By: Thierry Fausten --
08 August, 2018
Identifying opportunities to generate value is not only a key task of Procurement as a function, it is also an effective selling proposition for internal and external stakeholders to team-up with procurement practitioners.
In order to engage stakeholders at the right moment, using Category Lifecycle Management (CLM) can be of great help.
Let us start by framing the meaning of CLM. A category is commonly defined as ‘a logical grouping of goods or services’, i.e. products.
This is also how taxonomies of products and services (e.g. UN’s UNSPC[i], EU’s Common Procurement Vocabulary[ii], the German Eclass[iii]) are organised to create what is often referred to as ‘commodity code’ hierarchies.
Therefore, CLM is about products. In this article, the focus is on goods as a sub-set of products, and thus ‘good’ and ‘product’ are used interchangeably.
Now, let us look at the lifecycle of a product. In Marketing[iv], the following four phases of a product are recognized: introduction, growth, maturity, and decline. Procurement needs to also take into account the research and development phase—to supply prototypes and small series—and the post-market retirement—when aftermarket still needs to be served. Therefore, there are six possible phases to be taken into account by procurement professionals when dealing with the lifecycle of a product.
Step 1: The first task is to analyse spend based on clearly defined categories and sub-categories to which each product belongs. Spend analysis encompasses two major sequential activities. The first is portfolio segmentation, which is attaching each product to a category and is the foundation.
As indicated above, standards for this already exist. The granularity required is directly linked to the following two factors: firstly, the differentiation between products that the company requires, and secondly the spend value associated with each sub-category.
There is no fixed rule for how granular you make it; it is a matter of both simplification of work and agility in decision making for procurement strategy development and execution. Most hierarchies will nevertheless limit themselves to five levels, for practicality.
Step 2: The second is portfolio analysis, a critical phase of CLM. To undertake this, each product is identified and positioned into the appropriate lifecycle phase. As much as it is rather straightforward when the products are bespoke components specific to the company or its clients, it is far more difficult when the products are generic (e.g. fasteners, smartphones, CPUs, chairs, and pens) and the lifecycle is controlled by another organisation according to its own objectives and the specific pressures of the market.
The possible sources of information are sales and marketing, finance, supply chain management, and operations. As the information is often only at an aggregated level (e.g. budgets, sales projections), individual products are broken down with the support of operations and logistics.
The outcome is best crystalized as a forecast of needs (quantities) over time, for each product in the category. Depending on the pace of the industry, firm, and products, it is recommended to repeat this analysis as frequently as once per week (e.g. for perishable products) and at least once per year.
One must ensure that they are abreast of market and regulatory evolutions (e.g. ban of plastic shopping bags, introduction of a competing offer by a competitor, emerging technologies, availability of spare parts once the good is discontinued) that can affect some goods dramatically and create opportunities to redefine pricing levels and supply base for both procurement and vendors.
Step 3: Now that you have a forecast of needs, they must be positioned in the wider context: the supply market. Supply base analysis has to be conducted from a technical perspective. The question is ‘which firm can deliver the product in the quantity and quality known to be required?’
There is no point in assessing the commercial perspective (e.g. price, level of service, CSR, and sustainability) as no updated information has been gathered on this topic—this is part of the execution of the category strategy.
The breadth and depth of this analysis relies heavily on the resources of the procurement organization and the overall risk propensity of your stakeholders. There is no point is looking for new suppliers or alternative technologies when there are no resources to assess them and support their integration in the company value chain, similar to risk aversion.
Thus, one must start with the known suppliers and then include potential new sources. These can be actual vendors who do not supply the product or product category, or firms with whom there is no active business relationship.
In addition, two tools used in conjunction will provide significant help in understanding the market dynamics: SWOT[v] analysis and PESTEL5 analysis. Applied diligently (taking no shortcuts!), they will enable an accurate overview of the current and foreseeable evolution of both market and technologies.
Step 4: The next endeavour is to create the category strategy to identify value generating opportunities and to plan how to benefit from them. A commonly used tool is the Kraljic matrix[vi]. It highlights the products that require most attention according to potential risks and benefits. These include technical, commercial, and regulatory elements (and benefit from input of the SWOT and PESTEL analyses).
