I recently worked on a large-scale program of strategic sourcing transactions across multiple business and technology functions. The strategic sourcing team produced a considerable volume of contracts and notably delivered significant cost reductions along with contractual obligations for supplier-led innovation.
While the strategic sourcing effort followed a mature process and produced great results there was a gap in the process for ‘hand-over’ from the externally sourced strategic sourcing teams to transition the contract relationship to the category management function. The hard-earned gains and concessions of the negotiations phases needed to be understood by the category manager and then further nurtured and managed through ongoing supplier relationships.
The gap in the process was understandable as the business was in a state of disruption after their acquisition and the brand-new procurement function was immatureand still finding its feet. Notably they were starting to implement a strategy for category management, so no doubt the situation will quickly improve for them.
However, this first-hand experience of this gap did highlight for me the impact on the procurement organisation if they are unable to transition from strategic sourcing view to category management.
Category Management is a way of driving and delivering value, growth and innovation and yet most companies struggle with the transition from Strategic Sourcing to effective Category Management.
Category Management includes strategic sourcing but it is much broader than that. The Faculty defines Category management as: a rigorous, fact-based, end-to-end process for proactively collaborating with stakeholders to develop and implement strategies that generate significant value that stakeholders recognise, from an organisation’s external spend.
It sits above and guides both the content and the sequencing of the lower level methodologies such as (not limited to): spend analysis, demand management, strategic sourcing, supplier relationship management and benchmarking.
What is a category?
A category is a grouping of materials or services that have similar supply and usage characteristics to meet business objectives. Managing by categories is a strategic approach which organises procurement resources to focus on specific areas of spend categories.
This enables category managers to focus their time on the business requirements, conduct in- depth market analysis, supplier capability and performance analysis to fully leverage their procurement decisions on behalf of the whole organisation.
Many CPOs understand that implementing and sustaining an effective category management process can deliver great benefits, it usually leads to:
- Raising the profile and competency of the procurement function within the organisation
- Significant savings typically 10-30 per cent
- Reduced risk in the supply chain
- Improved stakeholder relations
- Improvements in service levels, quality, availability and value for money
- The revelation of other sources of value and innovation from the supply base
- Re-usable processes to leverage across other categoriesCategory management allows you to source more effectively and then to get even more value from constantly optimising the resulting contracts.
How to get started and maintain an effective Category Management function:
• Ensure that you have an effective and seamless transition process from strategic sourcing outcomes to the business-as- usual category management function
• Develop the logical categories for your business by bringing together products or services that have the same features and are bought from similar supply markets.
• Build an in-depth understanding of the organisation’s plans and business strategies and ensure that the categories are aligned to business goals
• Develop category benchmarks so that you can more easily identify additional improvement opportunities
• Use big data and business analytics to undertake continuous analysis of spend, (direct and indirect), market data and performance against benchmarks
• Undertake a program of constant price analysis on local and international markets and the monitoring of trends in the category
• Invest in a process of gathering supplier performance data for more quality and service improvements
• Monitor and track all the savings that have been achieved through substitutions, better compliance or contract negotiations
• Engage with your stakeholders! and have continuous discussions and reviews to ensure that all stakeholders are involved in decisions on the category.
The bottom line for the CPO
Category management will be a continuous improvement process that should form the basis for all future successful strategic sourcing initiatives. It requires the right level of attention and a good training program Category management will deliver a range of benefits such as being able to work with suppliers to speed up the time between initial adoption and full implementation. At the same time, also providing a layer of continual strategy adjustment once a new supplier or contract has been initiated.
Your category managers will be the ones responsible for all things related to a given project or managed service (gather requirements, collect bids and negotiate contracts) and their time will be freed up for engagement with the business to focus on their jobs and deliver better value.
Establishing the single points of contact means better co-ordination and this will streamline communication in a way that will vastly improve stakeholder and supplier relationships.