Category Management Basics
Procurement is still an evolving discipline and if you ask any two practitioners to describe what we do for any one of our processes such as “Supplier Management” or “Strategic Sourcing” you are likely to get very different answers. I believe this is largely because we, as procurement professionals, tend to have different focuses based on several factors such as the industry we are in and the maturity of the procurement organizations we work for. The topic of category management is no different. There are multiple approaches on how to deal with category management and what is included in category strategies and plans vary greatly between organizations. A recent survey of top procurement executives showed that ALL of them thought it was an important part of the procurement process but at the same time NONE of them said their organizations were doing category management consistently across their enterprise spend.
I am writing this white paper to reflect on what I have found to be the main components of a comprehensive category management program and what is needed to make those components effective for organizations.
Creating a Category Strategy
The main outcome of creating a category strategy is to be able to determine how the different actors the plan relates to will behave and which tactical levers to use to manage the relationships in the category. Fundamentally this means the category should have guidelines for when to bring transactions to market, if and how to manage incumbent suppliers, the best way to transact with suppliers and existing and desired category Key Performance Indicators.
Developing a comprehensive category strategy is quite time-consuming as it means collecting and evaluating a fair amount of data relevant to the category. In order to be able to develop First of all, the internal landscape of the category needs to be evaluated.
Defining Internal Landscape
The internal category landscape is relevant as you can gain an understanding of how you ended up in the situation you are in and the amount of flexibility you have to make changes in the category. For instance, an organization may have multiple outside printing service providers (statements, marketing, manuals, packaging, etc), understanding why the internal stakeholders chose one over the other, supplier relative performance, the differing contract end dates and any flexibility to move work between providers is relevant as you develop a strategy to either gain resilience and/or decrease costs of the category.
Internal Landscape Fundamentals
Internal category stakeholders, which will include the consumers of the goods or services, the supporting staff involved such as IT or Operations and the procurement resources processing transactions or running competitive selection processes.
Incumbent category suppliers, supplier performance and compliance data.
Category contract information
Spend data, including transaction data and spend on POs
Category Importance and Risk
Once the picture of the internal category landscape has been developed you are in a good position to be able to assess the criticality and/or risk of a category. Each organization will do this differently as most procurement organizations do this to assess risk and criticality of individual suppliers.
Usually I recommend re-purposing the artifacts that are already in place, but the idea here is to determine what would happen in the event of a supplier failure in the category, what would the regulatory/ operational/ customer/ implications be and how challenging would it be to shift from one supplier to the next in the event of failure.
Category importance and risk will influence how suppliers are selected and managed as well as the recommended contract term. When selecting suppliers for critically important categories, organizations are well served to do longer term agreements and adapt collaborative supplier management strategies.
Supply Market Analysis
The final input to a category strategy is to take an outside view of the category. There are multiple ways to do this and there are books written on this subject, for simplicity I will cover two main angles of this rather complicated topic :
It is important to get a view of who the leading category suppliers are and what kinds of clients each attracts. Understanding the number of credible suppliers available in the category, how they compete (price, features, functionality, etc) will help determine how to best extract value from the category. How incumbent category providers stack up vis-à-vis the available suppliers is important to evaluate what capabilities could be gained by switching providers or introducing another supplier in the mix.
This is often a neglected consideration as we all believe we are special and that all suppliers will move heaven and earth to get our business. While that is sometimes true, it is important to assess how suppliers view current and prospective clients as part of a category strategy.
Factors that determine how hard suppliers will fight over buyers
How many buyers are available in the market?
What are buyers' relative sizes?
Buyers’ brand name recognition
Participation in suppliers innovation
Buyers appreciating collaborative relationship
Buyers paying on time
Not going to RFP at the end of every contract term
Choosing a Strategy
Once you have compiled the above information the category strategy work can be completed. An opinion needs to be formed about what the best strategy is for the category in question.
Procurement tends to default to the lowest price strategy, but that may not be the best option if there are: 1.High switching costs 2.Few suitable providers 3.High supplier reliance 4.Internal clients who hate change.
The strategy output should identify what the likely internal changes and needs will be over the next 12-24 months, along with current and desired future KPIs. The core output of the strategy should be a summary of how to handle selection events, how to manage category incumbents and how to transact with the category suppliers.
For instance, a low price strategy is perfectly suitable for categories that are considered as commodities with little importance and competitive events are encouraged for such categories, whereas for categories where provider reliance, quality and criticality are considered vital a more collaborative approach would be appropriate.
Putting Category Strategies to Use
A category strategy can be used to work with internal stakeholders to map out the current landscape and create a plan for the period to come. Many surprises and busy work can be avoided by creating a collaborative plan with internal clients and when unscheduled projects come up the category strategy can be used to get a jump start on the work that needs to be done in order to achieve objectives.
Procurement organizations do not need to develop category strategies for all their spend, but covering the categories with most frequent competitive events and categories that are considered critical to continue day to day operations would negate significant amounts of churn.
If you want to learn more about Category Management principles, or the Focal Point solution to help organizations execute on category management, please email me at firstname.lastname@example.org