Category Management: The Trinity

The Trinity of Category Management

• Category management delivers value beyond cost reduction using structured decision-making.
• The Trinity in category management is a foundational framework, that structures strategic decision-making.
• Understanding spend, requirements and relationships allows organizations to prioritize, analyze, and optimize procurement strategies.

The Role of Spend Data

• Spend data must be completely accurate for effective decision making.
• It's not necessary to rely on perfectly accurate figures to develop category strategies.
• Spend data that is directionally accurate, meaning that as long as the data provides a reasonable representation of reality, is sufficient for strategic decision-making.
• When evaluating spend data, procurement professionals should focus on whether the spend data is in the correct order of magnitude.
• Determine if the reported spend figure roughly correct, even if the exact number is slightly off.

Understanding the Distribution of Spend

• Procurement professionals must analyze spend to see how it's distributed across different suppliers and locations.
• Spend visualization tools, such as pie charts, are valuable for this.
• Review spend breakdowns, and ask the following questions:
  • How concentrated or fragmented is the spend across suppliers?
  • Are there a few major suppliers controlling most of the category spend, or is it spread across many smaller suppliers?
  • Are there any red flags, such as over-reliance on a single supplier?
• In scenario 4, a single supplier controls a dominant share of category spend, which is a red flag

Identifying Risks in Spend Analysis

• Verify data accuracy to confirm whether heavy reliance on one supplier is justified.
• Assess supplier risk exposure, considering factors such as contract terms, supplier financial stability, and alternative sourcing options.
• Explore supplier diversification strategies, particularly if dependency poses potential supply chain risks.

How Procurement Should Handle Spend Data

• Procurement professionals often receive Excel spreadsheets or spend reports containing errors or outdated data:
  • Determine is whether the order of magnitude is correct.
  • Determine if the spend picture make sense, even minor inaccuracies should not prevent procurement teams from strategic decisions.
• Procurement can focus on actionable insights rather than being paralyzed by data perfectionism.

the Role of Finance vs. Procurement in Spend Accuracy

• Finance is responsible for ensuring data accuracy and reconciling spend figures with financial records.
• Procurement should focus on using spend data as a guide for strategic decision-making.

Key Takeaways

• Spend data does not need to be 100% accurate to be useful.
• Focus on whether the order of magnitude and spend picture provide a clear direction for decision-making.
• Order of magnitude matters more than precision; small percentage variations do not change the category strategy unless spend moves between major thresholds.
• Examine supplier concentration and spend fragmentation for identifying risks and opportunities.
• If one supplier controls more than 50% of category spend, assess potential risks and consider diversification strategies.
• Focus on insights, not financial reconciliation.

Kraljic Matrix and Supplier Preferencing Model

• The Kraljic Matrix evaluates categories based on their importance to the business and market complexity.
• Supplier Preferencing Model assesses how suppliers perceive the organization, figuring their willingness to invest in the relationship.
• The Kraljic Matrix categorizes procurement items into four quadrants based on business importance and market complexity:
  • Strategic (High Importance, High Complexity): Critical categories where supplier relationships require close management due to the complexity of switching providers.
  • Leverage (High Importance, Low Complexity): Categories where competition exists, allowing procurement to negotiate better deals or consolidate suppliers.
  • Bottleneck (Low Importance, High Complexity): Specialized or difficult-to-source items that are not core to the business but require extra effort to procure.
  • Routine/Non Critical (Low Importance, Low Complexity): Routine, low-value items where cost-efficiency and ease of procurement are the priorities.
• "How quickly will the business fail if this category were disrupted?" is a test to determine of a category is truly strategical.
• Supplier Preferencing Model classifies buyers in four quadrants:
  • Core (High Value, High Attractiveness): Buyers who generate significant revenue and strategic value for the supplier.
  • Nuisance: (Low Value, Low Attractiveness): Buyers who provide minimal business opportunity and are treated as transactional accounts.
  • Exploitable: (High Value, Low Attractiveness): Buyers who spend a lot but offer little strategic benefit.
• Development (Low Value, High Attractiveness): Buyers who hold potential for future growth or strategic collaboration.

Combining the Models

• Procurement teams should assess both the Kraljic Matrix position of a category and their supplier's perception of them.
• This creates 16 possible combinations to create the ideal procurement approach.
• Map these relationships so procurement professionals can develop customized strategies.
• Improve supplier engagement for strategic categories.
• Leverage market competition for categories where suppliers are indifferent.
• Minimize risk in bottleneck categories by identifying alternative sources.
• Optimize tail spend management for non-critical categories.

Relationship-Based Thinking to Improve Procurement Strategy

• Business relationships work similarly to personal relationships.
• Align category importance with supplier perceptions to optimize long-term value.

Key Takeaways Cont.

• Focus on order of magnitude and spend distribution.
• Assess category importance and supplier perception together to create a more strategic procurement approach.
• Procurement teams should aim to be seen as core customers rather than exploitable revenue streams.
• Business relationships can be understood using personal relationship dynamics for strategy development.