Procurement teams can use category management to group goods and services, analyze spending patterns, and make more informed decisions to optimize spending and the organization’s overall procurement strategy. Organizations should consider category management if they’re looking to improve spending, explore cost savings, and reduce risks. Learn more about category management and how it could support your procurement success.
What Does Category Management Mean in Procurement?
Category management in procurement is buying goods or services in strategically chosen groups to optimize organizational performance. This presents many different benefits, including increased revenue, cost savings, reduced risk, and improved collaboration with suppliers.
Core Principles of Category Management
By keeping the core principles of category management in procurement in mind, organizations can understand how it supports the overall process and operations:
Data-Driven Decision Making
Before choosing categories, organizations conduct the appropriate spend and market analyses. Category management is based on strategic, data-driven decisions that consider current spend, potential risks, regulations, and overall goals. This enables organizations to create a set of purchasing categories that can be evaluated and adjusted as needed to optimize spending.
Cross-Functional Collaboration
Meaningful cross-functional collaboration lays the foundation for successful category management. First, it’s key to have internal and external stakeholders on board with the implementation and execution of category management. Procurement professionals should also understand the intent of category management and their role in the process. Finally, suppliers are key members of the category management team, often encouraging a stronger buyer-supplier relationship with improved contracts and efficiency.
Performance Optimization
Performance optimization is also essential for category management in procurement. For this process to provide the maximum benefits to an organization, teams should regularly review category performance metrics. This can include market intelligence, pricing, supplier performance, delivery times, quality, and more. Performance optimization also involves identifying areas for improvement, prioritizing areas of success, and implementing changes as needed to continue seeing improvements during procurement. Category management in procurement should not be stagnant but rather an evolving process that drives innovation and growth for an organization.
Benefits of Implementing Category Management in Procurement
There are numerous benefits of category management in procurement, including:
- Improved insights: Organizations can see how much they are spending on certain categories, align categories with market insights, and make more informed decisions on which categories of goods and services to invest in at what time.
- Reduced risk exposure: Categorical insights allow organizations to identify potential disruptions to the supply chain, specific supplier issues, and other possible risks. In turn, they can then diversify their sourcing strategies and act proactively to ensure uninterrupted operations.
- More cross-team collaboration: Category management brings structure and a clear vision to teams, allowing them to communicate and work toward shared goals more efficiently.
- Stronger supplier relationships: The strategic approach of category management often results in better contract terms, improved responsiveness, and a better mutual understanding of the goals between buyers and suppliers.
- Increased operational efficiency: Improved insights, less risk, more collaboration, and stronger collaboration with suppliers are just some of the ways operational efficiency can improve with the implementation of category management in procurement.
- Cost savings: A streamlined procurement process can lower overall costs as an organization saves time, money, and resources.
- Increased revenue: Improved efficiency, supplier relationships, contractual terms, and cost savings can increase overall profitability.
All of these benefits work together to drive growth, success, and innovation for organizations. Understanding these potential advantages can also help organizations communicate the merits of category management with key stakeholders.
Key Steps in the Category Management Process
Category management takes a complex procurement process and puts it into a more manageable framework. For example, facilities management could be a category. This would group together purchases like janitorial services, HVAC maintenance, office supplies, utilities, and more. Instead of managing all of these purchases separately, they are looked at as a single entity to secure bulk pricing, streamline vendor relationships, and more.
For organizations that may benefit from this structure, implementation may entail the following:
1. Define Categories
First, organizations must define the categories they want to manage. Similar goods and services are grouped and treated as small business units. Each unit has its own parameters, so all teams understand where goods and services fall within the framework. Teams should also determine what role each category plays in their larger organization. What is the category’s purpose, budget allocation, etc.?
2. Determine Category Roles
Teams should also determine what role each category plays in their larger organization. What is the category’s purpose? How critical is it to operations? What does the category look like when considering the entire portfolio? Examples of category roles could be seasonal or core transactional.
3. Track Category Performance
Organizations should closely look at each category, collecting information such as sales, competitors, seasonality, etc. The goal here is to collect as much information as possible to make realistic goals for each category.
4. Establish Category Goals
With each category, their role, and their performance in mind, teams can work together to establish category goals. They could be associated with margin, sales, volume, or another metric that makes sense for the organization. Category Scorecards can be a unique way to see a numerical representation of each category’s success.
5. Create a Categorical Strategy
Once organizations have identified the current state of each category and their newly defined goals, they can work on developing a strategy to achieve those goals. This creates actionable steps for cross-functional collaboration during procurement.
6. Implement Category Management
Implementation plans can help organizations introduce category management to the larger organization and assign designated roles for execution. Educating key players about category management is crucial to its success.
7. Monitor and Optimize Category Performance
After implementing category management, organizations should continue to monitor performance. Are the categories tracking toward their goals? Are they falling short? What needs to be changed for each category to reach its full potential? The focus of performance will differ based on the organization. For example, teams could focus on optimizing a category to bring in the most profits for their organization, or they could be looking to identify and eliminate supplier disruptions.
Driving Procurement Success with Category Management
Procurement is a complex process that plays a direct role in driving organizational success. Category management helps streamline the procurement process and presents organizations with opportunities to optimize their spending toward goods and services.
For those seeking to improve their procurement process, RFxPremier can support by helping organizations secure contracts that meet their unique needs. We are dedicated to driving growth and success while fostering collaboration and transparency. Connect with us today!