How to Implement Product Category Management Strategies and Action Plan in Procurement and Supply Chain Management

The objectives and strategies that are developed through product category management are implemented in the procurement categories process (ISM Glossary 6th edition). Product category managers develop category “playbooks” that articulate the strategies and action plans for each category (ISM Mastery Model^®).

Supplier relationships — The type of relationships that are needed with the suppliers in a category should be identified when developing category plans. Supplier segmentation can identify the strategic categories in which strategic partnerships with suppliers should be developed. For categories considered to be leverage, price may be the primary selection criteria, and continued cost reductions may be expected (Monczka et al, 2016).

Indirect Spend Categories — The category plan should identify spend areas that can be changed (addressable) and those that cannot (non-addressable). For example, regulations or risk may restrict the alternatives that are available (cost transformation). However, there may be spend that is addressable, but it is being purchased directly by the internal customer, such as human resource management directly procurement categories benefits. In these cases, supply management can add value through product category management and procurement categories.

Geography and geopolitical considerations — It is essential that category managers stay current on global market trends, currency exchange rates, and geopolitical issues. Situations can change quickly, affecting costs and risks. Ideally, the product category management team will have members located in key regions around the world. These team members are best positioned to understand how changes in their region may affect the category plan.

Pareto Analysis — Not all categories are equally important for the buying organization. A Pareto Analysis (also called ABC analysis or 80/20 rule) identifies the most important categories that should be closely managed. A Pareto Analysis is “the process of determining the small minority of a population accounts for the majority of a given effect” (ISM Glossary 6th edition). Applied to category management, approximately 20 percent of the categories will account for about 80 percent of the spend.

The results of the spend analysis are used to do a Pareto Analysis, which are typically shown graphically in a combo bar chart with percent of annual spend on the left y-axis and percent of cumulative spend for all categories on the right y-axis. As shown in Figure 1, based on the overall percent of spend for category P is about 80 percent and would be considered an A category. Categories X and B account for about 15 percent of the spend and would be considered B categories, and the remaining categories would be considered C categories. The buying organization should closely manage category P because of its high level of spend.

Figure 1: Pareto Analysis

Develop Category management Strategies and Action Plans

The objectives and strategies that are developed through product category management are implemented in the procurement categories and supply management process (ISM Glossary 6th edition). Category managers develop category “playbooks” that articulate the strategies and action plans for each category (ISM Mastery Model^®). The results of spend analysis, future directions, and supply market analysis are summarized visually in the playbooks. Then, specific strategies and action plans for the categories are described. Typically, category plans address supply base optimization for the category, including issues such as the number of suppliers to use, which suppliers are best, locations of suppliers, the types of relationships needed with suppliers, and contract length. However, other factors may also be addressed such as supplier innovation and risk mitigation.

Supply Base Optimization in category management strategy

Supply base optimization involves designing the supply base so that it best meets the buying organization’s needs. When first implementing category management, supply base optimization often begins with supply base rationalization. The ISM Glossary 6th edition defines supply base rationalization as “determining and maintaining the appropriate number of suppliers by item/category depending on the risk and value of the item/category. Initially, rationalization often means reducing the size of the supply base. Longer term, the process focuses more on managing the size of the supply base, particularly as market dynamics change. This method reduces the expenses involved in qualifying and maintaining large supplier bases.” For example, supply chain risk or the need to access innovation may lead the buying organization to increase the size of its supply base. As part of supply base optimization, the category plan typically addresses the issues of single procurement categories, dual procurement categories, multiple procurement categories, or parallel¹³ procurement categories.

A sole source situation exists “when only one supplier possesses the ability to fulfill the organization’s needs” (ISM Glossary 6th edition). This may occur because a single supplier has a patent or proprietary technology, economies of scale, or governmental regulations. Because the organization is dependent upon a sole supplier, the organization is exposed to a higher level of risk. These risks include price increases, quality problems, lack of product/service availability if the supplier has capacity constraints or takes on another more profitable customer, and supply disruption due to disaster or supplier financial problems. Organizations may try to move away from sole procurement categories by redesigning products to include more suppliers or developing the capabilities of other suppliers to create competition.

