspects of "operating costs", which is part of the branch related to “profitability”.

One way to visualize the inter-relationship between financial factors is called the Pyramid of Financial Rates or Du Pont Model. The Du Pont model is a general measure of profitability that divides the profit for the assets used to produce that profit, called return on capital employed (or return on investment).

ROCE (Return on Capital Employed) brings a dynamic measure of the operational performance of a firm. It integrates both Profit and Loss (P&L) and Balance Sheet in a single indicator.

ROCE can be defined as a % of the return on capital invested in the business, measuring the business profit as a % of the capital employed. The Capital Employed can be defined as the invested capital required to make the businesses run: fixed assets + working capital. In summary, ROCE is a rate that measures how effective is the use of a capital in a firm.

Figure 3 shows a simplified model. We can observe the breakdown into two main branches: the profit margin on sales and capital employed.

Figure 3: simplified Du Pont model based on Otley (2007)

Return on capital employed is equal to the product of these two items. Each of these branches, in turn, can be broken down into new relations of ratios. Profit equals sales revenue less cost

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of goods sold less operational expenses. Capital employed can be divided into fixed assets (related to long term) and working capital (for the short term). Working capital (same as current assets), in turn, can be divided into inventory (stocks), payments to suppliers (debtors) and customers’ receipts (cash).

As we move ahead in each of the basic components of the pyramid, it is possible to establish a clear connection between the values of each rate.

This more focused approach in the analysis can be more interesting than the integrated approach of the pyramid (Otley, 2007). There is no single financial indicator to measure the performance of a business. Several financial indicators can be applied, depending on the emphasis of the analysis. Recently a number of authors have highlighted the financial impacts that Purchasing and Supply Management brings to the business (Ellram and Liu, 2002; Ellram et al 2002, Baier el al, 2008; Carr and Smeltzer, 2000;. Narasimhan and Das 2001; Schiele, 2007).

The use of tools such as Return on Capital Employed allows the performance of Purchasing and Supply Management to be significantly amplified, in the context of creating value to the organizations. From the analysis of the overall performance of PSM through the model of ROCE, it is possible to establish new relationships between corporate performance and the performance of the Purchasing and Supply Management area, providing an alignment between business strategy and procurement strategy. This alignment goes beyond the traditional focus on direct material cost reduction (with direct impact on cost of goods sold and consequently in gross margin) through strategic sourcing projects.

Let’s consider the Du Pont model presented previously, but now from the perspective of Purchasing and Supply Management (Figures 4-6):

Figure 4: Du Pont model (adapted by authors)

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The left side of figure 4 is related to the Profit and Loss, and clearly the contribution of Purchasing and Supply Management can be assessed in the Supply Chain Costs field, in which are typically included the cost of manufacturing, distribution and also Direct Materials, impacting on gross margin (details on figure 5)

Besides the impact on COGS (cost of goods sold) as mentioned earlier, PSM area can also act strongly on the area of R&D investment, through partnerships in developing new products together with suppliers.

The influence of area of PSM is not restricted to items related to production. Contribution of PSM in the area of Indirect materials (non-productive items) is also reflected in the P&L.

Figure 5 illustrates the various areas PSM acts within the organization with consequences at P&L level, and shows which variables in the ROCE model typically are influenced by the strategy of Purchasing and Supply Management.

Figure 5: impact of PSM activities on the Profit and Loss

On the right side of Figure 4, the analysis is on the Balance Sheet of the company and the management of working capital and assets.

There are four major the activities that PSM is responsible for in this branch:

-CREDITORS: management of payment terms from suppliers is a powerful tool for generating cash.

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-STOCKS: related to inventory of direct materials and its reduction has a direct impact on working capital.

-DIRECT MATERIALS LEAD TIME: related to delivery time of direct materials influences the calculation of safety stock inventory and consequently the cyclic inventory, which sets the total stock.

-MAKE vs BUY: management of fixed assets can also be evaluated in this sequence. Decisions around MAKE vs BUY related to fixed assets are a key issue for innovation projects (new product development) and for requirements on capacity increase, for example. The decision between investing on its own assets or amortizing the required capital by investing through the suppliers, impacts heavily on capital employed. Figure 6 shows the impact of the activities of PSM on the Balance Sheet, considering working capital management and asset utilization. These themes in the advanced stages of the PSM maturity model become crucial to measure overall performance in Purchasing and Supply Management.

