The category management approach is more familiar to those who are engaged in retail and manage categories of goods within the distribution network. This method of procurement management allows businesses to save significant resources on purchasing by buying the essential items more efficiently.
At the most common level, category management refers to the aggregation of the company’s procurement needs into categories based on similar characteristics. By following this concept, procurement managers may combine the disparate procurement needs of the company into a single contract.
Basically, the term “category” in this context means the group of resembling items that the company may procure within a single event. Category management partially refers to utilizing specific purchasing techniques for maximizing cost savings.
The key idea of category management is obtaining a single major contract that covers all similar requirements of the company instead of signing multiple minor contracts that cover each requirement separately. The larger the procured volume within a single purchase, the lower the unit price.
Let’s review an example. Assume that you possess a corporation that includes 40 plants, that are spread around the world, and each plant possesses its own manager that is responsible for purchasing. So when it comes to source… let’s say… paper clips…. each manager begins to procure paper clips separately which leads to time waste, documents disarrangement, and lack of control over supplier price offer because every proposal is reviewed by different persons that are not connected.
Such a situation provides suppliers with the power to charge higher prices in exchange for a quick deal since they are aware that managers do not wish to spend significant resources on procuring peripheral items like paper clips.
Now, imagine that the whole paper clips procurement process is held by a single purchasing manager. The purchasing manager combines all paper clips requisitions from every plant into one major contract. Such an approach will enable controlling the costs because all proposals are reviewed by one person that may bargain the best terms from multiple proposals. Also, it will allow getting rid of time waste as each manager does not have to spend his time to source paper clips.
In practice, attempts to combine disparate purchase requisitions into one may fail if you do not unify the nomenclature of goods and services that a business needs. Acquirell – a SaaS procurement automation solution includes not only tools for unifying and consolidating the procured item, but also capabilities for preventing errors while creating purchase requisitions and POs.
Well, we have reviewed a simple example that demonstrates how the category management approach works. If we adopt this approach to more important business processes, such as sourcing essential industrial products, the savings for the organization will be enormous.
In summary, category management is the process of clustering the procurement requisitions for similar items into one major contract which can be easily administrated.
The procurement gurus suggest applying the following seven steps in category management:
1. Defining the opportunities. A set of a company’s internal tasks refers to the determination of business needs and their priorities.
2. Elaboration of opportunities. Analysis of the supplier market capabilities that allows understanding how the company’s procurement needs can be satisfied.
3. Strategy development. Defining the best procurement approach through a comparison of the company’s internal requirements vs external opportunities.
4. Supplier selection. Determination of supplier market players that possess relevant capabilities to satisfy the company’s needs.
5. Auctions and RFP events. Providing suppliers with the opportunity to provide the best proposal and to demonstrate an interest in the performance of contracts.
6. Clarification and approval of proposals. Precision all proposal details to increase its value.
7. Supplier management. Ensuring compliance with the terms of the contract and monitoring supplier performance.
The main obstacle to applying this approach is the lack of recognition for category managers. In other words, the buyers are usually faced with mistrust while trying to communicate the benefits of the category management approach to the heads of the company or department. Therefore, many organizations are unable to successfully implement the category management approach.
However, the companies that are willing to change their attitude towards category management and ready to follow these simple steps may extract major advantages.