Category Management: still a value-creation tool for procurement – part 1

Category Management has long been - in fact for about 30 years - referred to as the most powerful instrument in procurement’s tool box. As a process (that is, developing a category strategy and implementing it into more than just sourcing, requiring strong project management skills) category management has enabled us to demonstrate a well thought-out approach to performing a core part of what we now call strategic procurement. Even though we haven’t always called it category management, it’s something we’ve been doing, in our heads or by manual execution, for a long time. Because of its age though, some believe that category management has had its day, and is lacking validity in today’s world of ‘everything digital.’

But if you talk to the experts, those who understand how to implement and embed the process properly, they will tell you that what is lacking is not its applicability to modern procurement, but the connection between the category strategy and the tactical execution of, for example, sourcing events. As our analyst said in a recent briefing paper:

“To truly transform procurement you need to start from the top by defining your category management framework, then create the actual category strategies based in this framework and finally cascade this down into sourcing events as applicable … This is obviously doable without having a system to support it, but by using a tool that has contract data, spend data and supplier management you could create a dashboard that would support the continuous analysis of trends, risk, demands or supply changes. The defined strategy should also guide you to the right type of sourcing event with the right category-specific configuration … but creating this type of solution is obviously not easy …”

The key is: doing category management well is hard, but because we ought to be seen as ‘doing it,’ we often just pay it lip service and don’t spend time to optimise it. And because it’s rarely being done properly, it is labelled ‘out-of-date.’

In fact, as we learnt from Mark Webb, founder of Future Purchasing, which has helped more than 80 firms globally to embed the process successfully, nothing could be further from the truth.

“What people mean when they say they are ‘doing category management’ varies from firm to firm,” he tells us. “Many mean that they have organised their teams into categories, but if you were to ask them how good those teams are at collaborating with stakeholders, or whether they are technically good at applying the tools to create compelling category strategies for 70% to 80% of their spend, you will get a very different answer. However, those that see the wider picture, understand that category management means creating strategies that go way beyond spend aggregation, sourcing and competitive tension; when done correctly, it can reduce costs, risk and generate revenue. And that is why more and more firms are realising that this is actually an essential instrument in today’s business world, one which demands so much from procurement.”

So what are the ROI and benefits that a robust category management strategy can bring?

“At Future Purchasing,” he said, “we look at this in terms of ‘outcomes,’ and these are demonstrated in our recent category management survey of more than 350 procurement professionals, which revealed three top outcomes that can transform long-term value: cost reduction, risk reduction and revenue growth.”

“The potential outcomes ‘uplift,’ for the average survey respondent is 2.8x their current performance. It is over 3x in terms of cost-reduction impact, which is the easiest of the three outcomes to quantify, and this relies on achieving maximum benefit from all value levers. This means that, for the average survey respondent, if your savings sit at 100m, you can be aiming for 300m, and if they are 10m, you can make them 30m, and so on. This is realistically the order of magnitude you can expect if you have everything working in harmony – which, as we said, isn’t easy. Also, this scale of opportunity requires more than 12 months to implement at the category level as the value levers accessed are likely to require some deep internal and supplier changes”

But of course, you can measure benefits in many other ways - tune in tomorrow to find out what they are and how a third party can help shape and implement a strategy to deliver those benefits. We'll also be looking at the evolving role of the category manager. Part 2 is here.

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