Spend Analysis, Procurement explained

What is category management? Definitions and best practices | Procurement Explained

Category Management (CM) is a strategic approach to procurement where organizations group together similar areas of external spend to identify opportunities for consolidation and to create added business value. Approaches like this were originally designed for project-based sourcing of goods and services. Category management has grown to include much more: spend management and analysis, market intelligence, leadership, performance development, corporate reporting, sustainability and risk mitigation. Category management allows procurement to focus their efforts and evaluate different market segments to leverage their agreements.

Category management provides a systematic cross-functional process to develop and utilize best-practices. It is supported by people, tools, and technology. Its use is widespread in businesses, government and not-for-profit organizations to align business strategy with sourcing initiatives and supplier relationship management. Benefits of category management include cost efficiency, improved quality, efficient use of resources, improved market understanding, streamlined business strategies and improved collaboration.

 

Category Management is a strategic approach to procurement where organisations segment their spend into areas which contain similar or related products enabling focus opportunities for consolidation and efficiency. - CIPS

 

Is category management the same as strategic sourcing?

No. The term Category Management is often used interchangeably with strategic sourcing, but it is not the same. Category management is a systematic, holistic way of managing categories for the whole life-cycle of goods and services, directing procurement activities. Strategic sourcing is a process to develop channel of supply for products or services with the best supplier at the lowest Total Cost of Ownership (TCO). Strategic sourcing process combines spend analysis, market research, negotiation and contracting.

Strategic sourcing is key activity within category management framework as seen in this example:

 

CM framework-1 

  

What is a category?

Procurement category is logical group of products or services with similar characteristics, supply and demand drivers and suppliers. The categorization depends on the industry, procurement’s own organizational structure, spend profiles and the external marketplace. The general principle is to group goods and services that have similar characteristics either using a global standard such as UN Standard Products and Services Code  (UNSPSC) or an internal classification method, also called a spend taxonomy. There is no correct way to categorise spend, but there are best practices.

What to consider when designing your taxonomy? Have a read: Spend data categorization: selecting a spend taxonomy

There are two broad groups of spend at the highest level:    

  1. Direct categories

The term “direct” is normally used to refer to raw materials and items for use in the manufacture of goods for resale. Direct spend management is the process of purchasing or obtaining materials, resources, goods and services that are used in core operations of its business. They are vital to the business and often acquired in large quantities, are of high value and are sourced from trusted suppliers. Practical examples would be chemicals for the manufacture of soaps or engine parts for airplanes. Direct and indirect categories may look different depending on the industry you are in. The IT category may be “direct” in banking and insurance where it is vital to core business operations and service provided to customer but “indirect” in the food or beverage sector.

For a fuller read on direct procurement, see: What is direct material procurement? Definitions, types and examples

  1. Indirect categories

Indirect categories are those goods and services that are required to support day-to-day operations. Indirect products and services enable business operations and production process but cannot be allocated to a specific product. Indirect categories can include marketing, maintenance, professional services, utilities and telecommunications. Professional services is a common indirect category group in most organizations. It includes legal, human resources (HR) and business consulting services.   All sub-categories require focus and expertise as many services have specific pricing models and market characteristics. In the following example we open up the level of sophistication.

Example: HR category in transition

The HR category is becoming more thrilling and complex to manage as we deal with major changes in work life. Distance work allows us to source best talent without geographical limitations. There is a trend in flexible employment models and freelancing that benefits both organizations and individuals. Highly specialized skillset is required to be successful in talent acquisition as new competence domains emerge. Talent attraction today is more than just a competitive salary and permanent contract. There is a new expectation level for what is considered as employee wellbeing. New technologies are emerging for performance management and development. Work wear needs to be more sustainable, potentially with circular economy consideration. All these elements will have impact on category management and sourcing decisions.

In addition to market changes, there is a constant drive by top management for cost savings in this area, which is challenging even for the most seasoned of HR procurement professionals. Procurement needs to collaborate proactively with People team to optimize the balance between core internal resources and such expertise that could be outsourced cost efficiently without losing strategic business capabilities. Simultaneously, HR suppliers can be local or global, while the hundreds of stakeholders are spread around the various business functions.

