Procurement is one of the most important departments for all businesses. As the primary department in charge of end-to-end organizational spending, procurement ensures that all business operations function smoothly through the acquisition of key supplies and inventory.
With procurement and supply chain management becoming increasingly complex in today’s global economy, organizational spending can easily become excessive, which can have a negative impact on the company. It’s crucial to adopt a strategic approach in procurement and supply management to adapt to the rapidly evolving nature of the market. One of the most beneficial approaches involves effective category management.
What is Category Management?
Category management is a strategic approach to procurement that involves segmenting similar products and services into categories to identify opportunities to consolidate spending and create more value for the business.
It was developed in the late 1980s by Dr. Brian Harris to take a data-driven project management approach to procurement. Its main goal is to streamline decision-making, optimize the usage of resources, and improve procurement performance.
Another strategic approach discussed frequently along with category management is Strategic Sourcing. Both terms are often used interchangeably with each other, although they differ in focus and scope.
Strategic Sourcing mainly focuses on identifying channels where procurement can secure products and services at the lowest cost to itself, which may not necessarily be the lowest price. This is essentially a way to satisfy the organization’s present needs while maximizing the value of its purchases.
On the other hand, category management takes a more holistic approach as it involves analyzing the current market and building relationships with suppliers to drive maximum value to the organization throughout the whole life cycle of goods and services.
Why is Category Management Important?
Category management is a crucial aspect of procurement as it goes beyond simply acquiring goods and services. Through the development of categories, the organization can better understand its spending patterns and identify critical areas where savings are possible. Building meaningful relationships with suppliers can aid in negotiations for better contracts. More insight into the company’s supply network minimizes risks by diversifying its supplier base.
Overall, category management helps businesses build value throughout the entire supply chain. By adopting a more strategic, data-driven approach to procurement, the company can improve business efficiency to achieve better outcomes.
What are the Benefits of Category Management?
The implementation of your category management plan may be the responsibility of your Category Manager, but it is a company-wide function that impacts the organization as a whole. Thorough implementation will affect every facet of the business, resulting in the following benefits:
Improved Vendor Performance
When done strategically, an effective category management plan can streamline your vendor and supplier management processes. Category management gives you a framework to evaluate vendor performance and make changes as needed, helping you work more efficiently.
Better Client Satisfaction
A single Category Manager handles all aspects of each category. They are tasked with sourcing requirements, bid collection, and contract negotiations with suppliers, among other functions. With all that taken care of, other team members can focus on their core organizational responsibilities, allowing them to deliver value-based services that satisfy client needs and expectations.
Greater Insight Over Resource Allocation
Category management offers more insight into the usage of resources, which aids in better decision-making. With a Category Manager in charge of each category, the organization can gather information on price, cost, and spending. You can acquire a complete list of vendors and data on expenditures, giving you an accurate picture of how your resources are allocated.
Build Stronger Relationships with Suppliers
Category management creates more opportunities for businesses to establish meaningful supplier relationships. You can work with suppliers more effectively and efficiently by establishing clear communication channels, encouraging collaboration, and providing an established framework for evaluating vendor performance and streamlining processes.
What is the Category Management Process?
The category management process involves a series of steps, each helping business owners achieve better outcomes in a structured and measurable way. Below, we break down each of the steps:
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Define the Category
A category is any group of similar items or services under a single retailer. Since businesses deal with a wide range of products and services daily to fuel their operations, grouping these into different categories enables the company to be more efficient with its procurement processes.
Groupings can be made in various ways and will depend on the company’s structure, the industry it operates in, its spending policies, and the nature of the market. More important here is adhering to a single standard of categorizing these goods and services to remain consistent. Today’s most well-known category system is the United Nations Standard Products and Services Code (UNSPSC).
Involving different sets of data is also helpful in understanding the procurement goals of the business. You can obtain greater insight from data on supplier performance, past organizational spending, and the changes in the pricing of products and services to identify prevailing trends and savings opportunities.
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Evaluate the Category’s Role
Once different categories have been created, evaluate how well they fit within your entire portfolio. This involves assessing how the category works within the organization’s entire portfolio and how they contribute to the overall profitability of the business.
Can these categories help you reach your procurement goals? Is there anything else that needs to be addressed? Assessing the roles of each category enables you to gain valuable insights and make informed decisions that ensure all your efforts are contributing to the efficient allocation of resources.
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Assess Performance
As a critical aspect of category management, category performance assessment involves the systematic analysis and evaluation of category performance to identify opportunities for improvement to ensure maximum profitability. In this process, the performance of each category can be evaluated using various key performance indicators (KPIs) as benchmarks.
Analyzing the performance of different suppliers and key competitors is also necessary during this process. Obtain valuable insights using each category’s detailed strengths, weaknesses, opportunities, and threats (SWOT) analysis. Depending on the results obtained, recategorization may be needed.
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Set Objectives and Targets
Set attainable and quantifiable targets for sales, volume, and margin once category assessments are completed. Setting objectives helps you define what outcomes you want to achieve for a specific category.
It’s also equally important to set realistic and achievable goals. Whether you’re trying to improve your profit margin or increase sales volume, category management should be able to help you align your procurement efforts with your organization’s targets. Then, with a category scorecard, you can keep track of the data to understand your progress.
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Develop Strategies
Once you’ve set your targets, you will need a targeted strategy to help you achieve them. The following are some examples of methods you can employ:
- Transaction Building: improve sale volume through aggressive pricing, strategic packaging, and promotions.
- Cash Generating: the main focus is to increase the turnover of goods in high-volume categories.
- Profit Generating: instead of increasing the volume of sales, the emphasis lies on categories with high margins.
- Traffic Building: the primary goal is to improve shopper traffic, which is ideal for destination categories.
- Excitement Generating: the strategy focuses on creating excitement for a particular category by tapping into relevant social trends.
- Turf Protecting: this strategy is often used when a competitor has increased its activity and you want to protect existing sales. However, this strategy will often have consequences on profit margins, so it should be used as a last resort to remain competitive.
- Image Enhancing: use this strategy to improve your overall image and encourage customer loyalty.
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Set Category Tactics
Category tactics are specific tools, actions, or initiatives an organization takes to implement a strategy and achieve its objectives for a particular category. These tactics are designed to achieve the maximum possible and can be any of the following:
- Product selection
- Pricing
- Promotion
- Placement
- Supplier management
- Analytics
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Implement the Category Plan
Implementation is perhaps the most important step in Category Management. It involves executing the plan developed during the first six steps of the process and working towards your goals.
This process usually involves five key steps:
- Execution: putting tactics into action with the help of all team members, from internal marketing teams to suppliers.
- Monitoring and Adjustment: continuous monitoring is required in order to identify areas where adjustments can be made.
- Effective Communication: all stakeholders must be aware of the plans and aligned with the goals and objectives set.
- Optimization: ongoing optimization is necessary to ensure that all strategies and tactics employed for a specific category perform at their best.
- Evaluation: the overall effectiveness of the plan must be evaluated to assess whether the objectives have been met and whether further optimization is required.
8. Review Each Category
While implementing your action plans, you may need to review each category to ensure they remain current. As the market continues to evolve, so will the category dynamics and the strategies you must implement to achieve your procurement targets. Whenever possible, you may need to make changes to each category to adapt and remain competitive.
Implement An Effective Category Management Plan With Supplier Gateway
At its core, category management is all about maximizing productivity while optimizing the procurement process to ensure the efficient allocation of resources. With Supplier Gateway, you can gain the means to create an effective category management plan using our all-in-one supplier management platform.
Get in touch with us today to request a demo of our platform.