In any organization, procurement is one of the main departments that touches and manages organizational spend. Whether it is procurement for business continuity, like inventory purchasing, or procurement for business support, such as IT, an organization must have a strategic and clear procurement process, or spending can get out of control. To do this effectively, then, organizations must use category management.
According to APQC’s Open Standards Benchmarking about category management within procurement: studies show that organizations that have initiated category management programs have a median supplier lead time of only six days compared to 14 days.
In addition to this, organizations that have initiated category management programs show a median turnaround time of eight hours versus a median 15 hours for purchase order processing. For those organizations that have not initiated category management programs, then, you’re missing out.
What is Category Management?
Category management can be defined as a strategic approach to procurement. In other words, where the organization segments its spending on bought-in goods and services, the segmentation arranges goods and services in discrete groups depending on the functions of these goods and services.
Some of the categories on which organizations typically spend include:
- Office management
- Human resources
- Professional services
- Travel and entertainment
- Industrial products/services
The Role of a Category Manager
This is a specialized procurement role in which the person handles a specific category of goods or services e.g. Professional services, IT or logistical support. This person is charged with strategic sourcing, creating a category plan, and providing oversight in the category.
Category managers handle supply chain relationships for their category role. This requires them to have a background in the category being handled, e.g. an IT category manager should have a degree in computing so as to help make purchasing decisions by justifying the need for the purchase to internal stakeholders to make sure they are getting the right product assortments.
Some senior procurement executives such as Fortune 100 CPO Reza Hagel believe that the current category manager role as we know it should be spit-up. Reza believes that the role should be split into a domain expert role with the aim of managing stakeholder relationships, as well as a purchasing manager role focused on the new generation of added value procurement services.
Hagel also notes that the foundation for business modelling is absent and the use of data in decision makings and strategic planning is not part of a defined process.
The Category Management Process
There are many ways to develop a category strategy, but here are some questions and points to consider.
- Definition: What should the different categories and sub-categories be?
- Spend analysis: How much spending is going to each category and its sub-categories?
- Market analysis: How does the supply market look for each category, does it fit the customer needs?
- Improvement: The market intelligence gained from the market analysis is applied. This may lead to a change in specifications, and also can change the scope of work or finding a new supply base and new vendors.
- Continuous application: This knowledge is continuously applied in strategic sourcing and transactional purchasing.
There are certain pre-requisites for successful category management:
- An analysis of organizational strategic goals, and tying sourcing to these goals.
- Updated pricing analysis on local and international markets, and the prevailing trends.
- An updated analysis of organizational spend vs market data as well as benchmarking KPIs to identify areas for improvement.
- Supplier performance data.
- Analysis of any savings gained through negotiations, substitutions and compliance.
- Continuous engagement among all stakeholders to ensure that everyone is onboard with the organization’s purchasing decisions.
What are the Benefits of Category Management in Procurement?
1. Centralizing Spend Data
There are benefits of consolidating and centralizing spend including easier tracking, logging, and reporting. There are also opportunities to outsource if the spend analysis shows that it would be cheaper to do so than procuring.
2. Opportunities for Cost Savings
Category management works by leveraging expertise and experience of category managers to gain insight into a category and its sub-categories. Armed with this information, the aim is to create value from each purchase. If the company is in need of IT hardware and software for 10 new staff, for example, the decision on whether to buy or lease the hardware, buy software or lease cloud computing services and other tech decisions are made from an area of expertise.
3. Better Vendor Risk Management
With category management, an organization can gain an in-depth understanding of each vendor. Operational risks associated with a supplier, then, can be used to benchmark in dealing with other suppliers in the category and sub-category.
4. Purchase to Pay (P2P) Process
When the process of dealing with one supplier in a certain category has been perfected, it can be replicated when dealing with other suppliers in the same category rather than coming up with unique processes for each supplier.
5. Benefits from Holistic Spending
Strategic sourcing brings in the economies of scale. By buying for the long term in different product categories, then, the category manager is able to offer higher volumes or larger scope of work to the suppliers. This saves time by avoiding repetitive transactional purchases. It also offers the power to negotiate for better prices.
6. Streamlined Business Strategy
When doing strategic business planning, category management comes in handy by tying specific strategic goals to strategic purposes. If a mining company is planning to expand its operations in the next 3 years, for example, category management in heavy machinery and equipment gives a more streamlined strategy, as the company will be able to identify suppliers and capital in advance.
Any business benefits a lot from adopting category management as one of its best practices in procurement because it has the capacity to reduce supply chain risk. Further, a business using category management can also drive innovation in different supply chain categories. As organizations begin to tap into opportunities to manage demand, then, category management gives them better cash flow management and enforces greater compliance of standards from suppliers.