Introduction to category management | Definitions and best practices
Category management is a cross-functional approach to managing similar areas of spend. It identifies opportunities for business value and consolidation.
Tell Me MoreUpdated: Mar 14, 2024
Category Management (CM) is a strategic approach to procurement where organizations group together similar areas of external spend to identify opportunities for consolidation and to create added business value.
Approaches like this were originally designed for project-based sourcing of goods and services. It has grown to include much more: spend management and analysis, market intelligence, leadership, performance development, corporate reporting, sustainability and risk mitigation.
It allows procurement to focus their efforts and evaluate different market segments to leverage their agreements.
In this article, I'll cover:
What is category management?
Category Management provides a systematic cross-functional process to develop and utilize best practices. It is supported by people, tools, and technology.
Its use is widespread in businesses, government, and not-for-profit organizations to align business strategy with sourcing initiatives and supplier relationship management.
Benefits include cost efficiency, improved quality, efficient use of resources, improved market understanding, streamlined business strategies, and improved collaboration.
Is it the same as strategic sourcing?
The term Category Management is often used interchangeably with strategic sourcing, but it is not the same.
CM is a systematic, holistic way of managing categories for the whole life-cycle of goods and services, directing procurement activities. Strategic sourcing is a process of developing a channel of supply for products or services with the best supplier at the lowest Total Cost of Ownership (TCO).
The strategic sourcing process combines spend analysis, market research, negotiation, and contracting.
Strategic sourcing is a key activity within CM framework as seen in this example:
What are procurement categories?
A procurement category is a logical group of products or services with similar characteristics, supply and demand drivers, and suppliers.
The categorization depends on the industry, procurement’s own organizational structure, spend profiles, and the external marketplace.
The general principle is to group goods and services that have similar characteristics either using a global standard such as UN Standard Products and Services Code (UNSPSC) or an internal classification method, also called a spend taxonomy.
There is no correct way to categorize spend, but there are best practices. Don't know what to consider when designing your taxonomy? Have a read!
There are two broad groups of spend at the highest level:
Direct categories
The term “direct” is normally used to refer to raw materials and items for use in the manufacture of goods for resale. Direct spend management is the process of purchasing or obtaining materials, resources, goods, and services that are used in the core operations of its business.
They are vital to the business and are often acquired in large quantities, are of high value, and are sourced from trusted suppliers. Practical examples would be chemicals for the manufacture of soaps or engine parts for airplanes.
Direct and indirect categories may look different depending on the industry you are in. The IT category may be “direct” in banking and insurance where it is vital to core business operations and service provided to customers but “indirect” in the food or beverage sector.
For a fuller read on direct procurement, see: What is direct material procurement? Definitions, types, and examples.
Indirect categories
Indirect categories are those goods and services that are required to support day-to-day operations. Indirect products and services enable business operations and production processes but cannot be allocated to a specific product.
Indirect categories include marketing (we explored this category in-depth), maintenance, professional services, utilities, and telecommunications.
Professional services is a common indirect category group in most organizations. It includes legal, human resources (HR), and business consulting services.
All sub-categories require focus and expertise as many services have specific pricing models and market characteristics. In the following example, we open up the level of sophistication.
Case Example: HR category in transition
The HR category is becoming more thrilling and complex to manage as we deal with major changes in work life. Distance work allows us to source the best talent without geographical limitations.
There is a trend in flexible employment models and freelancing that benefits both organizations and individuals. A highly specialized skillset is required to be successful in talent acquisition as new competence domains emerge.
Talent attraction today is more than just a competitive salary and permanent contract. There is a new expectation level for what is considered employee wellbeing. New technologies are emerging for performance management and development.
Workwear needs to be more sustainable, potentially with circular economy consideration. All these elements will have an impact on category management and sourcing decisions.
In addition to market changes, there is a constant drive by top management for cost savings in this area, which is challenging even for the most seasoned HR procurement professionals.
Procurement needs to collaborate proactively with the People team to optimize the balance between core internal resources and such expertise that could be outsourced cost efficiently without losing strategic business capabilities.
Simultaneously, HR suppliers can be local or global, while the hundreds of stakeholders are spread around the various business functions.
