By: Vel Dhinagaravel --
19 August, 2014
Procurement has traditionally pivoted around sourcing projects, events and activities. Procurement managers would run individual/discrete projects to achieve cost-savings objectives. But for how long will this discrete, transactional world continue? The world of procurement is slowly but surely changing.
As I said in my previous blog posts, it will become imperative for procurement function to move from "discrete" mode to "continuous" world as CFO's and CEO's increasingly expect procurement -- and the overall supply chain organization -- to prove that they have put in place an optimal cost structure for their organizations, vis-a-vis the competition.
In other words, in order to take on forthcoming challenges, procurement will have to move from running projects to managing categories i.e., continuous category management and optimization.
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.
Take innovation for example. It should not be "last year I had three innovations and this year I had four" -- basically this line of reasoning would again make procurement a transactional function. Instead of comparing the number of innovations year-on-year, it would make sense to say "I had the best innovation relative to the market."
Let us take another scenario. The day the purchase contract is signed, the procurement team would have perhaps secured the best possible price. But how do you ensure that you are getting the best price the day after, the week after, the month after and the year after the contract is signed?
The answer to the above two scenarios can be addressed by taking a "portfolio approach". A fund manager cannot buy a stock on a particular day and forget about it for the next two years. S/he needs to constantly track the market and ensure that the portfolio is optimized at all times. To ensure this the portfolio manager has to apply "mark-to-market" approach. And this is what category management entails: constantly mark the performance with industry peers as regularly as possible.
To ensure proper performance, the category manager needs continuous intelligence of all aspects related to the category. Intelligence cannot be accessed in a discrete or staccato manner. It has to be holistic and take all possible scenarios into consideration.
How does category management, backed by continuous intelligence, benefit procurement teams? In a discrete world, a procurement manager would sign a contract for 3 years and then not worry about it much. In this scenario, the need for contract renegotiations doesn't arise as the purchasing teams are incentivized to save money just once in three years.
However, continuous category management would entail procurement teams to constantly monitor the market on a daily basis and make price adjustments as and when required. This approach would incentivize procurement teams to bring in the "flexibility" factor to contract negotiations.
I had mentioned that category management is not only about cost savings. A pharma company, for example, may not worry much about bringing down the cost per drug. Instead, the management's focus is on the speed of clinical trials.
In this case, it won't make sense for procurement to keep talking about cost savings when the organizational pivot has moved away from it. Also R&D isn't interested much about cost because the cost of a clinical trial relative to the value of a molecule hitting the market is very small. However, it will be immensely helpful if procurement helps R&D team to speed up the trial by a month by having the right Supplier Relationship Model (SRM) in place wherein the suppliers accord priority to the company over others.
The point is that it would be tough for procurement teams to immediately align with organizational objectives in the discrete world of project management and intelligence.
Whereas category management would enable procurement teams work towards speeding up the clinical trials. And procurement's focus would be on selecting the right supplier, the right contract model, the right pricing, right SLAs and so on to enable the speed of clinical trials. Instead of costs, the team would be measured on how they helped R&D to speedily move a drug from phase 1 to phase 2 relative to competition.
Category management can place the procurement function at the heart of a company's strategy evolution.
To cut a long story short, category management and portfolio management are two sides of the same coin. It would serve well if category managers constantly look for innovation, information on capacity utilization, supply availability as well as risk management. Also, they need to look for opportunities to partner with suppliers and other internal stakeholders so as to align procurement objectives with that of the organization.
Are you geared up to get into the world of continuous category management?