Category management (purchasing)

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Category management is an approach to the organisation of purchasing within a business organisation, also often referred to as procurement. Applying category management to purchasing activity benefits organisations by providing an approach to reduce the cost of buying goods and services, reduce risk in the supply chain, increase overall value from the supply base and gain access to more innovation from suppliers. It is a strategic approach which focuses on the vast majority of organisational spend. If applied effectively throughout an entire organisation, the results can be significantly greater than traditional transactional based purchasing negotiations, however the discipline of category management is sorely misunderstood. [1]

Contents

The concept of Category Management in purchasing originated in the late 1980s. There is no single founder or originator, but the methodology first appeared in the automotive sector and has since been developed and adopted by organisations worldwide. Today Category Management is considered by many global companies as an essential strategic purchasing approach. Category Management has been defined as “an evolving methodology that drives sourcing strategy in progressive organisations today”. [2]

Definitions

The Chartered Institute of Procurement & Supply (CIPS) defines Category Management as:

"Organizing the resources of the procurement team in such a way as to focus externally onto the supply markets of an organisation (as against having a focus on the internal customers or on internal ... departmental functions) in order to fully leverage purchasing decisions”. [3]

Writing in 2007, CIPS argued in favour of a level of specialisation and precision which at the time it considered to be a "less fashionable" approach to the use of limited procurement resources, and similarly CIPS Australia notes from research undertaken in 2010 that " Category managers struggle to focus and specialise when their portfolio has too much breadth (they are managing multiple categories with few, if any, synergies) or too much depth (they are tasked with end-to-end procurement responsibility including strategic, tactical and operational requirements). [4]

Jonathan O'Brien, author of Category Management in Purchasing, defines Category Management as:

"the practice of segmenting the main areas of organisational spend on bought-in goods and services into discrete groups of products and services according to the function of those goods or services and, most importantly, to mirror how individual marketplaces are organised. Using this segmentation organisations work cross functionally on individual categories, examining the entire category spend, how the organisation uses the products or services within the category, the marketplace and individual suppliers." [5]

Mark Webb of Future Purchasing makes three statements in defining Category Management:

"It is a strategic end-to-end process for buying goods and services; it aligns business goals and customer requirements with supply market capability and it maximises long-term value for the organisation." [6]

Peter Hunt, partner at ADR International, writes

“the term category management can mean different things to different people, so a working definition is needed. A ‘category’ is the logical grouping of similar expenditure items, such as spend on advertising agency services or IT hardware. Category management is the sourcing process used to manage these categories to satisfy business needs while maximising the value delivered from the supply base”. [7]

Category Management Tasks

The main tasks of category management are: [8]

Analysis

Data needs to be accessed from internal systems such as demand forecasts, the current spend & pricing and existing suppliers capabilities & performance. This data typically comes from a company's ERP system, and often requires significant data cleansing. Internal data is then combined with external data, such as public information on suppliers, commodity prices, or currencies. Category Analysis can be supplemented with commercial data sources such as supplier parentage, credit ratings, sustainability scores or supplier risk profiles.

Development of Strategy

A category strategy aligns needs to align with the business objectives and stakeholder needs. For example the Kraljic matrix can be used by category to segment the category by dividing placing it into one of four classes, based on the complexity (or risk) of the supply market (such as monopoly situations, barriers to entry, technological innovation) and the importance of the purchases or suppliers (determined by the impact that they have on the profitability of the company). [9] This then allows the category manager to define the optimal purchasing strategies for the category.

Other analyses can be used such as Porter's five forces or SWOT Analysis.

Implementation

Once the Strategy has been developed it must be implemented, and this often requires sourcing activity and contracting. In addition supplier relationship management systems need to be set up to facilitate subsequent monitoring. Implementation also includes change management: making sure that all the stakeholders understand the strategy and comply with it.

Monitoring

Monitoring the category performance and value delivery using key performance indicators (KPIs) and other feedback mechanisms.

Skill requirements

CIPS Australasia argues that the skill set required for category management comprises strategic ability in relation to procurement and commercial competence, the ability to influence and communicate effectively, and a sub-set of skills which relate to the specific category being managed, which might include market knowledge, ability to set specifications for the goods and services being purchased within the category, and understanding of cost drivers and the wider environment in which the category operates. [10] White has referred to the "awesome range" of skills required. [11]

Kay Bayen of the European Institute of Purchasing Management (EIPM) has identified category management as a skill deficit area, with more procurement professionals being required to step into the role. [12]

Public sector usage

Many public sector organisations have adopted category management as a strategic transformation tool. Sir Philip Green, in his "Efficiency Review" of UK government spending (2010), recommended that "centralised procurement [should be] mandated for common categories to leverage ... buying power and achieve best practice". [13]

