Spend Analysis, Development

Category management and supplier segmentation | The criticality matrix

How to get started with category strategy and planning

Category strategy defines vision, mission and deliverables for the category to perform optimally. Category management in procurement is a strategic approach to segmenting their spend into groups of products and services that are similar in their nature and characteristics. Category management in procurement has been around for more than 30 years. Every few years someone floats the question “is category management dead?”. Some would say yes, but the real answer is no, but instead category management is always evolving. Category management was originally launched as a project-based approach to managing the sourcing of goods and services. The aim was, and is, to deliver value to the organization beyond just negotiating better prices. It enables harnessing the benefits of scale and scope.

It is generally accepted that category management forms the basis for successful strategic sourcing initiatives. 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 taxonomy. This thinking has not changed. The basics need to be in place before attempting advanced strategies. There is no one correct solution to categorization. It depends on the industry, procurement’s organizational maturity, structure and governance, spend profiles and the external marketplace. A manufacturer of packaging solutions will categorise differently from a software company. One thing is for sure, it is not an event, it is a living process. We can see that advances in technology are impacting category plans. As requirements and market conditions change, category strategies must be reviewed at least annually.

Category planning

There are some pre-requisites for successful category management and #1 is to have a category plan. Not just any plan: one that is developed and accepted by all stakeholders. The category plan should be based on:

  • An in-depth understanding of the organization’s business strategy so that the categories are aligned with wider goals

  • Continuous analysis of spend, market data, and benchmarks to identify additional improvement opportunities

  • Continuous price analysis on local and international markets and monitoring of trends in the category

  • Capturing of supplier performance data to drive quality and service improvements

  • Tracking of true savings achieved through substitutions, better compliance, negotiations

  • On-going stakeholder discussions and reviews to ensure that all affected parties and users are involved in decisions within the category.

Category spend analysis

The backbone for category planning and strategy work is spend analysis. Spend classification and supplier segmentation provides visibility on category spend trends and where sourcing and development efforts should be focused on in the hopes of highest return on investment. Category spend analysis can reveal potential for consolidation, best areas for tendering, payment term optimization, purchasing process improvement or contract coverage issues. With sophisticated spend analysis software you can identify opportunities on category and supplier segment level.

category spendprice opportunity in category management

Stakeholder management for category success

Category management is relationship management as much as it is data-driven leadership. Modern category management involves partnering with internal stakeholders and end-users as early as possible. Failure to do this can derail future projects. Stakeholders are often referred to as “internal customers” or “the eyes and ears” on the market. They can provide you with unique supplier and market knowledge, and relevant insights that might be time-consuming or impossible to obtain otherwise. In return, you are expected to understand stakeholder requirements and consider those in your category planning and sourcing specifications. Formally documenting category plans with your stakeholders ensures mutual commitment and focus. Plans drive the correct behaviour and direct the effort towards achieving the desired results. For instance, you might have targets for longer payment terms or improving contract coverage within the category. These initiatives are hard to implement alone and your stakeholders are your spokepersons towards the wide group of suppliers. Documention includes alignment and signoff from stakeholders. A well-thought-out and successfully implemented category plan delivers value, efficiency, quality, sustainability and innovation, as well as mitigating risk.

Criticality matrix approach

The International Institute for Advanced Purchasing and Supply (IIAPS) makes the case for a ‘paradigm shift’ in current thinking about how to undertake category management and develop sourcing strategies. Traditional approaches to identifying opportunities are often based on the Kraljic matrix or a similar model where the focus is on clearly identified strategic goods and services like this:

Kraljic matrix supplier segmentation

More on supplier segmentation and purchasing portfolios on Supplier Segmentation 101 – Stategic Suppliers and Future Success.

IIAPS promotes a more sophisticated understanding of the different types of categories of supply that must be managed by organisations. In their White Paper: Power Positioning & Sourcing Portfolio Analysis: Techniques for Effective Category Management & Strategic Sourcing, one of their less complex and more practical approaches takes the Strategic quadrant and offers a four-way classification based on criticality.

category strategy criticality matrix

  • Strategic Critical

A strategic critical category will have a significant impact on both operations and the commercial/mission-critical goals of the organisation. The total level of expenditure may not be high, although it often is. Such categories normally require extensive senior management attention, with the highest levels of organisational resource input in the sourcing process in terms of expenditure, time and involvement.

  • Strategic

A strategic category will normally have only a relatively low impact on operational delivery, but nevertheless, impact significantly on the strategic commercial/mission critical goals of the organisation. The total level of expenditure may not be high. Such categories do not normally require extensive senior management attention, or the highest levels of organisational resource input in the sourcing process in terms of expenditure, time and involvement.

  • Tactical Critical

A tactical critical category will normally have a significant impact on operational delivery, but not on the commercial/mission-critical goals of the organisation. The total level of expenditure may be high. Such categories normally require extensive attention, but with only middle rather than senior management participation in cross-functional teams. The organisational resource input required in the sourcing process, in terms of financial resources, time and involvement of internal and external stakeholders, is normally not as significant as that required for strategic items.

  • Tactical

A tactical category will normally have only limited significance for either operational delivery or the commercial/mission-critical goals of the organisation. The total level of expenditure will not be high relatively. Such categories normally require only limited attention, with middle and lower-level managers participating in ad hoc teams. The organisational resource input required in the strategic sourcing process, in terms of financial resources, time and involvement of internal and external stakeholders, is normally quite low.

suppliers criticality

count by spend tier

Focus on operational and commercial criticality enables focusing on business requirements and continuity, instead of looking at spend and opportunity cost only. This four-way segmentation consideration is essential because it plays a major role in identifying:

  • who will be part of the sourcing strategy team

  • the level of engagement of stakeholders

  • the level of time and resource that will be devoted to a specific sourcing strategy; and,

  • the types of value for money KPIs that are to be sourced.

The criticality approach provides guidance to resourcing, levels of analysis and work scopes that procurement must engage in when developing new sourcing strategies. The approach avoids many positioning errors made by procurement forced into making simplistic choices between categories. IIAPS White Paper offers many more sophisticated alternative approaches to category management and strategic sourcing that are beyond the scope of this article.

 

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