Category management, a panacea for effective sourcing and cost reduction

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What is Category Management?

The Procurement function and role have evolved to a strategic role as organizations continuously strive to seek value.

 

Procurement roles and responsibilities have become enormous within organizations as firms are growing and driving toward sustainable business growth.

 

Category management has become very necessary as a way to effective sourcing and cost reduction within organizations. Category management helps in the breakdown of procurement goods and services into various categories groups or segments. Category management is a strategic management approach to procurement that enables items to be categorized and managed by a category manager.

 

World procurement professional body, CIPS defined category management as “A strategic approach to procurement that segments and aligns spending with each supply market allowing greater focus on value creation.

The various category managers for efficiency, transparency, and visibility purposes manage categories of items. Category management involves the grouping of products (goods or items) or services or may relate to the dissecting of products or services by value, supplier, type, or volume into various categories to allow for easy management and sourcing.

In category management, there is a category manager who is the ‘CPO of their category’ and carries a weight of responsibility for their organization’s application of the category – especially for direct categories that support strategic supply lines. Category managers handle the development of strategies, assessing market trends, and making informed decisions to achieve procurement aims and deliver value to the organization.

Research according to Scribd shows that “companies are turning to category management strategies, combining standard sourcing and compliance procedures with process automation and improved data management and spend analytics to holistically manage the total costs of a good or service and its associated supplier relationships”.

Category management often refers to the method by which this ‘portfolio buying’ approach is put into practice. It is usually characterized by several clearly defined stages or sequences of activities. Within a strategic procurement framework, for maximum effectiveness, category management should be a continuous and embedded process, and yet prove the agility to meet the demands of a dynamic supply market and business.

Category management as a strategic procurement function

 

Category management is a continuous process that requires the participation of different stakeholders (internal and external) across the organization throughout the procurement lifecycle.  It can therefore be considered as a strategic function that drives efficient sourcing and cost reduction within organizations.

Category management is a vital strategic procurement function that involves grouping similar products and services into categories to streamline sourcing and optimize supplier relationships. By focusing on individual categories, organizations can analyze spending patterns, negotiate better deals, and drive cost savings. This approach enhances collaboration with suppliers for sourcing efficiency and ensures alignment with overall business goals.

Category management is considered a strategic procurement function as it helps drive value for the organization, such as reduced prices and costs, supply chain risks and timescales, and focusing on building supplier relationships. Category management plays a critical role in a firm’s procurement strategy as it helps the procurement team break down products and services into various segments and categories for easy management and strategy development for each category.

“Category management can incorporate data-based array planning, inventory control, and product pricing with the mutual objective of enhancing sales performance and operational efficacy.”

A category management plan will involve:

  • Defining the category
  • Analyzing procurement, sourcing, and spending value
  • Understanding the market and consumer behavior
  • Planning changes and improvements to the category
  • Implementing the plan and measuring the results

Benefits of Category Management

 

Category management plays a crucial role in procurement as a strategic function and offers several benefits to organizations. Category management can be used to manage both direct and indirect procurement. CIPS notes that effective category management can enable organizations across business sectors to gain a competitive advantage in the global marketplace. It should be cautioned, however, that to the unaware, this approach has been seen to detract from vital post-contract supplier development by encouraging procurement professionals to have a narrow, commodity-focused approach. Some benefits of category management include;

 

  1. Cost Savings. Category management ensures cost reduction, savings, and avoidance. By analyzing spending patterns within specific categories, organizations can identify opportunities for cost reduction, negotiation, and volume discounts. Through spending analytics data, organizations will be able to take effective sourcing and procurement strategies on certain items to realize cost savings.

 

  1. Supplier Relationship Management. Focusing on categories allows procurement teams to build stronger relationships with key suppliers, leading to improved collaboration, innovation, and responsiveness.

 

  1. Risk Management. Effective category management helps identify potential risks within supply chains, allowing proactive risk mitigation strategies to be put in place.

 

  1. Strategic Sourcing: By understanding category-specific market trends and dynamics, procurement can engage in more strategic sourcing activities and better align with the organization’s needs. Category management allows you to segment your spending into areas that contain similar or related products and services. It allows you to focus your time on those categories that align with your organization’s goals and that will bring the most value.
  2. Cross-Functional Collaboration: Effective category management requires collaboration across different departments, promoting a more holistic approach to procurement that aligns with overall business objectives.