In the United States, the federal General Services Administration, working with the Office of Management and Budget's Office of Federal Procurement Policy (OFPP), adopted category management as an operational tool for purchasing under the leadership of Thomas Sharpe, Commissioner at the GSA's Federal Acquisition Service, in April 2014. [14] [15] [16]

Related Research Articles

<span class="mw-page-title-main">Supply chain management</span> Management of the flow of goods and services

In commerce, supply chain management (SCM) deals with a system of procurement, operations management, logistics and marketing channels, through which raw materials can be developed into finished products and delivered to their end customers. A more narrow definition of supply chain management is the "design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronising supply with demand and measuring performance globally". This can include the movement and storage of raw materials, work-in-process inventory, finished goods, and end to end order fulfilment from the point of origin to the point of consumption. Interconnected, interrelated or interlinked networks, channels and node businesses combine in the provision of products and services required by end customers in a supply chain.

<span class="mw-page-title-main">Supply chain</span> System involved in supplying a product or service to a consumer

A supply chain, sometimes expressed as a "supply-chain", is a complex logistics system that consists of facilities that convert raw materials into finished products and distribute them to end consumers or end customers. Meanwhile, supply chain management deals with the flow of goods within the supply chain in the most efficient manner.

Procurement is the process of locating and agreeing to terms and purchasing goods, services, or other works from an external source, often with the use of a tendering or competitive bidding process. The term may also refer to a contractual obligation to "procure", i.e. to "ensure" that something is done. When a government agency buys goods or services through this practice, it is referred to as government procurement or public procurement.

Purchasing is the procurement process a business or organization uses to acquire goods or services to accomplish its goals. Although there are several organizations that attempt to set standards in the purchasing process, processes can vary greatly between organizations.

In the United States, a group purchasing organization (GPO) is an entity that is created to leverage the purchasing power of a group of businesses to obtain discounts from vendors based on the collective buying power of the GPO members.

Strategic sourcing is the process of developing channels of supply at the lowest total cost, not just the lowest purchase price. It expands upon traditional organisational purchasing activities to embrace all activities within the procurement cycle, from specification to receipt, payment for goods and services to sourcing production lines where the labor market would increase firms' ROI. Strategic sourcing processes aim for continuous improvement and re-evaluation of the purchasing activities of an organisation.

The Defence Logistics Organisation (DLO) was a key element of the UK Ministry of Defence, responsible for supporting the armed forces throughout the various stages of an operation or exercise; from training, deployment, in-theatre training and conduct of operations, through to recovery and recuperation ready for redeployment.

Supplier relationship management (SRM) is the systematic, enterprise-wide assessment of suppliers' strengths, performance and capabilities with respect to overall business strategy, determination of what activities to engage in with different suppliers, and planning and execution of all interactions with suppliers, in a coordinated fashion across the relationship life cycle, to maximize the value realized through those interactions. The focus of supplier relationship management is the development of two-way, mutually beneficial relationships with strategic supply partners to deliver greater levels of innovation and competitive advantage than could be achieved by operating independently or through a traditional, transactional purchasing arrangement. Underpinning disciplines which support effective SRM include supplier information management, compliance, risk management and performance management.

<span class="mw-page-title-main">Category management</span> Concept in retailing

Category management is a retailing and purchasing concept in which the range of products purchased by a business organization or sold by a retailer is broken down into discrete groups of similar or related products. These groups are known as product categories. It is a systematic, disciplined approach to managing a product category as a strategic business unit. The phrase "category management" was coined by Brian F. Harris.

Contract management or contract administration is the management of contracts made with customers, vendors, partners, or employees. Contract management includes negotiating the terms and conditions in contracts and ensuring compliance with the terms and conditions, as well as documenting and agreeing on any changes or amendments that may arise during its implementation or execution. It can be summarized as the process of systematically and efficiently managing contract creation, execution, and analysis for the purpose of maximizing financial and operational performance and minimizing risk.

Industrial marketing or business-to-business marketing is the marketing of goods and services by one business to another. Industrial goods are those an industry uses to produce an end product from one or more raw material. The term, industrial marketing has largely been replaced by the term B2B marketing.

Industrial market segmentation is a scheme for categorizing industrial and business customers to guide strategic and tactical decision-making. Government agencies and industry associations use standardized segmentation schemes for statistical surveys. Most businesses create their own segmentation scheme to meet their particular needs. Industrial market segmentation is important in sales and marketing.

A chief procurement officer (CPO) undertakes an executive role within an enterprise, focusing on sourcing, procurement, and supply management.

