The Ultimate Guide to Procurement Category Management
Taking an organized, strategic approach to Procurement is the basis for producing results that drive the business in a profitable, positive direction. But Procurement is big, and it touches nearly every part of the business. How can your team juggle it all or focus your efforts in the right places? In this guide to Procurement Category Management, we’ll give you four tips to help you get started.
What is a category in Procurement?
In Procurement, a category is a way to organize spending by grouping like purchases together. Categories can also be broken down into subcategories and so on down the tier list to give teams the granular perspectives they need to make strategic sourcing decisions.
The benefits of category management in procurement
Procurement without category management is basically taking a one-size-fits-all approach to purchasing, sourcing, and business unit relationships. Categories organize spend so that teams can tailor their decisions based on market trends, business needs, and purchasing volume. This nuanced approach comes with several benefits.
Spend data consolidation
Category management requires teams to consolidate their spend into a single source of truth and organize it into a sourcing taxonomy. Therefore, setting a category management plan is a great way to build a business case for a spend intelligence investment. Additionally, category management empowers teams to manage spend by finding unnecessary overlaps at the category level and then consolidating it with preferred vendor statuses and contracts. By extension, this consolidates the amount of data teams have to deal with.
Cost savings
By managing at the category level, teams can source based on market developments and business unit goals, driving greater savings as a result. It also lets teams find more opportunities and capture more value as a result.
More value from vendors
Evaluating spend from a sourcing category perspective reveals several details about vendor relationships, including pricing, spend trends, supplier fragmentation, and overall category needs. By actively managing categories, you can leverage purchasing volume to negotiate contracts, address vendor issues, and consolidate unnecessary overlaps.
Increased customer satisfaction
Category management lets Procurement tailor decisions to the needs of their customers and stakeholders instead of making category-agnostic cost cutting decisions. Overall, this approach is more strategic and allows Procurement to ensure its decisions are in the best interest of internal and external customers alike.
Accurate accounting
Having a clear picture of spending at the category and sub-category levels allows for more granular management, which translates to better cost controls and greater savings. Additionally, a consistent category management plan enables oversight at the line-item level so that all purchases and sourcing decisions are easy to explain and audit.
Better spend visibility
The greater Procurement’s ability to zoom in and out of organizational spending, the more it can see. Organizing spend correctly provides the potential for spend visibility, but when teams are actively managing spend at the category and sub-category levels, issues and improvement opportunities are less likely to slip through the cracks.
What is category management in Procurement?
Category management is Procurement shrunk down to a specific category or subcategory of spend. It functions like the large-scale Procurement process, but instead of dealing with everything the business buys, category management focuses on optimizing specific areas of purchasing like MRO or small parcel shipping.
Here’s how to develop a category management strategy and put it to work.
Step 1: Understand your spend categories
Procurement category management focuses procurement teams on driving value in specific areas of the business instead of diluting it across everything Procurement touches. However, you need to know what your categories are before you can impact them.
So the first step of the category management process is to make a comprehensive list of your categories and sub-categories. If you forget to include even one on your list, you risk leaving entire areas of organizational spend unmanaged and unsupervised.
The best way to thoroughly inventory your categories is to gather all of your spend data together and categorize it in a procurement spend taxonomy. A taxonomy is a hierarchical breakdown of what the business is buying. It organizes spend into categories, sub-categories, and sub-category tiers.
More importantly, though, a procurement-focused taxonomy organizes spend based on what was purchased instead of who purchased it. We explored why this distinction matters so much in this guide to spend analytics.
Of course, sorting your spend data into a taxonomy is easier said than done, but you might be surprised by how easy it can actually be. Read our guide to learn how AI in procurement is making the data part of category management easier than ever.
Step 2: Identify the most impactful categories
Large, mature procurement organizations usually have teams dedicated to each category, but if your team is smaller, it may be wise to focus your efforts on a handful of categories to drive deep impact instead of broad impact. This step will help you identify which areas of the business to focus on.
Start by looking at your procurement strategy, goals, and expectations and ask:
- Which categories are crucial to business operations?
- Where are we spending the most money?
- Are there any obvious, large-scale problems?
- What does Finance/the board expect us to accomplish this year?
Category management is a great way to move from administrative work to strategic impact. When evaluating where to focus your efforts, think from a strategic angle and a tactical one.
Every category has more procurement opportunities than you can count. But if you focus your efforts and go deeper instead of wider, you’re more likely to drive a level of impact you’ll be proud to report at the end of the quarter or year.
Step 3: Analyze your spend for opportunities
Once you know which categories to prioritize, you’re ready to look for opportunities inside them. This is known as spend analytics or a spend analysis. It’s the process of exploring your spend data to find trends, issues, and opportunities for improvement.
These insights will reveal projects that you can execute to deliver tactical and strategic results. Common project areas that you’ll find with a spend analysis include:
- Purchase price variance (PPV)
- Cost increases and chances to deliver cost savings
- Cost avoidances
- Supplier diversity spend
- Scope-3 emission reductions
- Payment term consolidation
- Non-compliance (maverick spend or maverick buying)
- Tail spend
- Risk
Using procurement category management for supplier relationships
Category management is also a great way to master supplier relationship management. While relationships with suppliers may span multiple categories, many won’t. When you regularly analyze spend from a category perspective, finding opportunities to enhance supplier relationships, such as contracts; improved payment terms; and better prices, will be easier.
