SECTION 2 -CATEGORY MANAGEMENT
Category Management is the application of a structured approach to the management of products and services in a way that maximises the value that is derived from procuring these categories. The scope of this section of the report was not to study the different steps of the category management processes in organisations, but rather to analyse the main challenges and tactics that organisations face in managing their categories.
Based on the State of Flux Procurement Building Blocks’ Framework, category management relates to spend management, contracts management and risk management.
The first thing an executive might ask when discussing procurement categories is “how much do we spend in a particular category?” Even if that’s not their first question, you can expect a reaction if you say, for example, “... in that category, we spend over € 20 million a year”. The amount spent in a given category has typically been a key indicator of how important that category is for an organisation. The higher the spend on a category, the more it impacts the cash flow and bottom line, should even small changes occur in the marketplace. Spend Management, in addition to highlighting the top spend categories, helps procurement to understand the cost make-up of the organisation’s overall spend, to identify its top suppliers, to analyse internal demand, to identify opportunities for cost avoidance or cost reduction, and so on. Spend analysis is extremely useful because it opens up opportunities for better management of spend and the delivery of cost savings. More often than not, the importance of a category increases as the spend in that category increases. From a category management perspective, this can be misleading as plenty of other factors determine the importance of a category. If you are not convinced, ask yourself the following question. Which is more important, a category in which you spend € 10 million and which can be sourced easily or from multiple suppliers, or a category in which you spend just € 100,000 but on scarce resources without which your plant cannot operate? Obviously from a risk management perspective, the second category is more important since a low-spend but high-risk category can tremendously impact an organisation, should a change occur in the market – for example, a sole supplier going out of business. What means do companies have to secure the value of their purchases, mitigate the inherent risks of a category and gain control over their spend? Among others, contracting with suppliers is a mechanism for putting in place provisions to ensure that an organisation is receiving the agreed benefits from buying products and services and that liability for potential threats is appropriately managed and enforced. Therefore, from a category management perspective, the question is not so much about which categories are more important than others, but how categories differ from each other, what are the internal capabilities in managing these categories and what strategies should be employed to maximise the value from procuring products and services within these categories.
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