Why Category Management Is Procurement's New Secret Weapon

If you haven't already adopted Category Management, discover why it's time to pay attention.

Procurement is experiencing a tremendous transformation. So it's no surprise category management, or understanding spend through classification and analytics, is an exploding trend. Highly passionate leaders are embracing creativity and leading the charge to elevate procurement to a place that truly drives business value across their entire organization. The category management process is a tall order with many moving parts from attracting fresh talent to supplier collaboration, business partnering and reimagining value props.

Let's dive in to better understand how grouping similar goods or services together for analysis gains greater focus while also generating more impact across all your organizational stakeholders and external partnerships.

What is Category Management?

First off, category management in procurement, like most components of the job, is changing. Historically built around project-based goods and services sourcing, its definition is quickly expanding. Either way, we can generally understand the category management process as a cross-functional approach that classifies external spend items into similar groups. Doing so allows for easier identification of opportunities to do better business, such as by implementing consolidation methods or conducting a comprehensive market evaluation for better negotiation and contract leverage.

Your category management process is typically built around defining your organizational needs, identifying optimal vendors, negotiating contracts and managing vendors. Its structuring of procurement resources may also include:

• Procurement spend management and analysis.
• Procurement process and performance development.
• Market insight.
• Risk management and mitigation.
• Sustainability plans.
• Corporate reporting.

Expert procurement visionaries today say category management skills are at the foundation of effective procurement.

Category Management Is Not Strategic Sourcing

To get the most from category management adoption, it's important to differentiate it from strategic sourcing as the two are often used interchangeably.

Category management involves the entire comprehensive and systematic management of categories throughout the complete goods and services cycle. The category manager oversees everything from the very early stages of understanding business objectives and targets around the category to contract management and continuous improvement. Thus, it's a never-ending, ever-developing strategy.

Strategic sourcing sits earlier within the larger category management process, including conducting spend analysis, market research, and negotiating. It's important to note, strategic sourcing ends with the contracting stage. Its chief aim is to build a reliable supply selection for goods and services with the best vendors while achieving the lowest total cost of ownership for the organization.

To clarify, here are three key differences between strategic sourcing and category management.

Scope.

• Strategic sourcing concerns vendor generation more narrowly and includes identification, evaluation and selection to meet specific needs at the lowest TCO.

• Category management spans a wider range of activities throughout each category's procurement cycle, including analysis, management and continuous improvement. Category managers must understand the organizational goals and all stakeholder needs while using their category management skills to create tailored procurement strategies that meet them.

Timeline.

• Strategic sourcing is the shorter-term process of selecting the optimal goods and service providers for a specific project.

• Category management is the extended and ongoing process of managing and improving a category over the long term, including planning, management and analysis along with collaborating and creating meaning across multiple departments and stakeholders.

Vendor relationships.

• In strategic sourcing, vendor relationships tend to be more transactionally focused, based on competitive bidding and short-term contracts.

• In category management, vendor relationships are managed and fostered over the long term, ideally becoming partnerships working to achieve larger business goals in win-win scenarios.

Why Having a Category Management Strategy Matters Today  

As globalization and dependency on outsourcing talent continue to increase, procurement plays a central role in ongoing operations and managing people to maintain a competitive advantage. More suppliers, services and constraints means more complexity. Category management offers a more structured approach to analyzing, organizing, and executing a specific supply chain in a more focused view.

Supplier relationships have never been more essential. In managing and strengthening relationships with goods, supply and service vendors, a category management approach enables internal and external teams to work more collaboratively and realize mutually beneficial scenarios.

In times of economic and geopolitical uncertainty, risk management is top of mind for procurement professionals. Because a CM-centric approach focuses on and analyzes strategy and risk management more intensely–including concerns around supply disruption, vendor performance or compliance–issues are identified earlier for more effective management and mitigation.

At the same time procurement leaders steer organizations through a confluence of challenges, they hold powerful tools that extend their abilities: digitization, data and analytics. In category management, these advances are increasingly accessible and useful, supporting procurement teams to more effectively identify cost savings opportunities, streamline processes and communicate in real time.

Category management procurement views these challenges and opportunities through a creative lens into strategic planning, execution and improvement as efficiency becomes ever-more important in a competitive environment.

Clear-to-see benefits of implementing a category management program include:

Improved spend visibility

Category-level visibility focuses on where money is spent according to each vendor and spotlights patterns of maverick and other under-managed spend areas for improvement as they're regularly reviewed against the budget.

Strengthened vendor relationships

Because category management narrows vendor relationships down to single contact points according to similar external spend areas, it invites more collaborative processes. Conflict is more easily avoided while transparency and trust are fostered.

Reduced risk

Category managers gain expertise around the specific issues and regulations within each category so they more easily optimize compliance and risk mitigation.

Contract optimization

With category-specific focus comes fewer goods and service vendors along with spend aggregation. It means more easily secured advantageous contract terms and conditions, streamlined systems and fair pricing, all in the name of healthier vendor relationships.

What's in a Category?

Simply put, each procurement category creates a classification of goods or services logically defined based on similar characteristics and market considerations. Like most procurement tasks, category creation depends on the unique situation, such as organizational structure, spend profile and external market conditions.