Bonus: Sync with your stakeholders
Let’s be honest–Procurement can have a contentious relationship with the rest of the business. Because category management often requires you and your team to make changes to the way business units operate, it won’t always be popular among non-procurement folks.
However, the long-term effect of category management should always benefit the business and the departments that make it up. If you can lead with that point, you’ll gain more allies than if you try to rush into impact head first. Here are a few ideas to consider.
Business units know they need help: The people responsible for spending probably don’t think their operations are perfect. Consider coming to them for opportunities and ideas before you approach them with proposed changes.
Lead with numbers: Ideally, everyone wants the business to succeed. If you can use your clean, organized data from the first step to illustrate the situation and its impact, getting stakeholders on your side won’t take much convincing.
Don’t accuse: “Your team is creating maverick spend. Why aren’t you complying?” is a pretty bad way to start a conversation, and it won’t create long-term compliance or comradeship. If you lead with questions and cooperation, though, you’ll find that Procurement has more allies than you thought possible. In other words, think of category management more like category cooperation.
Step 4: Assemble your category management plan
If you’ve followed this guide, you probably have more projects than you can accomplish in a single year. If you want to accomplish any of them, you need to prioritize.
In general, the best approach is to start with what will have the greatest impact, then do everything else. However, the following areas of spend are also good places to start:
- Contracts will control your spend, allow for better forecasting, and lower prices.They can also protect you from unexpected disruptions.
- Non-compliance is one of the leading sources of savings leakage. It’s an ongoing battle that you won’t win entirely, but you can make great strides with the right communication plan.
- Sustainability may not be directly financial, but it matters to the environment, investors, and consumers. Capitalizing on sustainability opportunities is a great way to drive value, establish Procurement’s strategic place at the table, and positively impact the world.
- Supply chain risk can bring a business to its knees when disruptions become reality. Category management gives you a chance to play a role in strategic sourcing, even if you’re in an indirect procurement role.
- Cost savings will always be important, even as Procurement’s role expands. If you can find ways to save the business money, you’re going to succeed.
Strategies for effective category management
Category management strategies will look different for every organization based on their goals, procurement operating model, and function maturity. However, there are some best practices that every team should consider when building category strategies.
Have the right taxonomy for you – Categories allow teams to manage related purchases as a single spend structure, so they’re only as useful as they are accurate. Spend taxonomies that categorize by GL codes, supplier name, business unit, or supplier type don’t help sourcing decisions at all.
For example, imagine that IBM is one of your company’s highest grossing suppliers. The problem is that you may buy both technology and consulting services from them. These aren’t the same type of purchase, but many taxonomies would group them together.
This same problem arises until you build a tailored taxonomy based on good and service type. A sourcing taxonomy fit to your existing spend data reveals opportunities for contracts, risk management, and more instead of just giving you how much the organization spent.
Develop individual category strategies – Every category contributes to organizational goals in some way. Start by identifying this contribution and areas where the category hasn’t delivered in the past. Then work backwards from there. This approach to category strategy will deliver greater results than a blanket cost cutting ever will. In the end, you’ll likely still create standard Procurement benefits—cutting costs and improving efficiency—but how you get there will be tailored and more effective.
Collaborate with stakeholders and business units – The worst category management mistake you can make is becoming the spend police. There’s a reason for every purchase that creates the spending you’re trying to manage. So before acting on it, talk to your stakeholders. You’ll earn buy-in, smooth the change-management process, and open the door to other opportunities that only your stakeholders can facilitate.
Make risk management a priority – Risk management in all its forms must be at the center of your category strategy. Vet every vendor you work with, whether you’re consolidating supplier fragmentation, going out to bid for new preferred relationships, or maintaining the status quo. If you can’t answer third-party risk questions around cyber security, human rights violations, scope-3 emissions, diversity, and financial performance in a category, get those answers as soon as possible.
Track the results at every level – Your impact in each category is what adds up to determine Procurement’s overall contribution to the organization. That means every instance of value leakage is working against the function’s long-term ambitions. To solve this problem, you need a centralized place to:
- Track and forecast your global pipeline
- Manage individual projects
- Log every savings and non-financial result
- Report the net impact of the entire team
Learn more about how you can make sure Procurement’s impact never goes overlooked again.
Conclusion
Category management and strategic procurement go hand in hand. However, the benefits of category management go beyond the large-scale, strategic impacts that today’s procurement teams are focused on. They extend down to the most minute parts of the procurement process, from PO efficiency to the quality of working relationships with key procurement stakeholders.
To capitalize on these opportunities, it will be up to you and your team to work together and create a focused category management approach. While there are many steps involved in this kind of project, spend visibility and spend analytics are the industry-approved place to start. When you can see all your spend, you can impact it.
If you’re ready to learn how to get started, read our guide from Hobson & Company on the seven quantifiable benefits of spend analytics.
