Spend Management in Practice: The Rise of Category Management

For many observers of the retail and CPG industries, category management is nothing new. Retailers have relied on category managers – often employees of CPG organizations – to manage specific categories on their shelves for years. Why? In the consumer world, category management can enable “manufacturers to more accurately judge consumer buying patterns, product sales and market trends of [specific] categories. By emphasizing profits and sales for entire product groups rather than individual items or brands, manufacturers and retailers can often enjoy a longer-term, joint focus on marketing and merchandising.” While much newer, the notion of category management in procurement is not that different than in the consumer and retailing worlds. In the procurement world, category management brings together the entire organization, not just procurement, to better manage processes, resources, knowledge, and activities for a specific commodity, part, or service category (e.g. temporary labor). Increasingly, companies are taking a category approach to Spend Management to drive sustainable savings and results for both indirect and direct materials categories. Category Management can work in tandem with other procurement strategies (e.g. strategic sourcing) to help achieve new levels of savings and efficiency. In his report, “Taking Procurement To the Next Level by Going Back to Basics”, Alex Klein hits on an interesting point when he states that: “Very few companies have managed to put in place an integrated cycle whereby every category is sourced periodically (every two to three years), after which ‘day-to-day’ category management is resumed. Where this integration exists, the two processes start to have a positive impact on one another. Thus, a strong sourcing process will uncover the key performance drivers that need to be managed as part of the category management process, while a strong category management process will provide the sourcing team with the key supplier issues that need to be addressed as part of the sourcing process.” Reports such as Alex’s are interesting reads, but how does category management work in practice? Let’s take the case of Accenture, the large consulting and outsourcing provider. Accenture realized that it needed a highly tailored approach to managing its own services spend. Focusing on temporary labor to start, Accenture deployed processes and technology that could enable collaboration across the buying process, enforce contract compliance, support multiple pricing mechanisms, and provide significant configurability specifically to drive temporary labor Spend Management best practices to the frontlines of the business. As Accenture observed, part of taking a category based approach to Spend Management involves building skills and expertise to drive better procurement decisions. But it also involves choosing the right technology. Tim Minahan and Christa Degnan of Aberdeen Group consider category management one of the Seven Habits of highly successful procurement organizations. According to Tim and Christa, organizations should not only focus on developing processes and expertise internally, but should “also demand new category-specific application functionality [from vendors] to satisfy the unique sourcing, procurement, payment, performance, and project management attributes of each spending category.” Tim and Christa have also authored two specific reports that provide some great insights on category management for telecom and contract labor. You can download them for free if you register here. While we can all agree that the rise of category management is about both process and technology, it’s worth understanding how the two work together. Professor John Hughes outlines some of the key elements of category management as both a functional tool and a business process. It’s worth a quick read if you can spare a few minutes. Where else can you go to learn about category management? While technology vendors can offer solid advice on how to structure a category approach so specific Spend Management challenges, it’s also worth talking to peers, and benchmarking your category performance. Also, feel free to post a comment to Spend Matters and ask questions about specific category management approaches. As category management is central to Spend Management, we’ll be sure to keep up our examination of the subject throughout 2005. -Jason Busch

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