Example of the HR category with sub-categories:
How does category management work in practice?
CM will cover the entire procurement cycle from sourcing to managing the supplier relationships. The main objective is to manage each category and sub-category of spend holistically, through their entire procurement lifecycle.
Large categories of spend and those that are strategic to the organization require dedicated time and a high level of specialization. The process used remains the same regardless of the category.
An effective process could look like this:
A category plan is critical to successful category management initiatives. It is documentation that includes category targets, stakeholder requirements, opportunities, prioritization, resourcing, and scheduling of activities.
The category planning process is led by a category manager who directs the portfolio, and runs the day-to-day activities and strategic sourcing. A category manager is a procurement role that is responsible for overlooking a specific area.
A category manager will track the market to understand pricing trends, regulatory changes, and innovation for the entire category. Category plans can be developed for the long-term (3 – 5 years), medium-term (1 – 3 years), and short-term (quick wins).
Categorizing historical spend in a structured way creates opportunities for cost savings and extracting more value from suppliers. The trend in category spend management is towards full transparency which is being achieved partly through the application of digital tools. A higher level of transparency leads to more insights and business value as more professionals can find opportunities for improvement and strategic sourcing.
Best practices in category management
Turning data into category insights with spend analysis is a good starting point, but isn’t enough to succeed in ambitious development efforts. Leading category managers spend a significant amount of time with stakeholders and end-users to understand their business needs so they can jointly support the organization’s goals.
Active stakeholder collaboration, networking, and benchmarking are keys to success. It requires multiple areas of expertise, such as
- stakeholder identification and management,
- supplier relationship management,
- performance management & development,
- sustainability & environmental management,
- risk management,
- effective communication
- and leadership skills.
Success is enabled by: People, Technology, and Tools.
At best, a category manager is a value-adding partner, that supports market analysis, external resource management, supplier performance development, and realization of business targets.
They will have extensive knowledge of the global supply market, and emerging trends and will encourage deeper collaborative relationships between suppliers and internal stakeholders.
Benefits include:
- Benefits of consolidation - Better pricing, improves quality management, and more beneficial terms and conditions can be achieved by aggregating spend and having fewer suppliers for a product or service.
- Improved spend visibility - Aggregating and validating spend by category provide insight into where money is spent and with which suppliers. Category management identifies improvement opportunities in maverick and tail-end spend.
- Better supplier relationships - Category management promotes single points of contact which avoids conflict and builds trust. The category manager facilitates closer collaboration with the selected handful of category suppliers. Fewer supplier contracts mean less administration time as well.
- End-user satisfaction - The category manager becomes the supply market expert and go-to person for a given product or managed service. A focused approach enables continuous learning and improvement within own area of expertise. This results in a better product-to-customer fit.
- Less risk and better governance - Understanding your category characteristics and suppliers helps address category-specific issues and improves compliance.
- Business strategy execution - Category management translates business strategy into specific category targets and deliverables.
How to overcome barriers
CM is continuous improvement and execution of the strategy. Markets keep evolving and not all changes are positive. A strategy that works well today might deliver opposite results tomorrow.
Obtaining stakeholder support for category strategies is not always easy. Business units have their own agendas and can be skeptical about potential misalignment, failure to understand their specific business needs, failure to supply, lower quality, and losing their preferred partners.
Open lines of communication, proactivity, and transparency are required from a category manager when aligning category plans with user requirements and business goals. Customer orientation and continuous seeking of opportunities for improvement and new business are preferred qualities of a great category manager.
Curiosity and genuine interest in your business areas will build common ground with stakeholders and develop your market knowledge.
Procurement is in a unique position to access market-specific information on new development, forecasts, upcoming trends, and changes.
To prove your value, you need to excite your business partners with new insights and be willing (and able) to share your expertise. The sheer volume of historical category spend cannot be managed manually to provide guidelines for category plans.
Analytical tools that provide greater clarity and visibility into spend categories, sourcing opportunities, and harnessed opportunities have been developed. Solutions like this are being used to support category management work for the best results.
Being able to share your wins and true category management impact in a transparent, unquestionable format is critical to earning stakeholder trust and mandate to operate.
Photo by: @mirapolis
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