Many buying organizations are adopting category management as a way to improve value though sourcing and supplier relationship management.
What is Category Management Procurement
Category management is “the process of overseeing and maximizing the financial and operational value of a group of related commodities, products or services” (ISM Glossary 6th edition). The group of related commodities, products or services typically has similar attributes or characteristics, and is a “category” (ISM Glossary 6th edition). Office supplies, IT hardware, or travel services are examples of a category. As part of category management, category strategies should be standardized across all divisions of the buying organization. Best sourcing and supplier relationship management practices should be identified and standardized as well.
According to the ISM Glossary 6th edition and the ISM Mastery Model® the specific activities in category management include:
- Identifying and monitoring total spend and consumption.
- Staying current on market shifts, new alternatives, or inventions.
- Forecasting market supply and demand.
- Continuously evaluating supplier performance to reduce cost.
- Improving supplier performance.
- Responding to changes in business requirements.
- Enhancing stakeholder satisfaction.
Some organizations use the term commodity management when referring to category management. According to ISM, category management and commodity management are not the same. Commodities are agricultural products such as wheat, coffee, or cotton, metals such as copper or gold, energy such as oil and natural gas, or other goods that are traded on organized exchanges, and whose prices are driven by perceptions about supply and demand. Thus, category management covers a broader range of purchases than commodity management.
Commodity management uses some of the same tools as category management. According to the ISM Glossary 6th edition, commodity management is “the process of managing a commodity (such as corn, gold, natural gas and oil) including the identification and monitoring of total spend and market forces by commodity to control elements such as increasing leverage, managing cost, increasing quality, ensuring continuity of supply, and/or focusing on the supplier relationship.”
Category Management in retail
Many retail organizations are adding greater value to their organizations through category management. For example, a study by McKinsey & Company shows that category management is one of the key factors that differentiates the leading firms from the laggards in the pharmaceutical industry.1 Category management is a proactive process that involves “overseeing and maximizing the financial and operational value of a group of related commodities, products, or services” (ISM Glossary 6th edition). Category management identifies spend and standardizes supply management processes across the organization. Although strategic sourcing is an important aspect of category management, it also involves monitoring and managing supplier performance; risk management; building and maintaining supplier relationships; and improving supplier performance.2
This section describes the steps in the category management process. The approaches for doing spend analysis, future needs assessment, supply market analysis, and category segmentation that are used to establish and prioritize categories are described. Some of the key components of category plans are discussed, including supply base optimization. Appropriate governance structures are described and the use of project management for category management is discussed.
The Category Management Process
Categories are “groups of related commodities, products, or services that typically have similar attributes” (ISM Glossary 6th edition). Categories for direct spend might include chemicals, plastics, machined goods, or electronic assemblies. Examples of indirect spend categories include office supplies, legal services, or software. When establishing categories, it is important to identify synergies among the purchases that comprise a category and for the categories not to be too broad or too narrow.3
Note that some organizations use the term commodity management when referring to category management. Depending upon the organization, some categories may be true commodities, such as wheat, coffee, copper, oil, and natural gas. Commodities are raw materials traded on organized exchanges, such as the London Metals Exchange, whose prices are driven by perceptions about supply and demand. However, for many companies, categories will consist of purchased components, finished goods, or services that are not true commodities.
Category management is a data-driven, proactive approach used to develop and implement sourcing and supply management strategies at an aggregate level. The category management process is shown in Figure
Figure 2-1: Category Management Process
First Step: Establish and Prioritize Procurement Category Management Strategy
The first step in the procurement category management process is to establish and prioritize the categories that should be managed based on a spend analysis, an assessment of the organization’s future needs, a supply market analysis, and category segmentation.
Second Step: Developing Procurement Category Management Strategy
When developing 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 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.
Third Step: Establish Governance in Procurement Category Management Strategy
Because category management affects all purchases across the buying organization it must have support from the executive leadership team. Ideally an executive-level steering committee provides guidance, resources, and support for category management activities. Typically, a commodity management team will be formed with the category manager and key internal stakeholders. Category management success depends on the involvement and commitment from key internal stakeholders because category strategies must lead to sourcing strategies that meet their needs. A governance structure needs to be developed to provide approval for category management strategies. As spend or market conditions change, category strategies need to be updated.
Category management requires resources and changes in sourcing 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 category management activities. Because 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.
Fourth Step: Implement Action Plans in Procurement Category Management Strategy
Once the plan has been developed, depending on the organization, it may be implemented by the category manager or strategic sourcing 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. Category management changes sourcing 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 category management project plan and obtaining support from the top management steering committee and internal stakeholders.
- Applying change management practices to standardize the sourcing process and implement other required changes.
- Monitoring progress toward meeting the 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.