In essence, category management empowers procurement teams to strategically manage their spending, drive efficiency, and contribute to the overall success of the organization.

 

 

Kraljic Matrix as a tool for Categorization and Category management

 

One of the best tools to consider when considering category management is the Kraljic matrix.  The Kraljic matrix serves as a tool for categorization and category management. This helps procurement and sourcing efficiency of items relevant to the operations of the organization. One item will fall into distinct categories for different organizations in different environments. This will help organizations create varying categorization strategies and techniques.

1. Non-critical items/ routine items

Non-critical items are low supply risk and have a low impact on organizational profitability. Stationery, simple consumables, and courier services are examples of routine items. Though they are very important and aid employees to do their job, pens, and papers do not have a significant impact on the business, nor does their absence pose a severe threat.

However, these items are interesting as the costs are mostly high, and hence, the purchasing strategies would need to be in place for these items to reduce administrative costs and logistical complexity. Such categories of items can be managed as a category for efficient sourcing and cost savings.

2. Leverage items

Leverage items have high profitability but a low supply risk factor. Thus, buyers possess the balance of power in the relationship and leverage this strength to gain greater returns.

Examples include Personal computers, Photocopy Machines, PA Systems, and electrical components. Category managers of this line of items would have to use negotiations and supplier diversification.

  1. Bottleneck items / Minimize risk

Bottleneck items are the opposite of leverage items. These are products with a limited source of supply, but they do not have a major profit impact. Some examples include petrol, stamps, Exams Papers, electricity, air-conditioners, light bulbs, spare parts, Vaccines

This quadrant belongs to a “Supplier’s Market.” Here, the segment of items is with the supplier and would require effective supplier management. This will help category managers how sourcing strategies and supplier relationship management.

4. Strategic items

Strategic items have high supplier risk and high-profit impact which are critical to any business or organization. Some examples of strategic items include large bits of capital equipment, work contracts, bespoke software (WAN), and generators.

These items are only represented and produced by a few suppliers. Category managers would have the responsibility of ensuring an effective supplier relationship which is key to the future of the purchases of a company.   Strategic partners should look at innovative ways in terms of the product and process so they can expect long-term commitments and proactive development.

 

 

 

 

With the help of the Kraljic Matrix, organizations can categorize items and plan based on the supply risk and its impact on profitability for an effective category management strategy. It helps organizations categorize routine items, strategic items, bottleneck items, and strategic items for efficient and effective category management which results in efficient sourcing and cost reduction.

Category management’s role in ensuring cost reduction and efficient sourcing.

By implementing effective category management strategies, organizations can systematically target and achieve cost reduction goals while maintaining or improving the quality of products and services they acquire. Category management plays a crucial role in ensuring cost reduction within an organization through several strategic steps:

  1. Through spend Analysis. Category management starts with a thorough analysis of spending patterns within specific categories. By understanding where money is being allocated, procurement teams can identify opportunities for cost reduction. This will help create cost savings mechanisms for the organization.
  2. Negotiation Strategies. Category managers develop negotiation strategies based on their deep understanding of the category and its market dynamics. They leverage insights to negotiate better terms, discounts, rebates, and more favorable pricing structures. Organizations can benefit from cost savings from such negotiations.
  3. Volume Consolidation. Through category management, the organization can consolidate or aggregate its purchases to achieve higher volume discounts from suppliers, particularly if similar items are bought across various departments or branches. This aids in efficient sourcing and cost reductions.
  4. Standardization. Category management encourages the standardization of products and specifications within a category. This simplifies procurement, reduces complexity, and can lead to bulk purchases, thereby driving down costs.
  5. Strategic Sourcing. Engage in strategic sourcing practices, which involve analyzing the supply market, identifying potential suppliers, and negotiating contracts that result in significant cost savings and efficient sourcing.

 References

Kraljic Matrix — Everything You Should Know – Procurement Tactics,

Category Management Benefits | CIPS,

What is Category Management in Procurement? A Guide (2023) – SCMDOJO,