Figure 6: impacts of PSM on the Balance Sheet

With the globalization and the use of suppliers located far from the manufacturing units, issues like delivery time, delivery reliability, inventory levels and asset investment requires an integrated analysis of the supply strategy and the requirements of the supply chain. ROCE allows to combine the analysis of the impact on profitability and working capital. Thus, it becomes possible to measure the benefit that a sourcing strategy based on value generation brings to the firm, according to the sixth stage of maturity model.

Interestingly, even in a typical process of negotiation with suppliers through tools such as strategic sourcing all these variables could be addressed within the elements of decision making, but the traditional PSM processes do not consider these elements within a joint and

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integrated assessment. Typically, the payment terms and delivery time are not measured financially, are measured in days. Translate these metrics to the financial language means translating days into monetary units, ie cash generation.

5. The link between PSM maturuty model and Financial Performance The PSM maturity model does not define the use of a holistic metric that allows for a correlation between firm performance, the performance of purchasing and its degree of maturity.

However, Axelsson, Rozemeijer and Wynstra (2006) presented a tool for assessing the maturity level of an organization, based on academic research mentioned above (example in Figure 7).

Each of the stages (1-6) is assessed on seven dimensions used to evaluate the different aspects of the area of Purchasing and Supply Management in a given organization: strategy, organizational alignment / structure, supply, supplier management, leadership / supervision, systems, and staff and skills. In each dimension, there are 5-9 questions, describing the possible scenarios for stage maturity model.

Figure 7: example of the maturity model assessing tool

In the end stages of the maturity model, pure measures should become less relevant, such as cost savings in raw materials (savings) and their impact on operating margin. Greater relevance should be given to aspects of purchasing and supply management in the value creation through the generation of new businesses, support the development of new products together with strategic suppliers, and optimization of working capital, by reducing lead times, improving payment terms from suppliers and optimization of investment in assets. The measurement of value creation from PSM side is not direct or obvious, and thus the advance to more sophisticated levels in the maturity model is still conditioned to the delivery of cost savings. A solid performance in the delivery of cost savings is a pre-requisite for companies seeking the most sophisticated and mature stages of the purchasing function (Schiele, 2007).

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But this is not robust enough to measure in a holistic way the strategic contribution that PSM can provide to value creation and subsequent performance of the business. The combined use of financial performance measures through the model Du Pont (ROCE) and the PSM maturity model brings a new sight to PSM performance. This allows a seamless access to the company's financial performance, Purchasing and Supply Management holistic performance and its degree of maturity. 6. Research Methodology The objective of this thesis is to test if it is possible to measure the overall performance of PSM in a firm in the end stages of the maturity model through the use of Return on Capital Employed (ROCE). The research will consist of three main activities: (1) A survey for measuring the degree of maturity of each company. These will be sent out to the senior PSM leaders in the selected companies. (2) Analysis of 2009 financial reporting, and consequently calculation of the ROCE. It will be analyzed all the key elements on which Purchasing and Supply Management has a direct impact and the results used to support the conclusions. (3) Testing if there is a co-relation between PSM Maturity model and ROCE To achieve this, the research methodology will follow the steps proposed by Forza (2002), as indicated in figure 8:

Figure 8: adapted from Forza (2002)

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The theoretical model considered to this research has the flowing elements (Forza, 2002):

• Constructs:

The independent variable in this study is the international firm’s maturity level. The PSM maturity level will be measured and scored using the assessment tool defined by Van Weele and Rozemeijer, within 7 dimensions: strategy, structure, sourcing, supply management, leadership, systems and skills and within the 6 maturity stages: transactional orientation, commercial orientation, purchasing coordination, process orientation, supply chain orientation and value chain orientation. Each respondent will analyse which of the six maturity stages fit better with the dimension he/she is evaluating. There will be scores per dimension and an overall score which defines the firm maturity model. The dependent variable in this study will be the Return on Capital employed, which will be calculated using 2009 financial reports as reference. Information related to Profit and Loss and Balance Sheet will be considered to calculate ROCE according to the methodology mentioned before (model Du Pont).

• Propositions:

The hypothesis claims that international firms positioned at stages 5 and 6 of the maturity model have a superior Return on Capital Employed (ROCE) than international firms in initial stages of the maturity model (1 and 2).

• Explanation: In stages 5 and 6 of the maturity model, PSM is totally integrated to the business and as a consequence of that, PSM can take the lead in additional areas, with a broader scope than before. In stages 5 and 6, PSM work goes beyond managing raw and pack material costs (direct costs) and its influence over the cost of goods sold. ROCE is a financial measure that reflects the operational performance of the business, and includes the additional variables that are related to the activities PSM is responsible for in stages 5 and 6.

