Category management brings many benefits. For example, it appears that organizations that have established category management realize an average of 10 to 14 process savings. What category management can mean for your organization depends on several factors, such as organizational focus, policy, strategy and setup. So to achieve returns, more is needed than instructing the procurement function to adopt the category management approach. It must be embedded as an organization-wide philosophy, with your business leading the way, both now and for the future. How you approach this, you will read in this insight.
What is category management?
Category management is a strategic approach drawn more broadly from retail for the purposes of procurement, where organizations segment their spending into areas that contain similar products or services. The products and services to be purchased are divided into categories. For each category, there is a tailored strategy and approach. The goal of category management is to maximize value-added and minimize risk, human, environmental and cost impacts. Supply Value’s procurement model below shows where category management is located.
Potential benefits
Well-designed category management has a number of benefits, starting with better visibility of spending. By being able to accurately see what is being spent per category, hidden costs are less likely to be overlooked. The accuracy of your spending is also a first step toward realizing savings. A better understanding of purchasing expenditures provides continuous results for the supply chain and allows for better decision-making. Furthermore, category management can help you work more effectively and efficiently with suppliers. Your strategic suppliers will see more in working with organizations that are genuinely interested in their processes and make the effort to build a relationship, resulting in access to more innovation. Category management can also deliver increased customer satisfaction. With a better awareness of the market the organization is in, it will be easier to assess which areas the organization excels in. Thus, within each category, it will be easier to see how products and services can be improved.
When is category management interesting?
Category management is a systematic approach that first emerged from the retail industry to manage a range of products as a strategic business unit. However, it has recently been widely used by companies in the public and private sectors. Category management can generate many forms of value for an organization, but it is still the ability to maximize business profitability that receives attention in the management of an organization. Category management is of interest when purchases of goods and/or services from all suppliers combined are among an organization’s largest expenditures. Furthermore, in certain situations it may be interesting to investigate whether category management can be set up. For example, when certain categories are so important that they require a specialized approach or when there is a proliferation of suppliers for the same type of services/products. It may also be that there is demand for the same services/products across different business units or when a strategic approach per category is lacking.
The basis for success
A process and philosophy
According to O’ Brien (2019), category management is both a process and a philosophy. Whereas the process focuses more on the execution of category management, the philosophy is how organizations embrace, organize and align the approach with strategic goals. There must be broad support within the organization that this approach is the new way to procure.
The core of category management is a strategic approach to procurement: From the traditional view of tactical contracting and procurement to value maximization to achieve business goals and ambitions. This cannot be realized only from the procurement function but requires a company-wide approach. Thus, if as an organization you want to realize the potential benefits, there must be support from the entire organization to make this possible.
A process and philosophy
According to O’ Brien (2019), category management is both a process and a philosophy. Whereas the process focuses more on the execution of category management, the philosophy is how organizations embrace, organize and align the approach with strategic goals. There must be broad support within the organization that this approach is the new way to procure.
The core of category management is a strategic approach to procurement: From the traditional view of tactical contracting and procurement to value maximization to achieve business goals and ambitions. This cannot be realized only from the procurement function but requires a company-wide approach. Thus, if as an organization you want to realize the potential benefits, there must be support from the entire organization to make this possible.
A cross-functional approach
In the case of category management, cross-functional teams are expected to work on category projects to identify and implement new sourcing strategies. Working cross-functionally ensures that walls are broken between departments. In addition, you create a shared and aligned understanding of the overall needs of the organization and its customers. Yet cross-functional working is not realized overnight. Procurement asking people from other business functions to give up their valuable time to work on a category management project will go well until priorities from their primary function arise. This can be avoided by making participation in a category management team part of employees’ personal goals, coupled with a reward.
Organizational Change
Category management is often more about organizational change than procurement. The core of category management lies in a business improvement approach. So here it is about getting people on board with a change to a new way of purchasing. To bring about a change, it is important to create support. Not an easy feat, but visible support from senior management is necessary. After all, the employees who are “affected” by the change must feel that they helped design the change. Therefore, it is important to include them in the what, why, how and when regarding the change.
Executive mandate
Category management requires a clear executive mandate. An initiative that appears to be supported only by procurement will struggle to create enough support it needs to become successful. When a CEO or other members of management see category management as a corporate initiative that the rest of the organization must also be a part of, it provides sufficient authority to implement category management. Executive mandate not only provides the necessary authorization to drive a change, but is also about setting the expectation and actively promoting a changing mindset among employees.
Governance
Als laatst is het van belang dat categoriemanagement geïntegreerd wordt in de organisatie. De uitdrukking governance lijkt geen universele betekenis te hebben, maar in wezen hebben we het over regelingen om ervoor te zorgen op welke manier de organisatie categoriemanagement kan besturen en haar effectiviteit in de organisatie kan waarborgen. Het vraagt daarom om middelen, processen en gedefinieerde werkwijzen. Het aanstellen van een goede projectmanager is in deze essentieel. Iemand moet toezicht houden op de uitvoering en het beheer van het categorieplan. Regelmatige fase-evaluaties van categorieprojecten op belangrijke punten in het proces helpen bij het waarborgen van de nauwkeurigheid van uitvoering van het categorieplan. Een geplande en beheerde benadering van bedrijfsbrede communicatie over de implementatie van categoriemanagement is essentieel. Verder kan een stuurgroep regelmatig bijeenkomen om alle aspecten van de voortgang te beoordelen en te zorgen voor ondersteuning waar nodig.
O’Brien, J. (2019). Category Management in Purchasing (4de editie). Kogan Page Ltd.
