What’s the importance of category management in procurement?
We all know the importance of having a clear procurement process to manage our business’s spend, but where does category management in procurement enter the fray?
In business, it’s widely used as a means of optimising cost by taking groupings of similar items and consolidating them into a single contract and price. This covers the ‘category’ side, while the ‘management’ part is all about applying the right processes to ensure significant savings are made.
Ultimately, this makes businesses more streamlined and cost-effective. However, an effective strategy is required to ensure that the execution of category management is done correctly.
This article explores exactly why category management in procurement matters, and what you can do to ensure it works within your business.
Why cost-cutting is so important right now
Every business wants to minimise costs while maximising productivity and efficiency. This is no different for procurement. However, the motivation to reduce business costs is arguably the highest it’s been for a decade- following on from the 2008 financial crisis.
Instability across well-established markets as well as the fragility of new emerging markets means that the global economic situation stands at a precarious point in time.
In fact, research shows that cost-cutting is a top priority for 74% of chief procurement officers (CPOs) across the world in an effort to mitigate the increased risk of a global economic downturn.
While it may sound like it’s all doom and gloom, there are still plenty of opportunities to take the appropriate action now to reduce the risk of those external factors that we have no control over.
What does business without category management in procurement look like?
Category management in procurement takes a little time and effort to implement and perfect, but overall it’s pretty easy to understand the premise of how it works.
The main principle is that demand is simplified by taking bigger contracts to the market. The bigger the contract, the lower the price. But why is this important? What does it matter if you choose not to implement category management?
Use this example:
Let’s say that your business operations occur in ten various locations across the country, and the manager at each location is in charge of all procuring office supplies for their particular office. Each manager is probably going to be taking out a different length contract with a different supplier, paying a different amount for similar supplies of varying quality and properties.
That means there are ten differently valued contracts with different suppliers to manage, making it harder to keep track of the overall cost. It also becomes a time-consuming and confusing task to negotiate better contracts and develop individual supplier relationships.
Basically, any work to progress supplier relationships and negotiate new deals would have to be repeated ten times with ten different results and ten varying degrees of success. These separate contracts not only have different prices but will also have ranging qualities, contract lengths and delivery schedules, all of which have their own knock-on effect to cost.
This example only covers office supplies, and you can already see how easy it is for divided contract management to become a nightmare to manage. For more complicated operations, the process will only become more complex and costly.
How does category management in procurement cut costs?
By taking the time to look at your various goods, group similar items together, and taking out a single contract for each of the groups make cost management much simpler to administer as well as quicker to negotiation and manage those all-important supplier relationships.
The time you save by only having to deal with a single contract also equates to saved costs, as staff time can be repurposed to tasks where they can pursue meaningful tasks that grow the business.
Seven step process
Now you know why category management in procurement is an area that needs to be prioritised, you need to know how to implement it so that its functionality is seamless. Luckily, there are seven easy steps you can follow to break the process down.
1. Opportunity identification
At this stage, your team needs to look at your current procurement processes and identify areas where there’s the opportunity for improvement.
You need to analyse your current spend and consider the potential impacts of any stakeholders who could influence category management implementation.
Create a list of priorities you need to work through based on the potential gains and start with the top item.
For example, is there one specific area of procurement where there are lots of different contracts for similar items? Do you want to consolidate categories with a supplier you’ve already built a relationship with?
2. Opportunity development
Opportunity development is all about taking a deep-dive into your suppliers and figuring out the pros and cons of those you have contracts with as well as other potential outliers that you haven’t yet considered.
If there’s one stand-out supplier, it’s a good idea to use them so that you don’t need to start your supplier relationship management (SRM) from scratch.
3. Finalise strategy
In this stage, you need to combine your internal procurement needs with the external capabilities of potential suppliers.
Going for the item with the lowest ‘price tag’ may not be the same as effectively optimising cost- factors such as quality, contract length, SRM, and opportunities to innovate also come into place. Click here to learn more about calculating the total cost of ownership (TCO).
By analysing this, you can create a solid framework for your requirements. The supplier that’s right for one business may not be the best choice for yours, so knowing how you differentiate from your competitors is key to finding the right suppliers to source from.
4. Screening suppliers
In this stage, you need to reach out to a variety of suppliers to find out which ones are best aligned to your business and its goals. With existing suppliers, it’s a good idea to let them know you’re planning to cut spend through category management. Who knows, maybe doing so could open the door to negotiate a new and better contract with an existing supplier.
Additionally, you should identify possible suppliers you haven’t yet formed a relationship with. It may be that a supplier you haven’t considered before is highly innovative and can drive business growth.
5. Conduct auctions and RFPs
Once you’ve screened and compiled a list of potential suppliers, you need them to prove themselves. Find out what contract they can offer you. Again, the lowest cost contract doesn’t equate to the best supplier.
If you’re paying slightly more for highly innovative suppliers who you can easily build a great relationship with, you’ll be optimising cost much more than choosing a low-cost supplier who you can’t rely on.
6. Shape and negotiate proposals
Once you have received the proposals from suppliers, you can negotiate and shape the best offers into a contract that best suits your business aims, goals and objectives. Choose the best option as long as it’s also appropriate.
If no proposal resembles what you want or need, you may need to reconsider steps one to four. If this doesn’t help, it’s time to get external help and outsource the task.
7. Implement and manage suppliers
Once you’ve onboarded your new supplier, you want to get the best out of them. Prioritising SRM is key to an equally fruitful relationship alongside your category management in procurement. Procurement training may be required if your team doesn’t have robust enough knowledge of how to manage suppliers effectively.
You can find out more about the seven-step process here.
Ultimately, category management in procurement is vital for any growing business. Placing it on the back burner can easily result in it being forgotten until you have numerous unnecessary small contracts that would have just been better off as a whole.
Remember, a lack of category management results in wasted time, higher costs and poor communication, not only with suppliers but internally, too. Consolidating your contracts means that everyone is much more likely to be on the same page, especially if you’ve also invested in the appropriate training.
Following the seven steps is a foolproof way to get the most out of your category management. It’s a process with the sustainability of your business at its core. However, if you are unsure of where to start, it’s best to obtain expert advice first.
At Bromley Wood Associates we have considerable experience in helping businesses to implement category management so that you can not only manage risk and compliance but, more importantly, optimise the cost of your procurement to help grow your business. If you would like to speak to us more about your procurement and how you can improve it in your business, contact us today.