Category management: Why bother?
Is category management all it’s cracked up to be or will it just turn out to be another management fad?
Does category management deliver benefits beyond just doing good procurement practice? Does it involve new techniques or practices? Or worse, is it just a fad word to make procurement practitioners or management consultants sound cutting edge?
I have seen much said and written about category management, its importance and its benefits. Most of what I have read could be described as just good procurement practice that has always existed in some form, including strategic sourcing, good contract management and supplier relationship management (SRM).
So why do we need a new term if it just delivers what good practitioners have always delivered?
Yet there are ample examples of some organisations and even category managers delivering material benefits beyond what could be delivered with a strategic sourcing or procurement process and good contract management and SRM.
What is it that they are doing differently?
The answer is that they have turned their attention internally and dedicate as much if not more effort on controlling internal drivers as they do on suppliers and the supply market. Our experience, is that this approach delivers considerably
Lack of evidence and research on category management practices, benefits and savings
However, there is scant evidence and research on category management practices that deliver results. There is even less research or evidence on the additional benefits and savings it delivers.
We’re changing this
The 2015 CPO study focuses on the tactics available to procurement practitioners, including the category management tactics, savings and other benefits derived from deploying those tactics.
What are the additional tactics deployed by leading category managers?
While category management can deliver significant improvements to the supply and consumption of goods and services within an organisation, and can further reduce supply risks, it is often targeted at better managing cost, or extracting further savings.
Essentially there are four cost control levers that are available to procurement / category managers to better manage and/or reduce cost. For completeness, I have included the use of aggregating spend and market testing (eg. tendering) to get better prices.
The four cost control levers are:
1. Pay less
Aggregate volume and market test, using competition and market leverage to obtain more competitive pricing and terms. This tactic is well known and is best exemplified by organisational wide, or even group buying, of procurement of goods and services such as energy or labour hire. It also involves ensuring buyers within your organisation use the deals put in place (minimise leakage) and suppliers charge based on the negotiated rates.
2. Buy less
Manage consumption to reduce demand. This tactic involves looking at ways to reduce what is consumed. It frequently involves use of policies, changes in processes and use of alternatives to consume less. Simple examples are double-sided printing to reduce paper consumption and video conferencing to reduce travel.
3. Buy cheaper
Manage buying behaviour to avoid buying niche or premium goods and services, including avoiding add-ons and variations. Simple examples include avoiding full economy airfares or buying IT systems off-the-shelf without extensive modifications.
4. Buy smarter
Or implement other efficiencies. Reduce costs in the process of consuming the good or service. This tactic requires a total cost view of the process and involves process engineering skills typically beyond the traditional procurement practitioner. It involves looking at reducing overall cost through such things as reducing waste, duplication, rework and internal processing costs.
Simple examples include streamlining purchasing to payment processes for an expenditure category. In many cases it involves paying higher prices to reduce overall cost. A simple example might be buying business cards in smaller batches (at higher cost) to avoid the need to throw out a large number of cards when the inevitable change in name or title occurs.
How do you identify these opportunities?
The elements of identifying a category management strategy that captures all of the above cost control levers include:
- spend analysis – this includes analysis of consumption to identify opportunities to buy less and buy cheaper
- market and supply chain analysis – including to identify how suppliers and their systems might help implement some of the cost control levers
- value chain analysis – including to identify opportunities to buy less, buy cheaper and other efficiencies in the process of consuming the good or service
- risk and stakeholder analysis to identify what resistance to change might be encountered; after all, we are talking about implementing changes internally to better control and reduce spend
- defining the category scope, category strategy, the go to market model and approach, and the implementation plan