It’s Time to Blow Up Spend Category Taxonomies Once and For All

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For many firms, category management is a foundational element of their procurement operating models. I’ve defined category management as the cross-functional (and cross-enterprise) processes for managing the lifecycle of supply for major spend categories – within which strategic sourcing is obviously a core process. My colleague Peter Smith has done a great multi-part series on the topic as well that’s definitely worth reading.

Category management typically organizes clusters of supply markets for such management and assigns responsibility of these processes to category managers (from lower level commodity managers to top level super-category managers – e.g., IT/telecom is a good example). Those managers will then “plug into” the organizational hierarchy depending on the operating model (e.g., line of businesses may host some direct categories while the corporate center runs indirect). The organizational hierarchy itself is driven by geography, product/service line (which is focused on the supplied solutions or the served industries), function, etc.

But wait, it gets more complicated. Some companies that outsource large swaths of connected processes on behalf of a customer might group their categories of supply along a process dimension. Other companies might start to look at natural groupings of supply based on the application of those products/services to a certain process, product, or customer – regardless of existing named supply markets – especially when this application may be very disruptive and represent a whole new category of supply. And some advanced firms may be looking to do all of these in the quest of letting supply markets tell them where to best find natural clusters of supply that can meet demand in new ways.

We call this more data-driven and supply-driven (because, sorry Gartner, Value Networks needs to be supply-driven, too) approach “Market Informed Sourcing” and have written a lot about it. It’s a way that lets you “supersize” your market baskets, but not just by working up a single spend category hierarchy (which is only one of the 10 supersizing techniques that I’ve written about in this 2-part PRO series here and here), but rather to dynamically find these new clusters. Why is it that customer-facing analytics are steeped in massively multivariate analytics to tease out insights on emerging clusters and micro-segments of demand, but many procurement organizations are stuck trying to crudely apply a 30-year old 2x2 matrix to massively multi-variant supply markets. This needs to change!

The problem, though, is that the underlying data models in the “modern” packaged business applications that power procurement and supply chain processes don’t help solve the problem. They are based on relational databases that are heavily hierarchical in nature, particularly surrounding master data such as spend categories, items, contracts, suppliers, cost types, organizations, etc.

So, given all the potential dimensions to define a spend taxonomy as I discussed above (i.e., supplier types, organization, product/service types, process, customer, etc.), how do you jam the relevant ones into a singular hierarchy? Most firms try their best to accommodate these multiple dimensions at different levels in the hierarchy, but it's only a kluge. For example, how do you model all the various types of contingent labor within the dozens or hundreds of nodes on a singular spend category taxonomy? There is no solution to a massively combinatorial problem using a single taxonomy. I do try to give some practical insights on this problem in my 2-part series on how to design a spend category taxonomy here and here.

There are multiple and inter-related taxonomies that need to get brought to bear. It will require much richer data models and analytics (i.e., think object modeling, metadata, big data, knowledge modeling, advanced business process management, etc.) to find these opportunities and risks that are increasingly more difficult for humans to see on their own. This is a very big topic that transcends spend categories. For “market informed procurement” – or more accurately, “market informed business” via the supply intelligence capabilities built by procurement and new classes of third parties – there will need to be a whole new class of processes and technologies that drive laser-focused, right-sized workflows that are pegged via analytics to value-producing opportunities or value-destroying risks.

We will do our best to continue to stay on the vanguard of these new capabilities, and we really do welcome your insights on this set of topics.

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