Category management brings many advantages. For example, it appears that organizations that have set up category management realize an average of 10 to 14 process savings. What category management can mean for your organization depends on various factors, such as organizational focus, policy, strategy and design. To achieve returns, therefore, it takes more than telling the purchasing function to follow the category management approach. It must be embedded as an organization-wide philosophy, in which your business is leading, for now and for the future. You can read how you approach this in this insight.
What is category management?
Category management is a strategic approach broadened from retail to the benefit of purchasing, where organizations segment their spend into areas containing similar products or services. The products and services to be purchased are divided into categories. There is a tailor-made strategy and approach for each category. The aim of category management is to maximize added value and minimize risk, impact on people, the environment and costs. In below procurement model from Supply Value you can see where category management is located.
Well-designed category management has a number of benefits, starting with better visibility of spend. By being able to accurately see what is being spent per category, there is less chance that hidden costs are overlooked. The accuracy of your spending is also a first step towards realizing savings. Better visibility into procurement spend delivers continuous supply chain results and improves decision-making. Furthermore, category management can help to work more effectively and efficiently with suppliers. Your strategic suppliers will see more of partnering with organizations that are genuinely interested in their processes and make the effort to build a relationship, resulting in access to more innovation. Category management can also lead to increased customer satisfaction. With a better awareness of the market in which the organization operates, it will be possible to better estimate in which areas the organization excels. In this way, it is possible to better see how products and services can be improved within each category.
When is category management interesting?
Category management is a systematic approach that first emerged from the retail industry to manage a range of products as a strategic business unit. However, it has recently been widely used by public and private sector companies. Category management can generate many forms of value for an organization, but it is still the ability to maximize the profitability of companies that gets attention in the management of an organization. Category management is interesting when purchasing goods and/or services from all suppliers together are among the largest expenditure items of an organization. Furthermore, in certain situations it may be interesting to investigate whether category management can be set up. For example, when certain categories are so important that they require a specialist approach or when there is a proliferation of suppliers for the same type of services/products. It is also possible that there is a demand for the same services/products across different business units or when a strategic approach per category is lacking.
The foundation for success
A process and philosophy
According to O' Brien (2019), category management is both a process and a philosophy. Where the process focuses more on the execution of category management, the philosophy is the way organizations embrace, organize and align the approach with strategic goals. It must be widely supported within the organization that this approach is the new way of purchasing.
At the heart of category management is a strategic approach to procurement: From the traditional vision of tactical contracting and procurement, to value maximization to achieve business goals and ambitions. This cannot only be achieved from the purchasing function, but requires a company-wide approach. So if you as an organization want to use the potential benefits, there must be support from the entire organization to make this possible.
A cross-functional approach
In category management, cross-functional teams are expected to work on category projects to identify and implement new sourcing strategies. Working cross-functionally ensures that walls are broken between departments. In addition, you create a shared and aligned understanding of the total needs of the organization and its customers. Yet cross-functional working is not achieved overnight. Procurement that asks people from other business functions to give up their precious time to work on a category management project will go well until priorities from their primary function arise. This can be prevented by making participation in a category management team a part of personal goals of employees, linked to a reward.
Category management is often more about organizational change than purchasing. The core of the category management process lies in a business improvement approach. So this is about getting people on board with a change in a new way of purchasing. To bring about a change, it is important to create support. Not an easy achievement, but visible support from senior management is necessary. The employees who are 'affected' by the change must get the feeling that they have contributed to the design of the change. That is why it is important to include them in the what, why, how and when regarding the change.
Category management requires a clear executive mandate. An initiative that appears to be only supported by procurement will struggle to build the support it needs to be successful. When a CEO or other members of management see category management as a business initiative that the rest of the organization should be a part of, it provides sufficient authority to implement category management. The executive mandate does not only provide the necessary authorization to drive change, but also sets expectations and actively promotes a changing mindset among employees.
Finally, it is important that category management is integrated into the organization. The expression governance does not seem to have a universal meaning, but essentially we are talking about arrangements to ensure the way in which the organization can govern category management and ensure its effectiveness in the organization. It therefore requires resources, processes and defined working methods. Appointing a good project manager is essential in this regard. Someone should oversee the implementation and management of the category plan. Regular stage reviews of category projects at key points in the process help ensure the accuracy of category plan execution. A planned and managed approach to company-wide communication about category management implementation is essential. In addition, a steering committee may meet regularly to review all aspects of progress and provide support where needed.
O'Brien, J. (2019). Category Management in Purchasing (4th edition). Kogan Page Ltd.
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