business

The Procurement Evolution: It Is All About Category Management

Introducing Category Management

There are many definitions given for category management, but simply it is the process that involves managing product/ services spend categories on behalf of your organisation to gain optimum benefit/ value from the product/ services attained as per contract arrangement with your suppliers.

Regardless of the definition, one certain thing is that strategic procurement has now evolved to Category Management and a lot of the top organisations are now deploying organisational structures that support category management approach as opposed to the traditional Strategic Sourcing structures.  Top organisations work to identify key spend categories across their organisations and proactively manage them to ensure that supplier arrangements put in place deliver the maximum benefit identified during the life of the arrangements.

Procurement has come out of obscurity and into mainstream business. Once known merely as a back office function, it is now a mainstream business management activity for most organisations as it’s now understood that it is more than just a cost-saving measure but a way to gain competitive edge in this day of business globalisation. Procurement competence has taken a more strategic approach because the way we do business has changed. There has been a natural strategic business evolution from purchasing to sourcing to strategic category management in the last 10 – 15 years. As such focus is now solely on understanding categories profile and managing the Category Management process as end-to-end function and along the way deliver optimised the return on supply investment.

As many organisations move into a category management model for their procurement function they require to employ category expertise for a given subject matter within their structure and invest in managing top spend portfolios at a strategic level.  Moreover need to understand and approach category management with the ideal structure, methodology and governance.

One of the key benefits of Category Management of a category management model is the ability to gain greater stakeholder support and influence via the in-depth understanding of the make/buy/sell decision process.  As such, this enables the Category Manager to further influence internal demand as opposed to just concentrating on price, compliance and risk as is the case with traditional sourcing practice.

The objective of Category Management is to ensure that all benefits from the awarded contract realised and as an ongoing function a are continuously improved.

To realise full benefit, managers need to have a complete understanding of the Category Management process and the dynamics of their category (portfolio of categories).  As such the following sets out some key considerations:

1. Set out to determine spend, categorise spend and forecast future category requirements and spend projections

2. Have a full understanding of who your stakeholders are, and what type of influence they have over change

3. Set to understand where your category ‘benefits’ align with stakeholders’ ‘business drivers’ or needs in order to create buy-in and to generate support

4. Conduct full economic analysis, such as 5 forces analysis to understand the “competitiveness of the supply market” and the linkage to your category strategy

5. Understand how do your supplier’s perceive your organisation within the market place and use attractive points to leverage category and gain their interest

6. Utilise hypothesis based work planning to focus data collection and outcome analysis

7. Finally, work to uncover additional sources of meaningful category value

Key Points to Consider

Category Managers are effectively Procurement Managers of defined portfolios of products & services. As such need a holistic approach to managing their category(s), as such need to consider:

* Categories and goals are different in every business, hence need to be flexible and agile in applying their expertise and management approach.
* Categories have phases of maturity and need different skills for each phase which in turn requires careful planning and execution.
* The criticality of a category to the business ultimately sets out the support and visibility. As such manager’s to understand its profile and how they are to influence and manage
* The key and most critical aspect of category management is to  validate value of their managed categories and Return of Investment to their business owners.
* The end to end management of category is the absolute key, as such category mangers require skill set and overall category management discipline and methodology. A successful category manager needs to have a tool kit with category management tools, methodologies and techniques. Backed up with field experience

A key component to Category Management is applying a category management methodology which ultimately is generically utilised to manage all categories.  The following is a suggested methodology/ process of Category Management.

Category Managers need to apply a holistic approach to the management of the total cost of a category and its associated supplier stakeholder relationships. Also attain category knowledge, deliverable opportunities and most importantly the process capability to ensure that the strategy and supplier arrangements put in place deliver the maximum benefit and value for their business.

Category Management Process

Below is a suggested Category Management model approach, which is delivered through a framework of 7 structured process steps, cross functional collaboration and by considering both demand and supply environments.

* Gather all relevant information, including category spend, and market dynamics, user / buyer requirements, suppler and supplier competitive analysis.
* Conduct analysis and set out opportunities for savings, benefits and improvements.
* Develop category strategies both in inward and outward focus including improving purchasing/ buying processes and supplier/ contract arrangements.
* Implement market strategy, including go to market, renegotiation and supplier rejuvenation strategy.
* Develop/ implement internal change strategy, including stakeholder management and communication plan strategy
* Establish Supplier Management program, including operational performance, continuous improvement and service delivery reviews.

As a result of this ongoing process Category Managers can define key objectives to be fulfilled over the life of the supply arrangement, define the benefits to be achieved and how this would be measured, communicate/ engage with all stakeholders impacted by the category program and continued Category baseline/ benchmark analysis.

A final word:

There has been a natural strategic business evolution from purchasing to sourcing to strategic category management in the last 10 – 15 years. This has been a key dynamic in the market, the shift from dislocated sourcing/ vendor management operations to full end-to-end category management. As such the new frontier is now solely focused on understanding Category’s profile and managing the Category Management process as end-to-end function, along the way deliver optimised the return on supply investment.

5 KEYS to success –

1. Communicate your Category’s Value

2. Drive Category Utilisation

3. Cultivate a Market Intelligence Network

4. Create Value and Minimise Risk

5. Optimise your Category Portfolio