Single procurement categories exists when a buying organization “deliberately concentrates purchases of a particular item with one supplier in preference over others in a competitive marketplace” (ISM Glossary 6th edition). This practice is sometimes used for strategic supplier relationships, early supplier design involvement (ESDI), and increased reliance on suppliers for innovation. In cases where there are high start-up costs, such as investments in new equipment and tooling, single procurement categories can be a cost-effective alternative to using multiple sources. In those countries where supplier diversity initiatives exist, there can be an inherent conflict between a single procurement categories strategy and small, diverse, and historically underrepresented supplier program goals. Small, diverse, and historically underrepresented suppliers may not have the capacity to meet all an organization’s purchase requirements.

Single procurement categories improves trust, information sharing, and collaboration with the supplier. Benefits from single procurement categories are: quality improvements, administrative simplification of working with one supplier, joint schedule planning, less complexity in logistics, early supplier involvement in product or service design, joint costing and pricing benefits from economies of scale, and a greater willingness on the part of the supplier to share innovations. Single procurement categories facilitates collaboration, because the supplier will be less concerned that its ideas and innovations will be shared with its competitors. Single procurement categories runs counter to the traditional approach of using several suppliers to maintain competition and to hedge the risk of supplier failure.

A heightened awareness of supply chain risks has some organizations looking for ways to retain some of the benefits from — but reduce the drawbacks of — single procurement categories. One approach is dual procurement categories, which is to award one supplier most of the business and award a second supplier the remainder of the business. After years of single procurement categories, Apple has shifted to a dual procurement categories strategy for many of its purchases.¹⁴ Another approach is to single source individual components, but to use different suppliers to provide similar, but not identical, items; this is called parallel procurement categories.¹⁵ This approach is used in the automotive industry. Companies such as General Motors will single source seats for one model with one supplier and single source with a different supplier for another model. This can reduce the problems of being too dependent on a single supplier. Suppliers will tend to be more innovative and cost and price conscious when other suppliers are competing for an organization’s business.

Multiple procurement categories involves “splitting purchases of an item among two or more sources” (ISM Glossary 6th edition). Using multiple sources eliminates the risk of supply disruption because problems with one supplier do not affect the ability of other suppliers to continue making the product or service available to the organization. Multiple procurement categories is an appropriate option to ensure the organization does not become overly dependent on a supplier. While multiple procurement categories tends to keep the chosen sources competitive, a frequent drawback is a short-term orientation and the absence of a strong, long-term relationship and commitment between the parties. Thus, multiple procurement categories is not desirable for high-spend, high-risk purchases in which strategic supplier partnerships are needed. However, multiple procurement categories can be a useful approach in other purchase situations, especially those that are high spend but low risk.

Establish Governance category management in retail

Product category management requires resources and changes in procurement categories and supply management strategies; thus, top management support is critical. When implementing category management, often an executive-level steering committee is formed. This team provides guidance, resources, and support for product category management activities. Because product category management affects all purchases across the buying organization and often requires changing suppliers and relationships, internal stakeholders must understand and buy into the change. With top management support and education, internal stakeholders are more likely to support the changes.

When developing product category management plans, often the buying organization forms a category team consisting of the category manager, key internal stakeholders, and other supply management professionals. The team’s composition depends upon the complexity of the project. This team is responsible for developing and getting approval for the category plan from the executive steering committee. This team will also update the plan at least once a year, or more frequently if there are changes in spend, the buying organization’s strategy, or the supply market. The product category management team leader is typically a supply management professional who facilitates the process. A category team leader must be able to think strategically, communicate effectively with top managers and internal stakeholders, effectively implement change, collaborate with internal and external stakeholders, and build effective relationships.

Implement Category Management Process and Action Plans

Once the plan has been developed, depending on the organization, it may be implemented by the category manager or strategic procurement categories team. When developing and implementing category plans, good project management practices should be followed. The category manager is the project leader. Project management is the process of coordinating the organization planning, scheduling, controlling, monitoring, and evaluating of activities so that the objectives of a project are met (ISM Glossary 6th edition). These include:

• Defining the project, its rationale, and performance measures to obtain executive support in a project charter. Product category management changes procurement categories and supply management processes and strategies, so top management support is essential for success.
• Planning the scope of the category strategy, team responsibilities and roles, developing a budget, determining the schedule, and identifying supply risk.
• Communicating the product category management project plan and obtaining support from the top management steering committee and internal stakeholders.
• Applying change management practices to standardize the procurement categories process and implement other required changes.
• Monitoring progress toward meeting the product category management project’s objectives and reporting to top management and other internal stakeholders. If progress is not being made, then the reasons why must be identified and modifications should be made.