What is category management in procurement?
Category management is an approach to organizing procurement to focus on specific areas of spend. This process strategically segments spend into areas with similar or related products.
Organizations that practice category management are able to consolidate procurement processes, find discounts by bundling items together, and make the purchasing process more efficient. Put simply, category management is an approach to organizing procurement to focus on specific areas of spend.
Within category management, there are a few different approaches to grouping products or services together in order to optimize spend. In this guide, we’ll break down ways to practice category management, how your organization can benefit from this approach, and some simple ways to get started.
How does category management work?
Category management can be accomplished in a few different ways. Some companies create categories by dividing direct and indirect products, or inventory and services. Others take a different strategic approach and use the Pareto Principle or ABC analysis. The Pareto Principle states that 80% of consequences come from 20% of the causes. ABC analysis divides inventory into A, B, and C categories: items in A have the highest value; B have lower value than A; C category items have the lowest value.
Perhaps the simplest approach to category management is to group products or services by value, vendor, type or volume. Ultimately, the model of category management you choose should help the procurement team discern where high levels of cost are being accrued, and then seek to lower those costs by negotiating better deals with vendors.
Category management is one approach to reducing tail spend. By grouping together common products or services, procurement teams can begin to identify duplicate vendors, redundant inventory, and opportunities for bundle discounts.
Benefits of category management
Category management can help centralize spending, which empowers procurement teams to get a better handle on rogue and maverick spend. But there are other advantages to this approach to procurement, too.
Category management makes it easier to get insights into the expenses and spending of the organization. By centralizing spending into categories, procurement teams can gain visibility into the pricing, cost, and spending for certain items. They can begin to identify vendors and gain a better understanding of existing contracts, which creates a full picture of supplier relationships.
With this information, purchasing teams can make better decisions to derive more value from every purchase. Purchasing teams can negotiate contracts for lower prices, taking advantage of economies of scale to offer higher volumes or larger scopes of work to vendors. Over time, category managers can build better relationships with suppliers, which leads to more reliable, tailored service.
Category management also allows companies to make more strategic business decisions. Organizing spending into discrete categories gives managers a way to tie specific strategic goals to strategic purposes. For instance, if a retail store is planning to move to a new location in the next three years, category management in the retail store’s product lines will give the company a way to identify suppliers and capital in advance.
How to get started with category management
Implementing a category management approach to procurement can be relatively straightforward for small businesses, but at larger enterprises, category management can be quite complex.
Start by auditing your spending to understand what products and services your departments are currently purchasing. Look for duplicate spending or multiple contracts with the same vendors. Consider prioritizing different spending activities over others depending on your business goals.
Next, group together categories and subcategories. Determine how much spending is going into each category. This will help you perform a market analysis: How does the supply market look for each category, and does it fit the customer needs? Each category should be examined for opportunities to streamline costs and consolidate vendor agreements. You may wish to assign a category manager to each grouping in order to manage each individual strategy.
Next, put your market analysis into action. For some categories, you may need to change the scope of work, renew a contract, or find a new vendor. Category managers should set KPIs that ladder up to the overall business priority, whether that’s better inventory management, streamlining procurement processes, or cutting down on rogue spend. Even improving supplier diversity can be achieved using the category management approach to procurement.
This process may seem labor-intensive, but once you have your categories established, purchasing can be more efficient and productive. A procure-to-pay (P2P) system can help, too. Technology empowers category management teams to track tail spend and identify problem areas that are driving profits down. It also lets you compare multiple vendors to ensure you get the best possible deal.