Most procurement teams use a structured category management process that, if executed correctly, can yield substantial benefits. Procurement experts and other interested parties may be hesitant to fully adopt it.

Management of Categories: What Is It?

Strategically linking business goals and needs with the capabilities of the supply market, Category Management is an all-encompassing approach to purchasing and supplier management. It optimizes expenses, reduces risk, improves service, and boosts revenue by increasing the value generated from all of a company’s spending on suppliers over time. By enhancing alignment with stakeholder requirements and creating long-term strategic expenditure management plans, it has the potential to provide substantial value beyond conventional methodologies.

These are some of the components of a comprehensive Category Management strategy:

  1. Strategizing by Category Consistency with objectives, long-term plans, and annual assessments of requirements
  2. When it comes to strategic sourcing, it’s important to create and implement strategies at the sub-category level that use all of the available levers.
  3. Managing your suppliers means keeping an eye on their productivity, value, creativity, and quality.

If so, what makes this so crucial?

The category plan’s purpose is to aid in better understanding the business’s needs, aligning with longer-term plans, and creating alternative solutions.

  • The most noticeable benefit for businesses will be improved cost efficiency, in the form of greater cost savings or enhanced cost optimization. To maximize the number of opportunities for cost savings, risk mitigation, and revenue growth that can be generated, a thorough examination of all value levers is conducted.
  • To better align sourcing with business goals: One of the most important factors in a company’s success is having its procurement activities align with its organizational goals and objectives. An executive sponsor gives each crucial category team or supplier relationship clear goals and a sense of purpose, which is essential for fostering organizational shifts and gaining buy-in from employees.
  • Procurement and business teams can reduce supply chain risk by defining mitigation activities after identifying potential risk during the category planning process (dual-source, location, standardization,…)
  • Optimize Sources of supply: Analyzing the suppliers, their profiles, and their core competencies is crucial for successful category management implementation. After this step is finished, you’ll have the data you need to find the most suitable vendors for your business’ needs.
  • Develop “productive” connections with critical vendors: The company can strengthen its relationships with its suppliers through end-to-end category management. By reiterating the importance of suppliers’ core competencies, improving transparency regarding the suppliers’ longer-term plans, and guaranteeing the use of the most suitable suppliers for each specific goal.
  • Keep in mind the full scope of the process: An easy-to-understand but well-rounded model is presented that unites the processes of category planning, strategic sourcing, and supplier management to summarize the development of strategies, the identification of suitable suppliers, and the management of those suppliers.
  • To enhance spend governance, specialized structures are put in place at the program, category, and supplier levels to guide, challenge, and solve issues that arise when working with suppliers.
  • Approved supplier strategies and one to three-year categories summarizing findings, improvement suggestions, and key decisions are documented as part of the strategy. Efforts are made to implement and evaluate strategies in a methodical manner.

What is your secret?

Developing a strategic category management procedure can be done in a number of different ways. Every one of them will feature essentials like:

  • Allocating funds to meaningful categories that are both specific and general (for instance, “technology” is too vague; instead, divide it into subcategories like “computer hardware” and “software”). Technology->Hardware-> The Mainframe as an Illustration
  • Support the right person in the right place who has the right expertise in the right category (staff, travel, external benchmarks,..)
  • Don’t wait until the last minute to consider who will need to be involved in the future vision, who will be its key “sponsors,” and who will help to shape it.
  • Outline the expected outputs and templates, as well as the governance process (review/sounding boards, a strategy document, approval, etc.).
  • Develop schedules: Updates are a regular part of category management, which is an ongoing process.
  • Don’t be afraid to make adjustments, but remember the importance of maintaining high quality standards.

When those obstacles have been removed, you can implement a systematic procedure:

Step One : Budget Analysis (Internal Analysis)

In the beginning, a great deal of information and data is gathered from within the organization. At your upcoming stakeholder meeting, you can refer to that information as supporting evidence (Phase 2). Examples of questions that need answering could be:

  • How about a global or regional category manager? do you have a global/regional category strategy or an overview of your current strategy?
  • How many major vendors are there, and what do they supply? Verify the current supplier(s) to see if there is any prior experience, current agreements, or similar projects.
  • What is our history with these vendors, and why did we decide to work with them specifically?
  • Spending breakdown by country/business unit (regional, global) and total.
  • Do these vendors offer a wide variety of products and services to meet our needs? What do we shop for?
  • Who are the major users of this category and who are the key stakeholders/business owners? Think of possible groups of people to work on the project with you.
  • Do you have any existing contracts, SLAs, special agreements, or stipulations? When do they run out (be sure to check for the precise notice period and any penalties that may be incurred for an early termination)?
  • How are supplier results tracked (key performance indicators, scorecards)?
  • What are the terms of payment and delivery at the moment?
  • Where can I find the primary requirements and specifications?
  • Exactly what are the current purchasing processes and procedures?
  • Is there anything that might act as a barrier or a limitation?
  • Speculate on future budget allocations and the state of the company internally.

