By: Sakthi Prasad --
27 August, 2014
In collaboration with Dhivya Anand, Senior Research Manager, Pharmaceuticals
The world of procurement is slowly but surely changing. Procurement managers have been running individual projects to achieve cost savings. But for how long will this discrete, transactional world continue? The world of procurement is slowly but surely is moving from project management to category management.
But what entails category management and what does it mean? Category management is not just about managing costs. It means having access to innovation, information on industry capacity utilization, supply availability as well as risk management; it also involves managing supplier relationships and aligning procurement priorities with that of organizational goals.
Also, category management would impel incessant tracking of the market, understanding the competitors as well as suppliers, getting a handle on downstream markets, adjacent markets, product substitutes, and being aware of technology changes and so on - all of which would bring about a competitive edge to the buyer i.e., category manager.
To enable all this it is very important that the category manager has access to proactive, continuous intelligence.
Now let's explore category management from the point of view of Gelatin market.
What does drought conditions in one part of the world have to do with capsules manufactured by the pharma industry? There is a connection, of course.
Pig skin, bovine hide and bovine bone are the major sources of gelatin in the U.S., European Union, Latin America, India and China.
Drought conditions affect the prices of soybeans, which is an important feed for the cattle population. An increase in the feed prices because of droughts, say, in South America or Russia, leads to an increase in the number of live cattle available for slaughter, which will in turn impact the supply as well as the price of gelatin. What would then happen is that because of sudden increase in the availability of bovine hide for 3 or 4 months, the prices of gelatin would drop; however, once the supplies are exhausted, the price of gelatin would go up once again.
Similarly, increase in demand for the tier 2 raw materials such as pig skin and bovine hide from downstream industries such as leather and food also has the ability to impact the prices of gelatin.
In the discrete world, procurement teams would just focus their attention on gelatin and not worry much about keeping track of what's happening across the value chain. Such a discrete approach will leave procurement teams unprepared when market dynamics change all of a sudden.
Whereas category management backed by continuous intelligence would prevent a company from getting caught in such situations as it would entail constantly tracking the entire value chain of gelatin. This approach would help category managers in arriving at the right procurement strategy.
Once a category manager is aware of the looming supply crunch, the procurement teams can ensure that there are relevant contracts in place with suppliers to ensure unhindered supply of gelatin.
Besides giving supply visibility, category management would also help procurement teams to understand the dependent and independent variables, lead and lag factors affecting gelatin. A good understanding of all these factors would help procurement teams to arrive at the right pricing formula.
So managing a category is not always only about getting the best price.