What Does Category Management Mean
Category management is a business strategy that can mean different things to different companies. However, in procurement, it means breaking up spend into areas containing similar or related products to uncover opportunities for enhancing quality and efficiency and reducing costs.
In practice, this can involve data-driven division of direct and indirect products or services by value, supplier, type or volume.
By addressing duplication, waste, and incautious spending, category management intends to restrain overall expenses whilst strengthening relationships with the suppliers.
Category Strategy in Procurement
Procurement professionals, especially category managers, spend a lot of sleepless nights figuring out the most cost-efficient and effective category strategies for their organization.
The problem is particularly perplexing for businesses with multiple direct and indirect categories across business units. Because, most of the time, procurement lacks clarity around how effective their strategy is around each category and what benefit it brings to the organization.
Based on needs and business objectives, the category management strategy differs. However, there are certain elements the strategy must include for higher returns and resilience. And spelling out a detailed spending structure by segment, supplier, business unit, and region arguably is one of the most important steps in the category management process.
Nailing the Category Strategy Process: The 6 Steps
A suitable category structure is a prerequisite for category management and strategic procurement. Learn more on how to create a category structure for your business in this article.
1. Analyze the Current State
Use your spend data to evaluate the current situation for the various categories. Questions you should try to answer are size of spend (value and volume), contract lengths, suppliers and your importance as customer for these suppliers. In many cases, it's also useful to make an assessment of how important the category is to your business and the complexity in the applicable supplier market.
2. Perform Risk Assessments
List the most critical risks that you and your team identify in the category, and create a risk matrix by scoring the identified risks based on probability and significance.
3. Identify Alternative Suppliers
Get up to speed on the current market situation by identifying alternative suppliers, their location and product/service offering. Remember to comment on any important information for the relevant suppliers.
4. Consider Applicable Levers
Select applicable commercial and/or process levers for the category and specify the feasible alternatives.
5. Create an Action Plan to Reach the Target
Decide on the appropriate actions you and your team will take. Create a plan by sequencing the actions in the short, medium and long term. The plan should also include responsibilities throughout the team.
6. Summarize the Strategy
Document the strategy on a "one-pager" where specific goals are detailed, e.g savings target, number of suppliers, contract lengths and market complexity.
In need of a template to get started? Download our free, battle-proven category strategy template.