Step 2 : Establishing Business and Stakeholder Needs

Key stakeholders/business category owners must be involved in the category management process from the earliest stages possible.

The following are required actions for this second stage:

  • Make sure you’re talking to the right person in the stakeholder group, and find out if they have the authority to make decisions.
  • Conduct interviews with the relevant parties and keep records of the results. Consider how open they are to change and how much pushback you might expect.
  • Verify that the stakeholder’s needs are being met (s). Verify that they solve a real problem for your company and push back if necessary.
  • Determine the internal demand drivers by locating the demand triggers.
  • Try to find ways to combine volumes and opportunities to standardize across all of your needs.
  • Learn how to make the most accurate predictions about future demand and the likelihood of change or innovation.
  • If you need to switch suppliers, you should try to anticipate the associated costs and potential problems.

Step 3 : Market Analysis, Third Stage (External Analysis)

In the third stage, we analyze the supply market in detail. Finding new suppliers, evaluating existing ones, figuring out what factors affect prices and risks, and anticipating market movements are all part of the plan.

Possible courses of action include, but are not limited to:

  • Assess the state of the supply market (how much money is being spent on supplies overall, which companies are providing the bulk of our supplies, and are we using any of them?)
  • Find new suppliers and competitors in the market.
  • Carry out a comparative analysis and learn something
  • Analyze the market and potential risks,
  • Trend analysis (changing technologies, supply base, globalization, raw material constraint, etc…)
  • Start looking into outsourcing, nearshoring, offshore, etc., as potential replacements for your current method of supplying goods and services.

Step 4 : Create a Category Strategy

In the final stage of the sourcing process, you’ll formulate your category strategy in light of the needs of your stakeholders and the results of your internal and external analyses (Phases 1 to 3). Its other purpose is to map out the various projects that will comprise your category strategy:

  • Focus on details by refining the project’s scope, specifications, and requirements
  • Consider whether it would be more efficient to allocate category spending across a few or many suppliers.
  • Specify each project and how you plan to “address” its scope.
  • Take into account any benefits or changes that could be made to the process.
  • Improve your analysis by fitting it into a preexisting framework. Numerous tools such as the Cost-Leverage Analysis, Porter’s Five Forces, SWOT, Kraljic Matrix for Supply-Positioning, Stakeholder Influence/Interest Matrix, etc.
  • Create a plan of action and the methods to implement it (national, state, regional, local, request for information, request for proposal, one-on-one negotiations, electronic procurement (reverse auctions), or any other agreed sourcing approach to increase competition).

Now is the time to compile a Strategic Summary for the category, detailing the planned approach and summarizing key spending, data, market information, etc. The Strategic Summary will be distributed and used to gain buy-in from all relevant parties (business partners, financial advisors, procurement team members, etc.).

Step  5 : Put Plans into Action

The fifth step is putting the various plans made in step four into action. It could look different from one strategy to the next. It’s possible that you’ll engage in a variety of competitive activities, such as brainstorming for new ideas, reducing resource consumption, and so on.

Step 6 : Maintain, Enhance, Evaluate, and Reassess

The goal of the supplier management process is to extract the most benefit possible from working with suppliers. Building a process that facilitates mutual performance assessment and the formulation of joint plans to enhance it is essential.

  • Keep an eye on your vendors’ progress and share the results
  • Construct methods for managing relationships with suppliers.
  • Conduct a post-implementation review.
  • Perform regular internal and external audits.

Because category management is an ongoing procedure, it necessitates periodic reevaluation of the current strategy. It needs to be revisited frequently to make sure it’s still relevant to the company and the market. Changes in user needs or the availability of suitable suppliers often necessitate a shift in sourcing tactics. You should solicit comments from the supplier as well as any relevant parties (such as teams, stakeholders, business users, etc.).

Depending on your point of view, this entire procedure can be viewed in a number of different ways. The most important thing is to take a transparent, comprehensive approach. In order to avoid being merely a “RFP transactional processing team” that takes in requirements and “generates contracts as output,” you should create a framework that facilitates a strategic, end-to-end approach. Increasing your position on the value chain is impossible without the described analysis and strategy phases, which are also what ultimately drive your spending and your suppliers’ involvement.