What is category management? Updated definitions and best practices

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JasmiinaToikka_100.jpgBy Jasmiina Toikka, Head of Content Marketing, Sievo

Category Management (CM) is a strategic approach to procurement where organisations group together similar areas of external spend to identify consolidation opportunities and 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 utilise best practices. People, tools and technology support it. Its use is widespread in businesses, government and not-for-profit organisations 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 that 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 a supply channel for products or services with the best supplier at the lowest Total Cost of Ownership (TCO). The strategic sourcing process combines spend analysis, market research, negotiation and contracting.

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

CatagoryManagement.jpg

What is a category?

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

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

Direct categories

The term "direct" is normally used to refer to raw materials and items for use in manufacturing goods for resale. Direct spend management is the process of purchasing or obtaining materials, resources, goods, and services used in its business's core operations. 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 aeroplanes. Direct and indirect categories may look different depending on the industry you are working in. The IT category may be "direct" in banking and insurance. It is vital to core business operations and customer service but "indirect" in the food or beverage sector.

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 processes but cannot be allocated to a specific product. Indirect categories can include marketing, maintenance, professional services, utilities, and telecommunications. Professional services are a common indirect category group in most organisations. 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 the level of sophistication.

Example: HR category in transition

The HR category is becoming more thrilling and complex to manage as we deal with significant changes in work life. Distance work allows us to source the best talent without geographical limitations. There is a trend in flexible employment models and freelancing that benefits both organisations and individuals. A highly specialised 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 employee wellbeing. New technologies are emerging for performance management and development. Workwear needs to be more sustainable, potentially with circular economy consideration. All these elements will have an impact on category management and sourcing decisions.

In addition to market changes, top management has a constant drive for cost savings in this area, which is challenging even for the most seasoned HR procurement professionals. Procurement needs to collaborate proactively with the People team to optimise the balance between core internal resources and expertise that could be outsourced cost-effectively 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:

HumanResourses.jpg

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 full procurement life-cycle. Large categories of spend and those that are strategic to the organisation require dedicated time and a high level of specialisation. The process used remains the same regardless of the category.

Effective category management process could look like this:

EffectiveCatagoryManagement.jpg

A category plan is critical to successful category management initiatives. A category plan is documentation that includes category targets, stakeholder requirements, opportunities, prioritisation, 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. A category manager is a procurement role that is responsible for overlooking a specific area. The 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 short-term (quick wins). Categorising historical spending in a structured way creates opportunities for cost-savings and extracting more value from suppliers. The trend in category spend management is towards complete transparency, which is partly achieved through digital tools. A 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 and jointly support the organisation'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, the category manager is a value-adding partner that supports market analysis, external resource management, supplier performance development and realisation 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 spending occurs 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. The category manager facilitates closer collaboration with the selected handful of category suppliers. Fewer supplier contracts mean 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. A focused approach enables continuous learning and improvement within own area of expertise. An approach like this will result in a better product-to-customer fit.

Less risk and better governance - Understanding your category characteristics and suppliers helps address category-specific issues and improve compliance.

Business strategy execution - Category management translates business strategy into specific category targets and deliverables.

How to overcome potential barriers to success?

Category management is the continuous improvement and execution of the strategy. Markets keep evolving, and not all changes are positive. A strategy that works well today might deliver opposite results tomorrow. Obtaining stakeholder support for category strategies is not always easy. Business units have their agendas and can be sceptical about potential misalignment, failure 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 opportunities for improvement and new business are preferred qualities of a great category manager. Curiosity and genuine interest in your business areas will build common ground with stakeholders and develop your market knowledge.

Procurement is uniquely positioned 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 spending 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. Sharing your wins and true category management impact in a transparent, unquestionable format is critical to earning stakeholder trust and operating mandate.

Sievo

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