A key point is to suitably position each product (or lowest sub-group of portfolio segmentation for simplification) in one of the nine quadrants. This is tricky as the matrix is a snapshot at a given time and the effort of CLM is time-bound.
Therefore, the best practice is to create as many matrices as necessary to cover the time horizon as dictated by the pace of the business. Namely, if any change in the value chain (e.g. technical evolution, switching suppliers) requires 6 months to be implemented, there should be at least three matrices based on portfolio analysis at 6-month intervals to represent the current status (t0) as well as foreseeable outcomes at t+6 months and t+12 months.
The reconciliation of these matrices on a timeline leads to the creation of a heat map showing the products that are potentially most promising sources of value generating opportunities. This heat map determines the priorities to be addressed and is therefore the basis of the category strategy. Some commonly used criteria are economic potential, time to market, economic and technical risks, and Corporate Social Responsibility (CSR) impact. Beware that some scales are in opposite directions (e.g. if a high economic benefit is a 5, a high risk is a 1).
In principle, the actions with the highest result ought to be undertaken first; however, a company can decide to prioritise one or the other criterion (e.g. lowest time to market first). The use of criteria specific weighting is nevertheless recommended over a single lead criterion. Planning of actions is undertaken using a situation-target-proposal approach. Remember that the focus of the category strategy is on products, not suppliers.
The supplier dimension is taken into consideration as the actions identified during the creation of the category strategy are executed, when the opportunity to modify the relationship with a vendor (essentially award or remove business in quantity or value, taking the time factor into consideration) is matched with the relationship lifecycle curve[vii] of the said firm. This curve is very similar to Kotler’s product lifecycle4.
However, it is the performance of the relationship, in economic, technical, and CSR aspects, that determine the pace of change. It is essential that the procurement function closely monitors these parameters as these directly impact the perceived contribution of the function to the organisation. This requires a clear business development strategy for each supplier.
Step 5: Supplier relationship management (SRM) is an essential part of CLM. It determines, among other elements, the composition of the ‘active’ and ‘potential’ pools of the supply base. The position in the relationship lifecycle curve also informs the buying organisation of the opportunity to modify the relationship with the firm in scope. As such, SRM is an active task in which internal stakeholders have a vested interest and role; it is the duty of procurement practitioners to ensure their participation.
In summary, CLM is a comprehensive continuous process that contributes to build a procurement strategy encompassing both products and suppliers. The brunt of the work is analysis and planning, paving the way for smooth execution of the value-generating actions identified in the category strategy. SRM is a central activity, conducted daily.
While this is a lot of work, it is well rewarded by the creation of robust category strategies that can identify the right sources of opportunities in the value chain, with the right supply base in scope. Furthermore, CLM supports the recognition of procurement’s value contribution to the business by internal and external stakeholders, and facilitates the identification and access to innovation.
Thierry Fausten is a procurement professional experienced in all aspects of procurement at strategic and operational levels. He gained a unique international exposure to direct and indirect procurement in the automotive and pharmaceutical industries in Fortune 500 companies. Fausten is currently completing a doctoral thesis on multi-tier supplier relationship management at Cranfield University School of Management.
To learn more about the author you can visit his about me page here
The opinions expressed in this article are the author's own and do not reflect the view of Beroe Inc.
[i] See http://www.unspsc.org/
[iii] See https://www.eclass.eu/en.html
[iv] Kotler, P., Keller, K. L. (2016) Marketing Management 15 Global Edition, Pearson, England. p. 370
[v] Porter, M. E. The Competitive Advantage: Creating and Sustaining Superior Performance. NY: Free Press, 1985.
[vi] Kraljic, P. (1983) Purchasing must become supply management, Harvard Business Review, Sept–Oct. 1983: 109–117
[vii] e.g. Moeller, S., Fassnacht, M., Klose, S. (2006) A framework for Supplier Relationship Management (SRM), Journal of Business-to-Business Marketing, 13(4): 69–94