Effectively Managing Categories of Spend

All spend is not created equal, largely as a result of the fact that all products and services aren't equal. Companies shell out their investors' hard earned cash buying either goods (raw materials) or services in hopes of converting them into a profitable and salable finished product, but in a world where profit margins are critical, scrutinizing spend is more important than ever.

The varying attributes associated with a company's spend can be further classified into individual categories using taxonomies such as UNSPSC, eClass, or other company proprietary classifications. The reporting, review, analysis and management of this categorized spend is typically done by a procurement professional known as a Category Manager or, based on the size of the spend, an entire Category Management Team consisting of members with specialized skills (market research, data analysis, contract management, supplier performance management, etc.)

We believe that there are a few key process steps that must be practiced on a recurring basis to effectively manage the spend within that specified category regardless of the number of roles defined.

A. Category Definition/Analysis

The first step in managing a category is understanding its scope and breadth. Several analyses need to be completed in order to fully understand the category that you are responsible for:

  • The overall spend of the category by supplier and location (Spend Analysis)
  • All sub-categorizations of the category along with the spend, supplier breakdown, and location
  • Geographic segmentation of the spend for this category by supplier (this represents the location from which the supplier is supplying the good)
  • Complete a Supply Market Analysis for the category (key competitors, trends, supply structure, risks, etc.)
  • Category history (all completed RFPs, supplier mergers, etc.)

B. Category Strategy

The second and most critical step is to design and develop a category-specific strategy -- broadly viewed as the list of required business objectives developed for the category (supplier rationalization, spend reduction, etc.). The category may support a particular business or product (e.g., resin), and it is critical that it be viewed in the broader product-line or business context. A few key questions should be asked:

  • What are our cost/performance objectives for this category?
  • What does the demand profile for this category consist of over the next one, two, or five years?
  • Does the strategy for this category align with the overall Procurement or Firm strategy? If not, how can we make this realignment happen?

C. Category Governance

Once the category has been defined and strategies are put in place, the actual management of that category from a day-to-day perspective is defined as Category Governance. Here are some main activities that need to be completed for proper governance to occur:

  • Roles and responsibilities must be clearly defined (key stakeholders, category sourcing experts, supplier management roles, relationship roles, etc.)
  • Category reviews agendas and timing should be clearly defined and outlined (supplier performance, product/service risk review, etc.)
  • Competency Management exercises should be completed to ensure that the skills needed in managing this category are being met (project management, communications, change management, contract management, etc.)

D. Category Usage and Compliance

Measuring and reporting on a category's usage and compliance is important in applying demand management best practices. The fundamental question that all category managers must ask themselves is "Is this spend absolutely necessary? Completing a demand analysis for each category will help identify pockets of opportunities. Another key requirement for proper category compliance is contract adherence. Developing the proper process and technology, such as a contract management system, are key enablers to ensure that proper compliance is met.

E. Category Performance Management

Finally, assessing the performance that category management has added over a given period of time to both the overall procurement organization and the business in general. Using a metrics defined approach to monitoring this performance leads to quantifiable results that can be shared with senior management.

  • Reconcile all of the savings targets for the category or any subcategories with actual performance over a given period of time
  • List all of the improvements made either to supplier performance or product quality as a result of ongoing governance for that category
  • Reconcile all of the other preset targets and objectives in the strategy (supplier rationalization, spend distribution, etc.)
  • Gauge the progress with regard to the long-term vision for the category. Is our category strategy better aligned to the overall procurement/business strategy now than it was when we started?

Treating category management as a continuous improvement process that can be shaped, refined, and polished will help you rationalize, track, and challenge each dollar spent and ensure that each category is managed to maximize efficiency and effectiveness for the organization.

-- Ketan Patel, Manager, Archstone Consulting (a Hackett Group Company)

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