Category Management Mastery

A well organised category management can consolidate spend data, reduce supply chain risk, and drive innovation in different supply chain categories. And right now, its about preparing for and adjusting to the new normal.

Whether it’s for business continuity or business support, without a strategic approach to procurement or a clear procurement process, spending can get out of control and become damaging to the organisation. Category management is a strategic approach to procurement, in which the organisation segments its spending on bought-in goods and services. This segmentation arranges goods and services in discrete groups, depending on their functions.

According to APQC’s Open Standards Benchmarking for 2018, organisations that have initiated category management programmes have a median supplier lead time of only six days, compared to 14 days for those organisations that have not initiated category management programmes. For PO processing, organisations which have initiated category management programmes show a median turnaround time of eight hours, versus a median 15 hours for those that have not initiated category management programmes.

Applying category management to procurement benefits organisations by providing an approach to reducing the cost of buying goods and services, reducing risk in the supply chain, increasing overall value from the supply base, and providing access to more innovation from suppliers.

Category Management Framework

(Image source: Grosvenor Procurement)

Office management, Human Resources, security, IT, logistical support, transport, industrial products or services, professional services, medical, travel, and entertainment are among the categories on which organisations typically spend.

The office of Category Manager is a specialist procurement role in which the practitioner handles a specific category of goods or services (e.g., Professional Services). A category manager is charged with strategic sourcing, creating a category plan, and providing oversight into that category.

Successful category management relies on certain conditions:

• An analysis of the strategic goals of an organisation, and tying sourcing to these goals.
• Updated pricing analysis on local and international markets, and prevailing market trends.
• An updated analysis of organisational spend vs market data, with benchmarking KPIs to identify areas for improvement.
• Supplier performance information.
• Analysis of any savings gained through negotiations, substitutions, and compliance.
• Continuous engagement between all stakeholders, to make sure that everyone is on board with the organisation’s purchasing decisions.

The process itself varies from organisation to organisation, but key factors to consider in general include the following:

• Definition of categories: What should the different categories and sub-categories be?
• Spend analysis: How much spending is associated with each category and its sub-categories?
• Market analysis: What does the supply market look like for each category, and does it fulfil the customer needs?
• Improvement: Here, intelligence gained from the market analysis is applied. This market intelligence may lead to a change in specifications, altering the scope of work, or finding a new supply base and new vendors.
• Continuous application: Knowledge gleaned from the above analysis is continuously applied to strategic sourcing and transactional purchasing.

Building Robust Category Teams

In a traditional procurement organisation, the procurement team often acts as a gatekeeper for suppliers to gain access. The team will typically run a procurement exercise, such as a Request for Tender (RFT) or Request for Quote (RFQ), to compare suppliers and their offerings.

Under this system, procurement has direct relationships with the legal, finance, and other support functions within the organisation. They will also engage with business representatives, often in an ad-hoc, or project specific way. But suppliers will also talk to these same stakeholders -- often without procurement being aware or present.

(Image source: Grosvenor Procurement)

In contrast to this, category management encourages an open approach, and discussion between all stakeholders, often facilitated by procurement. Discussions may also include external experts who know exactly how to optimise the supply chain for a specific category. This approach takes decision making outside of procurement’s direct sphere of control.

Because of this, category managers have access to a “toolbox” of skills and knowledge, which they can use to identify and analyse cost drivers, value drivers, stakeholders, spend, market information, and decisions around strategic commissioning.

Bringing the right people on board is perhaps the biggest obstacle to successful and strategic category management. To achieve the next level of direct and indirect spend management, category management practitioners require a deep understanding of what skills are required, where to find them, and how to keep them.

To handle supply chain relationships for their category role, category managers ideally need to have a background in the category concerned. So for example, an IT category manager should have a degree in computing, or an established grounding in the tech industry.

Understanding and analysing the market requires an awareness and understanding of external factors -- particularly in changeable environments. Trade policy and consumer preferences are key elements for market analysis, and category managers must also understand the suppliers' market.

Professor Janet Hartley, a professor in the College of Business at Bowling Green State University, describes a typical category manager: "It's a really interesting mix of skills. You need someone who's analytical, as well as someone who is creative and entrepreneurial."

Given this mix, and a lack of clear growth in the category management field, organisations in the current market tend to have retention problems with category managers. In some areas, technologies such as predictive analytics or robotic process automation (RPA) are helping to automate parts of category management. But the process isn’t reliant on technology alone.

Succeeding in category management also requires support from peers across supply management categories, who must be willing to break away from silos and manage spend in a centralised manner. Change management strategies and sustained and periodic training in the workings of a category management programme can assist in promoting this kind of culture for the organisation.

External stakeholders can also play a part in the making or breaking of a category management transition. Professor Hartley recommends focusing on "small wins" to resolve pain points for business partners, and build relationships.

A One Management System in NXP Semiconductor

NXP is a leader in the innovation and manufacture of devices that help shape the future of communications networks and the Internet of Things (IoT), as well as industries from mobile to automotive, Near-Field Communications (NFC) and Radio Frequency (RF). The company has adopted an integrated approach to the way it works using processes and procedures.

In a traditional quality system with many individual documents and procedures to manage, it can be difficult to get the interfaces, connections, and links between various processes properly aligned.

NXP’s One Management System connects those activities, provides details of the way they are working, and is supported by an in-house documentation system when additional information is required (e.g. for policies, specifications, forms, etc).

The One Management System portal provides NXP employees with access to the company’s quality systems processes, including their applicable documents, requirements, tools, training, and data in a user-friendly way. Each Process Owner (or category manager) also has the capability to own, manage, and improve their process. This is essential when facing new initiatives and future challenges.

Each process is structured in multiple views, including By Process (displaying the standard categories by process), By Employee Job Function, and By Process Task. In addition to process execution, the One Management System can facilitate process management and improvement, and handle complaints.

Mastering Category Management Matters

Consolidating and centralising spend data in an optimised category management system provides a number of benefits, including easier tracking, logging, and reporting. By drawing upon the expertise and experience of category managers in gaining insight into a category and its sub-categories, organisations are better placed to create value from each purchase.

With category management, an organisation is able to gain an in-depth understanding of each vendor, allowing for better vendor risk management. The operational risks associated with a supplier can also be used as benchmarks in dealing with other suppliers in the category and sub-category.

The process also provides knowledge by experience. When the process of dealing with one supplier in a certain category has been perfected, it can be replicated when dealing with other suppliers in the same category, rather than having to develop unique processes for each supplier.

By buying for the long term in different product categories, category managers can offer higher volumes or larger scopes of work to their suppliers. This saves time, by avoiding repetitive transactions, and gives buyers the power to negotiate for better prices.

And for the business as a whole, category management has the capacity to add value in reducing supply chain risk, as well as driving innovation in different supply chain categories. An organisation adopting category management as one of its procurement best practices creates opportunities to manage demand, enjoy better cash flow management, and enforce greater compliance of standards from its suppliers.

If applied effectively throughout an entire organisation, the gains from category management can be significantly greater than those from traditional transactional-based purchasing negotiations.