Example of the HR category with sub-categories:

HR categories

 

Category management in practice

Category management will cover the entire procurement cycle from sourcing to managing the supplier relationships. The main objective is to manage each category and sub-category of spend holistically, through their entire procurement lifecycle. Large categories of spend and those that are strategic to the organization require dedicated time and a high level of specialization. The process used remains the same regardless of the category.

Effective category management process could look like this:

 

CM process

 

Category plan is critical to succesful category management initiatives. Category plan is a documentation that includes category targets, stakeholder requirements, opportunities, prioritization, resourcing and scheduling of activities. The category planning process is led by a category manager who directs the portfolio, runs the day-to-day activities and strategic sourcing. Category manager is a procurement role that is responsible for overlooking a specific area. Category manager will track the market to understand pricing trends, regulatory changes, and innovation for the entire category. Category plans can be developed for the long-term ( 3 – 5 years), medium-term (1 – 3 years) and for short-term (quick wins). Categorizing historical spend in a structured way creates opportunities for cost-savings and extracting more value from suppliers. The trend in category spend management is towards full transparency which is being achieved partly through the application of digital tools. Higher level of transparency leads to more insights and business value as more professionals can find opportunities for improvement and strategic sourcing.

What is success in category management?

Turning data into category insights with spend analysis is a good starting point for category management, but isn’t enough to succeed in ambitious development efforts. Leading category managers spend a significant amount of time with stakeholders and end-users to understand their business needs so they can jointly support the organization’s goals. Active stakeholder collaboration, networking and benchmarking are keys to successful category management. Effective category management requires multiple areas of expertise, such as: stakeholder identification and management, supplier relationship management, performance management & development, sustainability & environmental management, risk management, effective communication and leadership skills.

Successful category management is enabled by:

  • People,
  • Technology, and
  • Tools

At best, category manager is a value adding partner, that supports in market analysis, external resource management, supplier performance development and realization of business targets. They will have extensive knowledge of the global supply market, emerging trends and will encourage deeper collaborative relationships between suppliers and internal stakeholders.

Benefits of successful category management:

  • Benefits of consolidation - Better pricing, improves quality management and more beneficial terms and conditions can be achieved by aggregating spend and having fewer suppliers for a product or service.
  • Improved spend visibility - Aggregating and validating spend by category provides insight into where money is spent and with which suppliers. Category management identifies improvement opportunities in maverick and tail end spend.
  • Better supplier relationships - Category management promotes single points of contact which avoids conflict and builds trust. Category manager facilitates closer collaboration with the selected handful of category suppliers. Fewer supplier contracts means less administration time as well. 
  • End-user satisfaction - The category manager becomes the supply market expert and go-to person for a given product or managed service. Focused approach enables continuous learning and improvement within own area of expertise. This results in better product-to-customer fit.
  • Less risk and better governance - Understanding your category characteristics and suppliers helps address category specific issues and improves compliance.
  • Business strategy execution - Category management translates business strategy into specific category targets and deliverables.

How to overcome potential barriers for success?

Category management is continuous improvement and execution of the strategy. Markets keep evolving and not all changes are positive. Strategy that works well today might deliver opposite results tomorrow. Obtaining stakeholder support for category strategies is not always easy. Business units have their own agendas and can be skeptical about potential misalignment, failior to understand their specific business needs, failure to supply, lower quality and losing their preferred partners. Open lines of communication, proactivity and transparency are required from a category manager when aligning category plans with user requirements and business goals. Customer orientation and continuous seek of opportunities for improvement and new business are preferred qualities of a great cateogory manager. Curiosity and genuine interest towards your business areas will build common ground with stakeholders and develop your market knowledge.

Procurement is in unique position to access market specific information on new development, forecasts, upcoming trends and changes. To prove your value, you need to excite your business partners with new insights and be willing (and able) to share your expertise. The sheer volume of historical category spend cannot be managed manually to provide guidelines for category plans. Analytical tools that provide greater clarity and visibility into spend categories, sourcing opportunities and harnessed opportunities have been developed. Solutions like this are being used to support category management work for the best results. Being able to share your wins and true category management impact in transparent, unquestionable format is critical to earning stakeholder trust and mandate to operate.

Photo by: @mirapolis

 

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