Organizations that are reactive in their purchasing activities and have no clear procurement goals are now realizing that they are not getting the best value out of their third party controllable spend. By processing day-to-day transactions without a plan, they can be paying too much for their goods and services.
Using a structured approach to high value purchasing activities by categorizing historical spend creates opportunities for savings and extracting more value from suppliers. “Category Management is a strategic activity which organizes procurement resources to focus on specific areas of spends”.(CIPS).
An example of a category would be I.T. It may have many sub-categories (commodities) such as software, hardware and peripherals. Further sub-categories can be added to provide a further level of detail.
Steps in the process of managing a category:
- Define the category and sub-categories (commodities)
- Perform a detailed spend analysis of the category based on the analysis of the commodities within it
- Do a supply market analysis per commodity and continuously monitor it
- Apply this market intelligence to make improvements to specifications, find new suppliers or change the scope of work
- Use this knowledge to actively manage strategic purchases and transactional purchasing
The benefits of category management
The main objective is to manage each category and sub-category of spend holistically, through the entire procurement lifecycle. By implementing category management procurement staff can focus their time wisely and not waste resources on repetitive transactional buying. Spend on a commodity or a service can be leveraged to offer larger volumes or scope to suppliers. It also highlights cost avoidance opportunities and potential quick wins.
In more advanced procurement teams, category management extends to setting up category boards that are responsible for the company strategy relating to that category. This is used extensively for high value categories such as raw materials, energy, information technology, facilities and professional services.
Pre-requisites for successful category management
- An in-depth understanding of the organization’s future plans and business strategy so that the categories are aligned to 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 additional savings actually achieved through substitutions, better compliance, negotiations
- On-going stakeholder discussions and reviews to ensure that all affected parties and users are involved in decisions on the category.
Category management is the best-practice method used in professional procurement organizations to manage purchasing of high value goods and services. However, it is a continuous process and it forms the basis for successful strategic sourcing initiatives, but only provided it is well managed and given the right level of attention.
This article first appeared in Bespoke Sourcing Bulletin.
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