In the last few years there’s been more focus on ‘indirect spend.’ This spend is typically harder to manage since there can be a proliferation of items in each category that are not tracked the same way that inventory is, i.e., using part numbers with exact specifications, etc. So how can you use Category Management, for indirect spend, to your company’s advantage?
The Category Management Process
The category management process involves looking at a category, from different perspectives, and working to maximize the ‘individual’ and the ‘overall’ benefit from items in that category. It is important to note that the ‘benefit’ can be more than just cost, e.g., you may find that your choice of suppliers may not be maximized because you are not getting the service you require (as in the fact that your company isn’t a good ‘fit’ for a supplier).
Category Management Defined
Category management is the process of identifying and segregating products and services into specific general categories. Once this is done, each individual Category is aggregated and this new segment of products or services is reviewed in this unique category. This provides an overview as well as a more granular look at the spend. This enhances management’s ability to evaluate and control these items. But there can be barriers such as the non-existence of individual part numbers that distinctly separate one purchase from another.
Control of Items in Categories
It is important to be able to identify, monitor, and evaluate these products and services to manage this spend. Some companies develop unique non-inventory part numbers specifically for this purpose (this also helps in the identification and inventorying of these ‘indirect spend’ items or services).
The category’s intrinsic importance to the company should be defined. This should be determined first and foremost by how vital the category is to the organization’s operation. Some organizations include the total spend associated with the category, but it could be less relevant.
A category appraisal at the company is a ‘snap shot’ of how the category is now supporting and functioning at the company today. You should have information about how necessary it is to the organization, historical usage, historical costs, supplier(s), projected demand, problems, challenges, and opportunities.
The scorecard is a numerical measure applied to that category. Typically, the scorecard has the elements contained in the appraisal. Some categories, as a commodity, are associated with an industry pricing index. The company may want to attempt to evaluate how their current purchase price costs compare with industry pricing on these items and weight that as well.
The company has a mission, and its objectives support the mission. A ‘Category Strategy’ should be developed that supports the company in pursuit of objectives that the category influences.
Tactics, for a category, refers to specific actions the company will take in an attempt to achieve its strategy for that category.
At this stage, the company executes its tactics to implement the strategy.
Review, Evaluation and Control
Each category and its operational results are periodically reviewed to determine if the company is reaching its objectives for the category. If the company is on track, further action is not needed. If not, the company will need to take corrective action.
The Advantage, Category Management
The category management process is the careful and deliberate segmentation of services and products. The company, once segmenting products into categories, can review the items individually and overall in a category. This allows the company to work on maximizing benefit(s) from these categories so that the company can work on achieving its objectives. The segmentation and analysis allows the company better control and management of these products and services when working to support the company’s efforts in reaching its objectives.
Manufacturing and Supply Chain Services
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