Typically, category managers break goods and services down according to either a global standard like the UN Standard Products and Services Code (UNSPSC) or an internally classified spend taxonomy. Either way, these business units are more clearly seen when considered as either a “direct” or “indirect” category.

Direct Categories

Direct procurement categories address spending necessities associated with the raw materials and services essential to manufacturing a product for resale. Common examples include lumber, metals, chemicals, parts, equipment, machinery, workers, and contractors. Direct spend category management is the entire process of selecting and purchasing materials, resources, goods and services for core production.

Direct category items are essential to doing business, oftentimes purchased in large quantities, and depend upon reliable suppliers to meet production needs.

Indirect Categories

Indirect procurement categories address spend items required to support an organization's daily business operations. These goods and services support production processes and business operation but they're not directly allocated to any specific product.

Indirect categories may include technologies, maintenance, IT, travel expenses, office supplies, consulting or professional services, outsourced supports and any utilities required outside of production but needed daily for company-wide operations.

5 Steps to Category Creation

Category management strategy considers the entire procurement cycle from sourcing goods and service providers to managing vendor relationships. Managing each category and its spend takes time, dedication and specialized knowledge but each category follows the same process.

Regardless of category, your content management process may include the following steps.

1. Assess

Category management procurement starts with a strong understanding of where you're at today. It requires a deep dive to analyze your current spend, suppliers and vendors while understanding demand at the individual business item level.

This is a good time to create a profile of each associated vendor and prioritize them according to historical performance.

ProTip: As you overview all the assessment data and analytics, note any potential opportunity for greater efficiency, cost reduction or avoidance, and improved performance or compliance.

2. Strategize

Category management procurement is a long game. Each category management plan includes organizational goals, category targets and measures each according to realistic key performance indicators for constant improvement. Stakeholder obligations, priorities, resources and activity scheduling also factor in here.

Category managers oversee daily activity and strategic sourcing in their specific area. They consider any new potential vendors and negotiate with existing vendors to ensure the organization achieves value for their money and from their contracts.

ProTip: Nail the category strategy creation process by closely tracking markets to understand price trends, regulations, innovation and opportunities within the category. Your plan should include short-term wins, mid-term goals–up to three years away–and long-term five-year–plans.

3. Manage relationships

Achieving desired results through category strategies depends on ensuring vendors and suppliers comply with contract terms while delivering high-quality service and performance. Monitoring and tracking these activities allows for early intervention and correction should a potential issue arise. It also encourages accountability, supports worker well-being and establishes long-term relationships.

Furthermore, procurement pros lead stakeholder management across multiple departments and functions to develop meaningful understanding and appreciation around why good procurement is not simply a “nice to have,” it's a “must have.”

ProTip: Set, communicate and enforce expectations, policies and processes early on to foster accountable work environments where safety, ethics and quality prevail.

4. Measure performance

Words to live by: you can't manage what you don't measure. Building and tracking KPIs into category management strategy across projects and over time helps you to:

• Effectively identify improvement opportunities.
• Ensure the category continues to add organizational value.
• Reward exceptional performance for continued relationship building.

ProTip: Once you've defined category KPIs, use them to track performance, measure progress and determine areas for improvement. Consider cost savings, vendor performance, contract compliance and on-time delivery. Build out regular review routines so you can invest in people where needed and reward excellence.

5. Improve

Working at the category level sharpens vision into opportunities for process improvement and operational excellence to more effectively meet your organization's immediate needs and longer-term objectives.

Because the procurement environment constantly evolves, category management strategy and execution are never complete. Procurement leaders align category planning with organizational goals and end-user demands. They consistently demonstrate a commitment to proactivity, strong communication and transparency.

ProTip: Continuously improve category management by leveraging the incredible data and analytics advanced technologies offer. Use dynamic dashboards and reporting to gain insight into category spend, vendor performance and compliance, as well as any other key metrics you've set. Then, make data-driven decisions to set new benchmarks and goals.

Take Category Management to the Next Level

Procurement visionaries working to transform the profession seek strategic approaches that add organizational value today and protect prolonged success. This transformation could not come at a better time. It's met with an influx of innovation that supports such ambitious growth.

Over 42% of procurement professionals surveyed in a 2022 Economist Impact study listed category management as a top-three motivator to digital procurement adoption.

Here are five reasons why:

1. Process hygiene: Data and analytics reveal process weaknesses. That insight is critical to developing better systems for clear processes and streamlined operations.
2. Communication and transparency: A centralized platform allows all internal and external stakeholders to work collaboratively, communicate in real time and all see the same data. This creates alignment and efficiency opportunities in virtually every area of procurement.
3. Data-driven decision-making: With real-time insights, intelligent automation and advanced analytics provide category-level insights into compliance, market trends, risk and other essential metrics, enabling agile decision-making.
4. Contract management and monitoring: Turning repetitive compliance and performance monitoring over to an automated solution increases early intervention and correction of potential discrepancies. Software-generated alerts decrease awkward human intervention.
5. Clear analysis: Data that's aggregated and analyzed across multiple vendors within a single category more clearly identifies patterns, trends, cost savings opportunities, process gaps and risk management priorities.

Achieve Unprecedented Success

Struggling to get all the data you need on your indirect spend categories? You're not alone. Our customers rely on PayShepherd to get a single source of truth on the spend and performance of their service vendors.

Book a call with one of our indirect spend experts today and let's discuss your needs.

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