Global sourcing is the practice of sourcing from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service. These efficiencies include low cost skilled labor, low cost raw material, extreme international competition, new technology and other economic factors like tax breaks and low trade tariffs. Common examples of globally sourced products or services include labor-intensive manufactured products produced using low-cost Chinese labor, call centers staffed with low-cost English speaking workers in the Philippines, India and Pakistan, and IT work performed by low-cost programmers in India, Pakistan and Eastern Europe. While these are examples of low-cost country sourcing, global sourcing is not limited to low-cost countries.

A supplier association is a business term used when a customer company brings a group of its major suppliers together on a formal and regular basis in order to achieve strategic and operational alignment.

<span class="mw-page-title-main">Indirect procurement</span>

Indirect procurement is the sourcing of goods and services not related to manufacturing for a business to enable it to maintain and develop its operations. The goods and services classified under the umbrella of indirect procurement are commonly bought for consumption by internal stakeholders rather than the external customer or client.

<span class="mw-page-title-main">Invitation to tender</span> Business process

An invitation to tender is a formal, structured procedure for generating competing offers from different potential suppliers or contractors looking to obtain an award of business activity in works, supply, or service contracts, often from companies who have been previously assessed for suitability by means of a supplier questionnaire (SQ) or pre-qualification questionnaire (PQQ).

Market Dojo is an e-Procurement software company based in Stonehouse, England. The company was established in 2010 by Nick Drewe, Alun Rafique, and Nic Martin. Alun previously worked at Rolls-Royce before meeting Nick Drewe at Vendigital, whilst Nic Martin came from Attensity. All three co-founders studied at Bristol University. The company's competitors include Ariba, Curtis Fitch, and Scan market amongst others.

<span class="mw-page-title-main">Kraljic matrix</span> Method used in supply chain management

In supply chain management, the Kraljic matrix is a method used to segment the purchases or suppliers of a company by dividing them into four classes, based on the complexity of the supply market and the importance of the purchases or suppliers. This subdivision allows the company to define the optimal purchasing strategies for each of the four types of purchases or suppliers.

At around £290 billion every year, public sector procurement accounts for around a third of all public expenditure in the UK. EU-based laws continue to apply to government procurement: procurement is governed by the Public Contracts Regulations 2015, Part 3 of the Small Business, Enterprise and Employment Act 2015, and the Public Contracts (Scotland) Regulations of 2015 and 2016. These regulations implement EU law, which applied in the UK prior to Brexit, and also contain rules known as the "Lord Young Rules" promoting access for small and medium enterprise (SMEs) to public sector contracts, based on Lord Young's Review Growing Your Business, published in 2013.

References

  1. ↑ Whitaker, John (May 2013). "Category Management in Purchasing". Supply Management. 18 (5): 50.
  2. ↑ "Five Best Practices for Category Management", Justin Falgione et al., Inside Supply Management, August 2008
  3. ↑ CIPS Knowledge Works: Category Management, July 2007
  4. ↑ Perfect, M., The state of the art of category management - CIPS Australia, published 2019, accessed 23 December 2021
  5. ↑ O'Brien, J., Category Management in Purchasing, Second Edition (2012), Kogan Page, London, ISBN   978-0-7494-6498-1 E-ESBN 978 0 7494 6499 8
  6. ↑ "Is Category Management More than Just Strategic Sourcing?". July 2, 2014. Archived from the original on January 8, 2020. Retrieved January 18, 2021.
  7. ↑ 'Category management explained", Supply Management, 30 January 2003, accessed 26 May 2011.
  8. ↑ CIPS. "What is Category Management". www.cips.org. Retrieved 2023-08-25.
  9. ↑ CIPS. "What is the Kraljic Matrix?". www.cips.org. Retrieved 2023-08-25.
  10. ↑ White, T., How to match the right Category Managers to the right categories, CIPS Australasia, published September 2011, accessed 20 November 2022
  11. ↑ CIPS Australia, The 4th CIPSA Category Management Forum, 6-7 April 2011, Agenda, accessed 20 November 2022
  12. ↑ Supply Chain Digest, Supply Chain News: The Category Manager and the New Skill Requirements for Procurement Professionals, published 8 September 2010, accessed 4 January 2022
  13. ↑ Sir Philip Green, Efficiency Review by Sir Philip Green Archived 2010-10-14 at the Wayback Machine , published 11 October 2010, accessed 13 June 2011
  14. ↑ General Services Administration, Guide to Category Management, accessed 27 February 2021
  15. ↑ Clark, C. S., White House Issues New Guidance on Category Management, accessed 27 February 2021
  16. ↑ "The Future FAS: Categorically the Right Thing to do for Taxpayers". Archived from the original on 2015-03-15. Retrieved 2015-03-06., accessed 6.3.2015
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