The procurement category management process is the intentional action by a company to divide its procurement spend into segments with related items. The main reason for segmentation is to find opportunities to generate value through greater efficiency. When successfully implemented, the company can gain through lower purchase prices, better relationships with suppliers, agility in logistics, and more robust data for analytics.
When implementing the procurement category management process, companies can segment their spending by volume, types of goods, suppliers, or even value. For instance, when value is the factor, the costliest items would be bundled together and a procurement strategy developed for them. The same would be done for the less costly items.
Segmentation strategies will differ by company, industry, and even the leadership at the helm of each company. However, the process of category management can be broken into identifiable steps at every company. Brian F. Harris developed a model containing actions that managers should follow when planning categories for more efficient procurement spend management. Here is a breakdown of the category management process.
The management should identify the categories it will use, depending on the objectives it has set. If the objective is to improve relationships with suppliers, it can bundle items according to their supplier. A manager may then be appointed to lead negotiations and other communication with every supplier. The goal would be to find mutually beneficial opportunities in the business relationship. If the goal is to lower logistical costs, items may be categorized by their origin with a view to consolidating shipments.
Beyond the main categories, there also needs to be subcategories. This is because items within categories have different characteristics that may need nuanced decision-making. Category managers need to consider the subtle differences between items in the same category in order to make procurement as customer-centric as possible.
Each category management strategy has its role in fulfilling the overall objectives of the company. High-value items may have the highest margins but may only account for 20% of company revenue. Low value and low margin items may account for a larger portion of revenues owing to their large volumes. The company has to remain cognizant of such information and allocate resources adequately for each. Mission-critical categories must receive the most attention. Other categories may be seen as potential stars or cash cows with greater focus. Management must see categories objectively in terms of current and future contributions to revenue.
Identifying the Right Strategy for Different Categories
There are different strategies that are commonly adopted in category management by large companies. The first is transaction building whereby the goal is to grow the volume of transactions by customers in that category. There is little focus on margins, and in fact, the company will use aggressive marketing and pricing to achieve the goal.
There are categories that are cash-generating because the turnover is high. These categories can be used to provide working capital for the other categories.
Traffic building categories are meant to bring people to a physical store or online store so that they can spend on other items. The company will therefore focus on promoting the traffic building categories through promotions. Such an approach can work to offset the negative effects of prices in another category by ensuring that customers are still coming to the store.
Other strategies in the procurement category management process include image building. The company identifies items that it wants to use to portray itself using and builds around them. The major talking points in image building may include quality, service, convenience, and variety.
Once categories have been implemented, there must be a way to determine whether the company is achieving the goals it set. If it anticipated better relationships with suppliers, this has to be quantified. One advantage may be longer credit periods. Another gain would be better discounts for large volume purchases.
Each category needs to be treated as an independent unit with KPIs. The category manager has to account for performance from one period to the next. Category spend analysis is necessary so that the company can implement a change of strategy for a particular category if required. In some cases, the company may need to develop new categories altogether.
The dynamic nature of the business environment today means that a constant review of procurement categories will always be necessary. The actions of a competitor may force your company to change tact. For instance, if a beverage company introduces a new flavored drink that is eating into the market share of competitors’ products, the competitors must respond quickly. In most cases, they are likely to launch their own variant of the new flavor now that a market has been created.
Each category requires hundreds of data points to be collected for proper decision-making. The use of analytics tools is necessary to be able to take up that much information and present it in an easy-to-use dashboard.
The background work that goes into defining categories can take months. When it becomes clear that the company needs to change tact, enough time must be allowed before rolling out new categories. The plan has to be well explained and communicated to the procurement team. It’s important that they are able to see their roles as being a part of a larger plan.
Having the right e-procurement tools greatly helps in implementing category management. Items in the same category can be grouped together on the end-to-end procurement software. Various metrics can be aggregated, tracked, and compared from one period to another. E-procurement software can also help in contract management with suppliers of different categories.
Procureport is the world’s leading supplier of e-procurement software. We will help you in the category management journey by providing tools to automate processes and gain visibility into your operations.