When Brian F. Harris, former university professor at the University of Southern California (USC) first coined the term “category management” it was in relation to retail. Today, however, the term has found widespread use across sectors including the procurement industry and adopted a variety of meanings. With so many interpretations what is the official category management definition in procurement?
Category Management Definition
According to the Chartered Institute of Purchasing and Supply (CIPS), the category management definition as it relates to procurement is as follows: “Category Management is a strategic approach to procurement where organizations segment their spend into areas which contain similar or related products enabling focus opportunities for consolidation and efficiency. Category Management may involve the splitting of direct and indirect products or services or may relate to the dissecting of products or services by value, supplier, type, or volume.”
Benefits of Category Management
Why is it important for procurement teams to adopt category management? What are the advantages of employing category management in procurement?
- Category management allows procurement teams to focus on specific products and hence improve the quality of their sourcing process.
- Category management provides procurement professionals with an in-depth understanding of respective supply chains.
- Category management promotes an efficient administration of organizational spend through strategic category plans.
- Organizations with category management programs have an average supplier lead time of six days whereas firms without a category management strategy have a mean supplier lead time of 14 days.
- Additionally, the average turnaround time for purchase order processing in organizations with category management programs is eight hours compared to 15 hours in companies without a category management strategy.
It’s clear to see that category management is an invaluable concept that procurement teams cannot afford to overlook. Every organization is always looking for ways to become more efficient – as they rightfully should. According to the International Data Corporation (IDC), inefficiency costs businesses 20 to 30% of their revenue every year. This is revenue that could be funneled to marketing, securing more consumers, and growing the business. Category management is a methodology that can be used to reduce inefficiency.
Category Management Protocols
In order to make the most of category management, there are several protocols that should be implemented for the best outcomes.
1) Define the categories and subcategories
A quick look at the category management definition and we will establish that the underlying principle behind category management is the segmenting of goods and services that the organization needs to procure. Groups are created after departments have submitted their list of needs. The most common categories to which spend is attributed within organizations include industrial products, transportation, IT and security, travel and entertainment, medical, office management, professional service, and human resources.
Each of these categories may be further broken down into subcategories. For example, office management as a category may include the subcategories: stationery and supplies, furniture, computers, appliances, and consumables.
2) Assign qualified category managers to each category
Once the categories have been defined the next step is to select verified category managers to handle the requirements of a particular category. Ideally, the person selected to oversee the procurement needs of a category must be qualified in that respective area. For example, a person tasked to manage the procurement of IT security systems should be someone with a degree in cybersecurity and can justify spending to internal stakeholders.
A person who is already acquainted with the industry is an asset in that they can negotiate mutual value between the organization and the supplier. They know the technical jargon used in that particular industry and can reach out to their own network to find reputable suppliers.
3) Regular program review and manager accountability
How do you know if your category management program is working as it should be? To know, the category program must be reviewed periodically, with managers held accountable. A category management process that is successful shows itself in strong supplier relationships, a comprehensive market analysis that leads to reduced organizational spending, and sustainable and ethical procurement.
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