Introduction
A robust and strategic supply chain helps businesses create value through efficient supplier relationship management, the lowest total cost of ownership (TCO), and maximum probable return on investment (ROI). And one of the most crucial - and effective - tools in developing an optimized supply chain is through efficient category management.
Market intelligence and compliance solution providers like Beroe offer the advantage to companies by delivering procurement intelligence relevant to their supply markets, which allows them to make informed sourcing decisions and step up their category management cycle. Beroe specializes in assisting category managers throughout every phase of the procurement lifecycle management to build a strategic methodology to spend management that results in winning category tactics and implementation.
Understanding the basics
Category management is a business tactic that can mean different things to different companies. In general, it is a procurement method that breaks down products into units of similar goods to tackle the efforts such as acquisition and merchandising on the category, at large.
Category management can incorporate data-based array planning, inventory control, product pricing with the mutual objective of enhancing sales performance and operational efficacy. By addressing duplications, waste, and indiscreet spending, category management eventually aims to curb overall expenses and build a deeper relationship between a client and supplier.
Category management lifecycle
Management is never about a series of steps that once completed are done forever. It encompasses continually monitoring and ensuring the processes are giving optimal results. This is no different when it comes to the category life cycle. Some of the major stages of category management lifecycle are:
- Spend analysis: Defining categories and the sub-categories of products is the first step in category management. This needs to be based on the business spend after careful evaluation and analysis. When it comes to spend analysis, it involves sub-parts. The first is portfolio segmentation where the product segmentation takes place. The value of the spend should be linked to the various specified categories and subcategories. The point of the analysis is to make decision-making easier for procurement professionals.
- Portfolio analysis: In this stage, the product is mapped to where it is at present in the life cycle. The analysis must be repeated depending on the nature of the productions. For instance, for perishable products, the analysis is repeated once every week while for other products the analysis must be done at least once a year.
- Supplier base analysis: In the next stage, the supply market should be in the focus. Businesses must consider which suppliers can ensure product delivery and what will the quality be like. The quantity of the products must also be considered at this stage and which suppliers can meet the requirements.
- Category strategy: The business must focus on creating a category strategy next. This is used for identifying the various opportunities that exist and how the business can ensure these opportunities are seized. The Kraljic matrix is one of the ways to do this as it helps to uncover the benefits and risks of products. This helps determine the products that require the business’s attention. Then a heat map can be created whereby a business can know the product that is likely to be the most successful. The category strategy is based on the heat map.
- Supplier relationship management: When a business wants to acquire goods then it must ensure it has the correct and sufficient supply base to do that. After categorization, businesses must spend enough time to ensure they are dealing with suppliers that can provide them with value rather than a random set of suppliers who are only interested in negotiations. Supply relationship management involves the processes of segmenting suppliers, developing supplier strategies, and executing those strategies effectively.
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 economies of scale to create a benefit for the organization.
Benefits of Category Management
The benefits of category management are many:
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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.
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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.
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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.
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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.
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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.
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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.
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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.
Category management: Book recommendations
Want to learn more about category management? Fascinated how smart category management strategies can define business growth and success? Here are some of the book recommendations to add to your “to read” list:
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The Category Management Handbook
Written by Andrea Cordell and Ian Thompson and published in 2018, the book promotes a 'do-it-yourself' approach for category management. It takes the readers through every step in the category management process, arming them with the right information and tools to apply a smart strategy in their own organizations. Learn all the basics, as well as advanced (but practical) concepts of category management, and prepare yourself to bring a big positive change in your business.
The book has been recommended by many procurement and supply chain managers, billed as a "must-read". Hands-on in setup with easy-to-apply templates, if you're looking for an ultimate checklist that hand-holds you throughout the category management process, 'The Category Management Handbook' is a book you can trust. It has a 4.5/5 rating on Amazon.
True to its name, this is a handbook that's filled with tools and tips to help anyone ace category management strategy in their organization.
Check out the preview of this book here.
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Category Management in Purchasing: A Strategic Approach to Maximize Business Profitability
Originally published in 2009, the book is written by Jonathan O'Brien. Category management is not a basic concept but a thoughtful strategy that provides organizations an edge in the market. This is what 'Category Management in Purchasing' underlines, focusing on how adopting a defined strategy can impact a business's profitability in a big way.
On the back of his 27+ years of experience in the industry, the author takes readers through the necessary tools and techniques on how stakeholders in organizations can implement category management strategies. The third edition of the book ties this cost-saving purchasing method with Supplier Relationship Management (SRM), to provide readers a holistic picture to improve their supply chain.
Give this book a read and amplify your understanding of modern-day category management. Discover real case studies of IKEA, NHS, Cardiff Council, and more. Learn about different techniques and applications of category management in purchasing. Go through the steps for a strategic and practical understanding of the concept. The book is rated 4.5/5 on Amazon.
Check out the preview of this book here.
Frequently asked questions
What is category management?
Category management is a strategy wherein similar items or products are grouped together into categories and then managed as a business unit. These entities that are bundled together might be related to each other or have similar functioning. The way they are grouped can vary from company to company and from item to item. Category management can make procurement easier, convenient, and manageable. Rather than manage several different entities, it becomes affordable and time-effective to manage in categories.
What are the benefits of category management?
There are many benefits of category management.
- Convenience in management: It is much easier to manage anything when it is grouped together rather than manage it individually. This cuts on the effort required to manage.
- Higher control: Category management enables businesses to have better control over purchases.
- Time and cost savings: Category management ensures time, effort, and cost are saved every time when it is done with careful planning.
- Reduction in redundancies: Placing duplicate orders is not an ideal situation as it increases unnecessary costs. With category management, this is not the case as there is a reduction in duplication and redundancies when it comes to orders. This helps to save costs and cut down on the efforts by various departments.
What category management process involves?
The category management process may vary from one company to another depending on their distinct needs and requirements. In general, it involves defining the category, assessing the category's role and performance, setting clear targets and objectives, developing a strategy for the category to achieve the outline goals, making prompt implementations, and regularly reviewing and improving.
What are some category management examples?
The category management strategy can be deployed by anyone, right from a small retailer to a Fortune 100 company. There are diverse examples. For instance, if a large corporation is procuring raw materials for production, it would procure those items in a category rather than focus on them individually. The centralization of procurement on category-level simplifies negotiations with suppliers, eliminates maverick spending, and saves time.
How to create a category management strategy?
Foremost, define the primary and secondary objectives of creating a category management strategy. This will help you track important KPIs and make subsequent improvements.
Now, based on one's needs and goals, the category management strategy for different companies may vary. However, there are some elements that the strategy must include for higher robustness and greater returns. It includes category planning and segmentation, spend analysis, and supply market analysis.
Following internal assessment, create categories and define their roles and goals objectively. Analyze all the relevant data, decide on your strategy, deploy the right tactics and start implementation.
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