According to Procurement Magazine, citing a McKinsey study, procurement excellence requires mastery of many areas, including data, analytics, and particularly category management. When implemented well, category management can bring sustainable benefits to procurement, helping organizations streamline this process, negotiate better deals with suppliers, and save money.
This article will help you gain a deeper understanding of category management and its benefits as well as the basic principles of its implementation in procurement.
Key Takeaways
Category management in procurement drives value and reduces costs.
Bundles purchasing by category.
Improves supplier leverage.
Cuts duplication & waste.
Aligns buys to strategic goals.
Supports total cost visibility.
What is strategic procurement category management
Category management is a strategic approach to procurement that involves segmenting spending into areas containing similar or related products. At its most basic level, category management is the separation of products by value, supplier, type, or volume into different categories to facilitate management and sourcing.
Category managers need to analyze data, understand consumer behavior, and collaborate with suppliers as part of their category strategy to effectively manage different product categories and ensure transparency and visibility.
What's the difference between category management and strategic sourcing
Category management and strategic sourcing are sometimes mistakenly seen as the same thing, but strategic sourcing is a procurement process that focuses only on selecting the right suppliers and negotiating the best prices.
On the other hand, category management is a broader concept that often includes strategic sourcing as the first step. It's a continuous process that often focuses on long-term business goals, contributing to centralized spend data, streamlined business strategy, and improved supplier risk management.
Importance of strategic procurement and category management
According to Oxford Economics' last findings, procurement organizations are now a major pillar of support for top business priorities, including growing revenue and improving profitability. Respondents cited category management (44%) as one of the tactics that will bring value over the next two years.
In modern retail, the role of procurement is not just clerical but a strategic role. With the right methodologies and skills, strategic category procurement can deliver competitive and lasting benefits.
One of the clearest and illustrative examples of strategic category management, which reveals the essence of the process, was given by Jonathan Webb, Head of Advisory at Procurement Leaders, in Forbes. If you imagine a company with 40 factories, each run by a general manager (GM) who negotiates deals independently, even for small items like paper clips, vendors will take advantage of this, charging higher prices for a quick sale, repeating the process with each GM. This leads to inconsistent prices, terms, and contracts across the company, known as the "divide and rule" strategy.
Alternatively, if there is just a single buyer who merges all of the deals into a single global contract, vendors will have to go through this buyer, standardizing prices and freeing up GMs' time. As a result, the company saves money and time even on small purchases let alone on large deals.
Benefits of category management in procurement
Below are the key benefits of category management. Procurement process for retailers can become much more efficient with proper strategy prepared by procurement professionals, and here's why:
Centralization of spending data
Reporting on expenses by category gives you a clearer picture of business operations, how money is spent, and with which suppliers. A holistic category management approach to spending allows you to find ways to buy in bulk for the long term, reduce the number of repetitive transactions, and lower unexpected costs.
Good category management practices also provide insight into which suppliers offer the most value, which can then substantially help meet business objectives.
Cost savings
In retail, supply bottlenecks, poor quality, and unexpected price increases result in large losses. Nevertheless, this can be successfully avoided with the help of category management. Moreover, market research and data analysis as part of category management help to maximize the use of the budget. Armed with a clear understanding of the different categories and subcategories, any category manager can ensure that the company is getting value for money from its purchases.
Better supplier relationships
Better-planned contracts improve supplier relationships and a properly functioning category procurement strategy helps you better understand your suppliers while making sure that you're working with them in the most efficient way possible. It can also help you refine contracts to maximize the value you get from your suppliers.
Business strategy optimization
Category management adoption dates back to the 1980s – back then it was a manual process performed in separate spreadsheets, documents, and presentations. Manual data collection, market analysis, and reporting were very time-consuming, and procurement teams had less time to focus on category strategies and value realization.
Today, however, most processes can be implemented automatically or semi-automatically owing to modern technology. Specialized assortment management software, such as LEAFIO AI Assortment Planning, allows retailers to perform category management tasks swiftly and efficiently.
When a category manager can easily take on more procurement responsibilities, such as sourcing and procurement opportunity assessment, these procurement professionals can then focus on other important tasks including providing the best possible in-store shopping experience and increasing customer satisfaction, which in turn will lead to increased profits.
''Category managers today should build strategies based not on what sales and suppliers are pushing but on customers’ needs and willingness to pay'', - McKinsey & Company.
Steps to implementing category management in procurement
The successful implementation of category management in procurement relies on three pillars: analyzing cost data, dealing with suppliers, and monitoring and searching for growth points. These are 3 steps that are important to take in order for category management to be an effective element of the category strategy.
STEP 1. Analyzing spend data
Data is at the heart of many business processes, and procurement is no exception. It can catalyze a category management initiative, as well as help it improve over time and move in the right direction by measuring its effectiveness.
Procurement category management software can automate and speed up many steps in the process of analyzing spend data by consolidating it into a unified system. This, in turn, allows for seamless tracking and reporting of business expenses.
STEP 2. Supplier selection and negotiation
Enhancing supplier relationships is critical to the successful implementation of category management. A healthy collaboration ensures that category strategies are not only aligned with business goals but also have the support they need to be successfully executed.
A functioning procurement plan facilitates supplier relationship management as it helps you better understand your suppliers and ensure peak efficiency in supplier performance.
When negotiating with suppliers, a category manager is then well-informed on the category and the company's goals, which allows them to obtain better payment and offer terms, as well as reduce supplier-related risks.
STEP 3. Monitoring and continuous improvement
Collecting and analyzing results is a necessary part of the category management process, as it allows you to continuously improve your strategic sourcing and procurement efforts. Category managers should regularly use key performance indicators (KPIs) and benchmarks to measure performance, especially if a new category has recently been introduced to the workflow.
To ensure regular monitoring of results, as well as to find new growth points in time, managers can use specialized procurement category management software. For example, LEAFIO Assortment Planning Software constantly analyzes the changes made in the categories and their results. Based on this, the solution offers profound qualitative improvements, so managers can work with assortment efficiently.
LEAFIO Assortment Performance: a category management tool that provides exсellence
In addition to analytic insights, LEAFIO Assortment Planning Software offers many other useful tools for assortment management. The solution helps managers to:
- Create an effective category management strategy and track its compliance. The system will show you what you need to focus on to achieve your goals.
- Plan and optimize the number of SKUs in each segment to ensure the ability to compare/balance the assortment (which is impossible to do in .xls format).
- Determine which products should be displayed in-store using analytics.
- Find out which products have been added or removed from the current assortment in the store.
In summary, the best way to implement category management in procurement is through technology. Specialized software can help you effectively control procurement categories, offering ways to improve assortment management and make better business decisions.
Key takeaways
- Centralized Spend and Streamlined Strategy: Category management helps procurement teams group products, centralize spend data, and align business strategies for improved decision-making.
- Cost Savings and Risk Reduction: By understanding both category specifics and business goals, managers can secure better deals and minimize supplier-related risks.
- AI-Driven Efficiency: Tools like LEAFIO’s AI Assortment Management use ML and AI to enhance category management, keeping retailers informed of potential performance improvements.
- Time and Cost Efficiency: A successful category management process helps retailers save time, reduce costs, and prevent cash leakage through optimized procurement practices.
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Kristi Miller
Retail optimization expert
