The concept of category management is familiar to those in retail. It refers to the approach of grouping items within a shop environment. This concept started to be used by Procurement departments in the 90s. It became a way for companies to buy more effectively and make significant savings.
At its most basic level, category management is about bundling items. We look for items purchased across the company and consolidate them in categories and sub-categories. The objective is to have an overview of the spend by defined categories.
Requirements for a successful implementation of Category Management is to generate procurement outcomes that fully satisfy agreed business needs by maximizing supplier contribution to corporate development. The illustration below summarizes the necessary elements for a successful Category Management:
The head in the middle represents the buyer inputs required. This is basically our expertise as Category Managers. They can be summarized as:
1. Procurement expertise
2. Category expertise
3. Industry expertise
The wider expertise we have as buyers the better our inputs will be for a successful Category Management.
At the top and the bottom of the head we find 2 key elements we need to take into consideration for the success of Category Management:
4. Stakeholders business partnering
This is one of the most important elements. If Procurement is not considered a trusted partner within the organisation we will not succeed as Category buyers. It’s very important to partner with internal stakeholders to be involved in every single project and be considered as a strategic function. Category buyers are experts on specific commodities, and this should be understood by all business stakeholders. It’s up to the procurement function to “sell” procurement benefits internally to become a strategic partner, and not just an operational function.
5. Compliance to procurement processes & policies
Within an organisation we have different processes and procedures that must be followed. Normally we have strategic, tactical, operational and support processes that we need to acknowledge. As explained in the Problem Solving principles, to continuously improve it’s necessary to standardize processes to then follow PDCA process again (Plan, Do, Check, Act).
On the right side we find the outputs of Category Management. It actually shows the steps to successfully implement Category Management:
6. Perform a spend analysis
7. Define a category strategy based on the Kraljic Matrix
8. Sourcing strategy and implementation (RFI, RFP, RFQ) & establishing contracts with suppliers (KPIs & SLAs)
9. Supplier Relationship Management to ensure high level of performance agreed
The 4 benefits of Category Management
We defined Category Management and the different elements it requires for a successful implementation. But what are its benefits? There are 4 main benefits:
1) Spend Consolidation
This activity allows us to highlight sourcing opportunities via spend segmentation & data analysis. Ultimately, we will have better leverage when negotiating with suppliers.
2) Risk Reduction
It enables the early identification of risks by spotting trends that may create a risk. This allows the early development of a mitigation plan.
We mentioned earlier the importance of partnering with stakeholders. Category Management actually offers an extent of engagement with internal & external stakeholders
4) Leverage expertise & insight
Giving a deep insight into each category, resulting in improvement in service levels, quality, supply, innovation & value.