Category Management Explained

Introduction to Category Management

• Category management is a strategic procurement approach, focusing resources on specific spending areas.
• It aims to develop and execute sourcing and contracting strategies to deliver the best value from external spending.
• Large global businesses, governments, and nonprofits widely use this approach.
• Category management connects business strategy with sourcing initiatives.
• The term originated in the 1980s retail mass market, defining a "category" as a range of resale products broken down into similar sub-groups like cleaning products.

Defining Category Management

• Within procurement, it is a systematic approach to managing product and service categories.
• CIPS defines it as the entire science of procurement applied to a single type of expenditure, yielding greater results than traditional methods.
• It is a rigorous, fact-based, end-to-end process for stakeholder collaboration in developing and implementing sourcing strategies.

How Category Management Works

• Category teams are led by a category manager, who guides the planning process and daily activities.
• This involves applying best procurement practices to meet internal customer needs.
• A structured approach to categorizing historical and future spending reveals savings opportunities and extracts more value from suppliers.
• Category plans can span long (3-5 years), medium (1-3 years), and short terms (quick wins).
• Large and strategic spending categories require dedicated expertise and specialization.
• The automobile industry was an early adopter of category management.
• Glass is an example of an automotive category, with sub-categories like windscreen glass and skylights.
• Category teams manage the entire procurement cycle, from understanding business requirements to supplier relationship management.
• Market trends, changes, and innovation tracking are crucial for the entire category.
• It is standard for public and private sectors and involves achieving improved outcomes through project management in sourcing.
• Delivering these outcomes requires a structured and measurable project management approach for continuous improvement.

Defining a Category

• A universal standard for categorization or grouping doesn't exist; similar goods and services are generally grouped.
• The United Nations Standard Products and Services Code (UNSPSC) can be used or organizations can develop their models.
• Categories are defined by grouping controllable third-party spending.
• Different industries and organizations will not have the same category groups and sub-categories.
• Professional services are a common category including legal, human resources (HR), marketing, and consulting.
• Most large organizations have an information technology category group.
• It includes sub-categories of hardware (desktops, laptops, tablets, servers) and software, licenses, warranties, and maintenance.

Direct and Indirect Categories

• "Direct" refers to items vital to the business, including raw materials, components, and sub-assemblies used in manufacturing.
• Chemicals for cleaning products are an example of a direct procurement category.
• These items are typically required in large quantities and acquired from reliable suppliers at the best cost and quality.
• Interruptions to direct procurement can limit or halt manufacturing.
• Capital expenditure (capex) is not treated as either a direct or an indirect category but is calculated on a project-by-project basis.
• Indirect categories are goods and services not used for the delivered product or service but are necessary for daily business operations.
• Examples include repairing equipment, buying office supplies, and acquiring essential services.
• Information technology is a common indirect category; telecommunications is increasingly included.
• Information technology is often split into hardware and software sub-groups.
• Analyzing supplier data for both direct and indirect categories allows for procurement requirement analysis.
• It's possible to consolidate spending by reducing suppliers, leading to added procurement value by finding one supplier who offers many services.

Role of a Category Manager

• Involves managing a category group from planning to execution to achieve the best market value.
• Business strategy is analyzed; initiatives and projects are created around business priorities managed by category managers.
• Manages each category and sub-category of spend through the entire procurement life cycle.
• The seniority of the manager is determined by the third-party spend and geographical scope (local, regional, global).
• The role's complexity and profile within the business is also a factor.

Key Responsibilities

• Identifying demand requirements

• Identifying potential suppliers

• Identifying value creation opportunities

• Identifying risks

• The team executes the plan using appropriate tools following the category management process.

• Successful category managers consistently execute projects using a holistic approach and implement process, project management, consulting, supply market, negotiation, and technology skills.

Benefits of Category Management

• Bundling items into categories delivers the organization's strategic objectives.
• Has well-documented and proven benefits as a best practice.
• Lower prices and extra value (10-30%) can be achieved by combining spend and reducing suppliers for a product or service.
• Discounts, rebates, and more attractive payment terms.
• The risk of unknown spending can be reduced; expenditure accuracy is improved.
• Fewer supplier contracts, speeding up processes and reducing supplier administration time.
• Speeds up processes, leading to faster completion rates and improved performance.
• Establishes single contact points within your organizational structure.
• Streamlines communication and builds trust, improving supplier performance.
• Strong supplier relationships increase risk exposure visibility and provide possible responses.
• A category manager is the supply market expert and go-to person for products or managed services.
• Expertise is utilized to provide key information for new product development.
• Builds stakeholder relationships, creating an environment where innovation and creativity can thrive.
• Combining and validating spend by category provides insight into where money is spent and with which suppliers.
• Information goes unnoticed without a category structure.
• This includes understanding expenditure on existing contracts and those that have yet to start.

Risk Management & Contingency Planning

• Processes assess and reduce risk; contingency plans are implemented if necessary.
• Improves information sharing with suppliers.
• This enables collaborative planning, forecasting, and replenishment processes.
• Leads to the identification and management of risk in the supply chain.
• Optimizing processes and effective stakeholder collaboration can reveal opportunities for innovation in the supply chain.

Category Management Structure

• In more advanced procurement teams, category management extends to setting up category boards responsible for company strategy.
• A category board brings together stakeholders from different functions across the organization to develop and implement a strategy.
• It will focus on procurement spending that mitigates supply security risks and reduces supply chain disruption.
• Products will be identified as strategically critical, characterized by a high percentage of total expenditure and presenting a high level of risk.
• Other strategic categories may represent a smaller percentage of total expenditure but still present a risk, and require additional oversight.
• Boards are established to oversee a specific category and work within a governance structure established by agreed terms of reference.
• Members of category boards tend to be in senior roles and directly influence procurement decisions for strategic spending decisions.
• It is used extensively for high-value categories such as raw materials, energy, information technology, facilities, and professional services.
• Category teams focus time wisely, eliminating wasted resources on repetitive transactional buying.
• Spending on a commodity or service can be used to offer larger volumes or scope to suppliers.
• By implementing category management, cost avoidance opportunities and potential quick wins can be identified.

Enablers for Effective Category Management

• There are three main enablers of successful category management: People, Tools, and Technology.
• It is supported by procurement policy, procedures, strong governance, defined roles, stakeholder involvement, performance measurement and benefits tracking.

What is needed for category success

• Includes an in-depth understanding of the organization's future plans and business strategy.
• It also requires continuous analysis of spend, market data, and commodity prices.
• An evaluation of cost drivers by category and option definitions assists sourcing decisions.
• Furthermore, short-, medium- and long-term planning and sequencing should define future decision evaluation.
• Robust stakeholder relationships ensure involvement of all affected parties and users.
• Savings tracking through substitutions, compliance, and negotiations are key to success.
• Ensuring early involvement in business activities influences the organization's key cost drivers.
• Successfully involves capturing supplier performance data to drive quality and service improvements.
• An effective category management structure observes fully involved category managers in the early stages, procurement teams working with business stakeholders to understand operational requirements, reduced risk, lower costs, improved internal governance and engagement of key suppliers to share knowledge and experience.
• There should be action plan for short-, medium and long-term goals.