Enhancing Procurement Through Category Management

The CIPS defines category management as, "a strategic approach to procurement. It’s where organizations segment their spend into areas which contain similar or related products. It allows more focus on categories that have opportunities for consolidation and efficiencies.”

You may think this all sounds like business as usual for procurement, but it’s astonishing just how many teams out there are still not using category management to its full potential. This is despite the fact those brands which do deploy these strategies have been shown to better:

• Focus their time and conduct market analysis to leverage negotiations
• Manage suppliers in alignment to objectives
• Organize procurement team resources
• Enhance supplier relations
• Gain an in-depth understanding of how each category contributes to risk management
• Manage categories of spend

Let’s therefore take a more detailed look into the concept of category management and try and define some key concepts and lay out a groundwork for establishing it within your procurement operation.

Key Principles

According to the CIPS, the key principles of category management are as follows and should be kept firmly in mind when developing any strategy related to these concepts:

Categorization: classifying organizational requirements and segmenting into categories creates expertise, and market knowledge to deliver innovation

Aggregation: Collating the total business requirements can achieve a reduction in purchase prices and overall costs by increasing volumes and reducing the number of transactions and agreements

Standardization: Setting a standard set of policies and procedures for individual users and cross-functional teams for consistency and tracking benefits

Relationship management: Enabling a clear and consistent exchange of knowledge and information with suppliers and key stakeholders to build relationships and add value

Outsourcing: Identifying opportunities to utilize expertise from third parties, who have the skills or expertise to add value which enables staff to focus on other core activities.

What’s a Category?

Obviously, we all instinctively know what a category is – we’ve all played Trivial Pursuit after all. However, when we are talking about it in the context of category management, it does have a slightly deeper meaning.

To streamline the work of procurement we often segment the products and services we need to acquire into categories according to demand, vendor, purpose, etc. with these groupings often being defined by secondary factors such as corporate structure, industry, spending policies, and surrounding market.

Whatever the factors which feed into the categorization of procurement for your business, the goal is the same – creating a single standard for the categorization of all products and services procured for the business.

UNSPSC

By far the most common system used for procurement categorization is the United Nations Standard Products and Services Code (UNSPSC) which offers a single global classification system which can be deployed for, among other things, procurement optimization.

"Encompassing a five-level hierarchical classification code set, UNSPSC enables expenditure analysis at grouping levels relevant to your needs,” says the organization on its website. "You can drill down or up to the code set to see more or less detail as is necessary for business analysis.”

By seeking to establish a global and standardized means of product and service categorization, the UNSPSC helps to remove siloes and inefficiencies which can occur when one organizations categorization policy clashes with another business they are trying to interact with.

Next Steps

Whether you choose to go with the UNSPSC code set or an alternative method of categorization, once the category structure has been defined, the next step is to analyze [macro analysis, trend analysis, market analysis, cost structure analysis, category positioning, SWOT analysis, etc.] those categories to identify opportunities and then use the information gleaned from that analysis to develop your category management strategy.

Keeping in mind the business needs and goals, existing contracts, and projected demand, this strategy can work towards procurement related objectives such as selecting vendors, make-or-buy decisions, developing partnerships with suppliers, involving suppliers in co-innovations, product designing, and more.

Some common frameworks for category strategy development include:

• The Kraljic Matrix: A method of delivering accurate supplier segmentation which maps supply items against the equally key dimensions of risk and profitability.
• The Dutch Windmill Model: A framework which combines the Kraljic Matrix with supplier preferencing and defines 16 distinct types of business-to-business relationships by assessing the level of buyer-supplier interdependence that exists, together with the subsequent impact this may have upon possible category strategies.
• The Kearney Purchasing Chessboard: Supports decisions between procurement and management by managing spend, leveraging competition among suppliers, changing the nature of demand, and seeking joint advantages with suppliers.

Once a strategy has been selected and implemented, the goal from there is to maintain, review, and improve, as the process develops. Collecting data, reassessing assumptions, and establishing a culture of communication at all levels will ensure problems do not develop beyond your control and your category management is a constantly evolving beast.

Final Thoughts

Category management will help your procurement operation become more effective and efficient than ever before, whilst maintaining the agility and innovative spirit necessary to continually refine and develop these strategies beyond initial implementation.

Category management is sure to be part of the conversation at ProcureCon Indirect West 2023, being held in February and March at the Hilton San Diego Bayfront, San Diego, CA.

Download the agenda today for more information and insights.