Category Management: All You Want to Know

Procurement manages sourcing all the innumerable things of varying sizes and quantities on a repetitive and continual basis. Procurement not only addresses the process of identifying suppliers, negotiating prices and terms, and then placing orders. The management of all the purchases till they arrive at their destinations is also the responsibility of procurement.

In the real world, there are unforeseen events that delay and disrupt the supply chain. On an international level, this is compounded by political turmoil, governments in trade wars with each other, and extreme weather and other disasters that can potentially disrupt supplies.

Management of procurement becomes so much easier when the items are grouped into categories. When a company negotiates a single agreement for a group of items that fall under one category, it gives them a more significant price advantage. So many separate contracts get bundles into a single contract agreement. What is category management? Category management is a procurement function that segments goods and services in different categories. These goods and services are categorized based on the functions they perform. For example, a company can have categories such as human resources, transport, office management, industrial products, medical supplies, and so on. Management of these categories falls under category management. 

Category management is a very cost-effective system as larger volumes naturally drive the price down. This is especially useful in companies that have many different units and locations. Purchasing for all of them under a single agreement gives a great price advantage and prevents the management’s added strain of overseeing each repetitive order individually. Centralized purchases give larger companies a great advantage.

Components Of Category Management Implementation

Identify Categorisation Opportunities

The procurement category management process involves the following. 

Spend analysis

Spend analysis must be done to understand the spending of each category and each subcategory.

Study The Market

This is how procurement does an internal analysis to identify categories that are suitable for category management. Categories and subcategories should be determined in this section.

Decide On Categorisation

If the first two steps show that there is an opportunity and a clear benefit from the category management process of purchases procurement decides to implement a category plan.The market analysis is crucial.

Identify Suppliers And Objectives

Larger volume suppliers may not be the same suppliers that individual purchase contracts were made with. Identifying a supplier capable of supplying all the items and materials for one category through a single agreement is essential. The procurement team should also set an objective of the benefits they intend to create through the shift to category strategy.

Approach Suppliers

The buyer should issue RFPs or conduct auction/tendering processes to select a supplier. The background checks and due diligence for each potential supplier is carried out.

Negotiation

This is the same negotiation process of procurement on a larger scale. The increased volume will be a crucial factor in negotiating the most favorable deal.

Implementation Of Category Management

The previously diverse purchase agreements now get grouped into one category that the procurement team manages on an ongoing basis. 

Improve

As with all systems of procurement category management should be continually reviewed to ensure that the changes in the market are reflected in the contractual agreements.

The Main Differences Between Strategic Sourcing And Category Management

The drivers behind strategic sourcing and category management are the same. However, category management is not to be confused with strategic sourcing. Category management is the grouping of materials/items into one category for ease of management. Strategic sourcing is the continual re-evaluation system to be one step ahead of changes in demand or supply trends in the market.

Category management’s goal is to save money and time. It involves a close relationship with fewer suppliers to add value together. Components of category management involve many stakeholders, demand management and encompasses the entire supply chain. Category management uses the economies of scale to create a benefit for the organization.

Benefits of Category Management

The benefits of category management are many:

• Ease of managing a single category supplier

It is common to get confused when companies need to manage suppliers of individual products. When category management is implemented, it makes management of a bundle of products so much more convenient and simpler while making supplier management easier too. 

• More significant savings of time and money

Cost-saving is possible with category management as buying products in bundles can be negotiated. When individual products are bought, it won’t lead to effective negotiations. However, when a category of products is bought from the same supplier, then it will lead to high savings for the business. It can help save time and effort.

• Streamlining of procurement

One of the top benefits of category management is procurement gets streamlined. As it helps to relate business goals with the purpose, it makes the process of procurement manageable. It can help drive down the risk of the supply chain while boosting innovation across the various categories in a business. 

• Better control of purchases

Tracking all types of spending can be difficult. However, with category management in place, it becomes easier to control what is purchased and when. This is one of the benefits of category management in procurement. Better control of spending means lower costs and better control for businesses. 

• More consistency in quality and timelines

When the company is dealing with specific suppliers, then the supplier will cooperate by ensuring that the buyer gets exactly what he asks for. This means there is going to be an increased focus on the quality of the products and when they are supplied to the buyer. Hence, it can be said that category management ensures consistency. 

• Greater cooperation between the supplier and the buyer

When there is an effective strategy of category management in place, then the relationship between supplier and buyer improves as a result. This is because the buyer will have a long-term buying relationship with the supplier. This will lead to better collaboration and cooperation.

• Reduces duplication

A business isn’t required to keep buying the same product over and over again with category management. Instead, a business can buy in bulk thereby eliminating duplicate purchases which can cost money to the business. This reduction in duplication helps save time as the process isn’t done repetitively. 

Roadblocks To The Acceptance Of Category Management

Though procurement departments understand the advantages and benefits of category management, it is sometimes difficult to convey to the decision-making management. Some decision-makers are simply resistant to something new especially having such a close and enhanced relationship with a supplier. There is also hesitancy to abandon current suppliers and move to new ones. Though the cost-effectiveness is apparent, the management has to be convinced of maintaining quality and timelines.

Using tools to analyze procurement management data make the benefits of category management very obvious. It offers large or globalized organizations significant cost advantages to put them ahead of their competition. However, there have been great benefits in organizations that have used their size and scale to implement category management.In order to overcome the challenge of category management adoption, it is necessary that all the concerns are thoroughly addressed by all stakeholders.

Effective communication with the stakeholders must involve listening to all their questions and concerns first. Then the category manager should define the value proposition clearly so that it is easily understandable by the stakeholders. The more open the communication is, the better it would be and the smoother the adoption of category management would be. While this is easier said than done, discussing the long-term impact of category management is important. Showing how business goals will be aligned is also an effective approach to convince stakeholders.