• Boundary Conditions:

In this research, the study will be concentrated in international firms, with easy-to-access financial reports. The selection of companies will consider the following industries: construction, banking, food and beverage, pharmaceutical, telecommunications, electronics, computers, automotive and retail. These were the sectors studied initially by Van Weel and Rozemeijer in the elaboration of the model of maturity. Additional to these sectors, it will be included three new segments: home and personal care, chemical industries and packaging companies. The selection of the international firms in each segment will consider firms with similar characteristics, as such turn over, product assortment, R&D investment, multi production sites. For each sector will be selected 3-5 companies, to have a mixed basket in the sample.

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Once tested this thesis, ROCE could be established as an indicator of business performance which measures the overall performance of PSM in a firm in the final stages of maturity. 7. Conclusions In today’s environment, business requirements on PSM contribution exceed the traditional focus on delivering cost savings in direct materials and services. Purchasing and Supply Management can contribute significantly in several other business fronts: cash generation, asset management, indirect materials / services management, and incremental turnover from joint product development with suppliers. To move out of traditional cost saving measures, and move ahead towards the final stages of the purchasing professionalism evolution, it is fundamental to use a new set of performance indicators. The establishment of financial ratios as ROCE to measure the operational performance will bring an overall measurement of PSM performance which will support the PSM path to end stages of maturity model and its journey to create exceptional value to the business. 8. References ANSOFF, H.I.; Corporate strategy, McGrsaw Hill, 1968. AXELSSON, Bjorn; ROZEMEIJER, Frank; WYNSTRA, Finn. Developing Sourcing Capabilities. 1st Edition. West Sussex: John Wiley & Sons Ltd, 2006. BAIER, Christian; HARTMANN, Evi; MOSER, Roger. Strategic alignment and purchasing efficacy: an exploratory analysis of their impact on financial performance. European Business School, Vol 44, number 4, 2008. BECHTEL, Christian; JAYARAM, Jayanth. Supply Chain Management: a strategic perspective. The international journal of logistics management, vol 8 , number 1 , 1997. BOHTE, K. Strategic Supply Management. New York: Amacom, 1989. BURT, David. Doyle, M. The American Kereitsu. Business Week, May 18, 1998, p 76-81. CAMMISH, R.; KEOUGH, Mark. A strategic role for purchasing. The McKinsey Quarterly, No 3, p 22-39. CARR, Amelia; SMELTZER, Larry. An empirical based operational definition of strategic purchasing. European Journal of Purchasing and Supply Management, vol 3 /4 , 1997. CARR, Amelia; SMELTZER, Larry. The relationship of strategic purchasing to supply chain management. European Journal of Purchasing and Supply Management, vol 5 , 1999.

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Author’s autobiography

Fabio Ferraz de Arruda Pollice (pollice.fabio@gmail.com) is a doctoral student in

Operations Management at the University of Sao Paulo (USP), Brazil. His field of

research is on Purchasing and Supply Management. Previously, he concluded his

Master of Science in OM, in which he studied buyer - supplier relationships in global

value chains. Fabio works in Unilever as Global Procurement Director.

Afonso Fleury (acfleury@usp.br) is Professor in the area of Work, Technology and

Organisation at the University of Sao Paulo and (former) head of the Production

Engineering Department. He was a research fellow at: Institute of Development

Studies (UK), Tokyo Institute of Technology, École Nationale des Ponts et Chaussés

(France), Institute for Manufacturing, Cambridge University (UK) and prepared

research projects for ILO, UNU, IDRC, UNDP, IDE, ECLAC as well as Brazilian

institutions, covering different industries such as Aeronautics, Automobile, Capital

Goods, Computing and Information, Machine-tools, Shoes, Software,

Telecommunications, Textile/Apparel. He is currently engaged in research about

International Manufacturing and Operations and coordinator of a project about the

internationalisation of late-movers: firms from Brazil, China, Mexico and other

emerging economies that is being developed at the Centre for Technology Policy and

Management at USP. He has published several books and articles on work

organization, global operations and technological and industrial policy. He is

associate editor of the Journal of Manufacturing Technology Management

Address:

Production Engineering Department, University of Sao Paulo

Avenida Professor Almeida Prado, 531, 05508-900, Sao Paulo, Brazil

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