Category management (purchasing) in procurement refers to the grouping of related spend items together with a view of finding value opportunities. Organizations can categorize items according to any formula that fits their strategy. Categories can be vendors, country of origin, price, volume, or even frequency of purchase.
Managers need to constantly minimize internal costs of procurement and maximize the return on procurement activities. Category management helps.
It’s a complex undertaking in companies that procure dozens of products or whose procurement volume runs into millions of dollars. A marginal saving on costs could translate into tens of thousands of dollars each year. Finding value opportunities today happens through powerful analytics tools that identify trends, changes, and opportunities in the company’s procurement spend.
The motivation behind the categorization of spending items varies across companies.
To Take Advantage of Analytics to Find Insights
Dissecting procurement data can reveal unseen opportunities for a company. When data from related spending items is grouped together, it’s possible to find patterns that reveal risk exposure, poor performance, or profit opportunities. The company can then make decisions based on the intelligence gathered.
Through analysis, the company will make important pricing decisions and terms with vendors from a point of knowledge. For instance, when items are categorized according to their demand elasticity, it’s possible to predict the impact of changes in the prices from suppliers. The company can therefore negotiate discounts with knowledge of what the impact on volume will be if the discount is approved.
Improved Supplier Relationships
Category management (purchasing) can lead to stronger supplier relationships as a company consolidates its procurement endeavors to gain from economies of scale. When looking to get related goods from a single vendor, a business will evaluate those with the best capacity to fulfill orders as required. When purchasing huge volumes from one supplier, the supplier will be keen to provide personalized services, a dedicated account manager, open communication lines, and timely deliveries. In manufacturing enterprises, the supplier may be willing to customize items as required to keep that business.
Part of supplier relationship management is providing them with feedback on performance standards. By sharing such information, both parties will gain from improved quality standards.
Better Insights into Spending, economies of scale
Shorter Supplier Lead Times
Category management (purchasing) can help businesses cut the time it takes for orders from suppliers to be delivered. By bundling related goods and sourcing only from the most efficient suppliers, a business can reduce lead times. Alternatively, the business may opt to minimize supply chain risk by sourcing goods from suppliers who are nearest to warehouses. This can reduce the working capital needs of the business by not having too much inventory in transit.
Category management can be part of efforts to attain strategic business objectives. When a business is attempting to build more resilience against supply chain risks, it can minimize exposure through bundling items together and sourcing strategically. For instance, if a certain region where a business source is going through turmoil, the business may need to find alternative suppliers in a different location.
Another strategic goal may be to procure items from a certain segment in society, say minorities. The business could come up with a category of goods and set it aside to achieve that end.
Continued Process Improvement
Category management allows scrutiny of procurement activities of a business. It becomes easy to see what is working and what is not. The business can get on a path of continuous improvement of procurement processes. If a certain supplier is not delivering as expected, the business will look to replace them. If too many suppliers are not honoring their contracts, the business might relook its supplier selection process.
The Category Management Process
The category management process begins by deciding on the categories that the procurement team will use. There need to be objectives the categories will help fulfill. The company must define the various strategies it will implement to fulfill the objectives. The strategies should then be prioritized and rolled out gradually. Remember, the various categories will have different strategies applied to them. It’s important that company stakeholders buy into the objectives the procurement team is trying to achieve.
Once the categorization is done and the strategies implemented, the company should evaluate the impact. The objectives set out at the beginning must be measurable. As time goes on, the company should look at ways to fine-tune its procurement strategy to make even further gains.
Value of Technology in Category Management
Technology aids the visibility of supply chains when attempting to implement category management to attain set objectives. The use of RFID tags on items or containers coming in from different parts of the world would help to visualize supply chain routes. Items coming through the same routes can be grouped together and de-risking decisions can then be made if need be.
If a company is looking to only source goods from suppliers who meet certain ethical or sustainability standards, it needs detailed information on all its existing and potential suppliers. Some databases are so detailed that it’s possible to find information on a supplier’s suppliers. Technology aids in collecting information and collating it.
If your organization is seeking to implement a category management approach to procurement, ProcurePort’s e-procurement solutions would help support the process. You’ll have better information management as well as a contract repository for all agreements with vendors. To learn more, contact us here.