Category management in procurement – does it create value beyond strategic sourcing or is it just a waste of time? Find out in this arcticle.
Procurement yesterday – today – tomorrow
Over the last decades procurement was turning from a pure cost focus to a real value contributor. In the past, most CPO’s were facing issues like bringing the right product, in the right quality with the right price to the right place. The focus was – more or less – mainly cost driven. As markets got more complex and competition increased, the attitude as well as expectations towards procurement got continuously challenging. Some CPOs changed, some were changed.
In today’s discussions with our customers we see rising expectations towards strategic procurement. Costs remain the major topic, but the overall context is steadily increasing. While “Total Cost of Ownership” (TCO) was the buzz word of the 90’s, nowadays it tends more in the direction of value management, innovation and digital enabling conjunct with costs (for sure) but – and that’s new – with new business generating additional turnover. In other words, procurement organizations need to deliver more than just cost savings.
The role of category management in the context of value contribution
One of the main questions we often get asked by our clients is how to tackle this objective and how to deliver real value for the entire organization. In general, there is no “one-fits-all” approach. Usually a starting point for enhancement is a structured category management which needs to be extended and redefined with a new context.
Category management should be broadened and no longer be seen as part of strategic sourcing, it turns out that strategic sourcing is getting more a part of a structured category management. If organizations are looking for an additional value beyond the pure price, the strategic approach – how to treat the supplier market – has to be redefined. Fruit for thoughts can be
- Co-innovation projects
- Jointly operated sourcing activities
- Format & design of existing contracts
- Extend of collaboration
The most common hurdle for long lasting and well-established procurement managers is to move the price which needs to be payed of the procured goods a little bit aside and focus more on the bigger picture. An early involvement of internal businesses as beneficiaries often supports or even enables additional opportunities.
A practical approach to lever an existing category management
To identify value-adding opportunities for the organization, it is always recommended to start with a supplier classification followed by a category profiling.
Supplier classification is usually based on quantitative as well as qualitative factors as annual spend, performance & quality, duration of collaboration, past innovations and further company specific criteria. This is usually part of supplier management which is strongly recommended to establish in the context of an advance category management.
In parallel a profiling of the existing category structure is advised. Main questions related to the category classification are for instance:
- Is the classification still matching the corporate environment?
- How are the categories classified within the “Kraljic Matrix”?
- Are latest market developments reflected?
- How are the category strategies classified?
Based on the category profiling a rework of the category structure might be necessary in order to adjust to recent changes or developments of the internal and external environment.
As soon as transparency about supplier and category classifications is established, first opportunities for value beyond the pricing can be identified. It is highly recommended to start with a category strategy which is reflecting the opportunities and targets over the next years.
As part of the supplier categories, four intensity levels of category management can be defined:
- Category based initiatives
- Strategic projects
- Cross category management
- Cross enterprise
The closer the collaboration, the higher the expected value contribution for the entire organization.
Our experience shows that the highest probability for quick results is usually anywhere in the middle of the complexity together with “Key Suppliers” in leverage or bottleneck strategies. Strategic projects or cross category opportunities should be easy to identify.
The majority of “Key Suppliers” is willing to grow with their customers. On the other side they mostly have capabilities to start initiatives as co-innovations, expand to other sourcing categories or act as pilots for digitalization projects.
Is it worth to invest in category management?
For sure, the most significant long-term gains can be achieved with cross enterprise initiatives. Changing the view from the buyer-seller perspective to a more holistic level considering the whole relationship in both directions can enable true benefits. The bigger the organization is, the higher the probability that your supplier is your customer as well. If these relations can be identified, the door for significant value contribution is open. Joint cash-pooling of accounts receivables and liabilities, purchasing pools or R&D projects along the value chain are just a few examples.
In a world with continuously increasing competition and decreasing product lifecycles, the role of procurement as the door to external markets is getting more and more important. To support this in a structured way a well-designed category management is the most suitable approach to identify and lever potentials. The time to just squeeze suppliers and markets comes to an end.
At the end your organization needs to be willing to move from a price-centric to a value-centric mindset. This won’t be an immediate change. It is more like a journey and a transformation process which procurement should trigger, but at the end the involvement of the entire organization is required. CAMELOT is happy to support you from the first thought to the final implementation with real results.
We would like to thank Wolf Göhler for his contribution to this article.