Category Management

In the last few years there’s been intermittent discussions about ‘category management.’ So, what exactly is Category Management, what is the ‘category management process,’ and how can it be used to your company’s advantage?

Case Study: Category Management Process

Category Management Defined

Category management is the idea of organizing and deliberately segmenting the company’s products and services into the different categories. This enables the organization to more easily understand, source, and manage the products and suppliers.

The Category Management Process

The Category Management process concept is rooted in managing the different categories for a company. There can be differences between companies as to what actions are taken in this process. However, when it comes to a process, most companies include in their process the following actions:

Strategy Formulation

  1. What objectives are needed for this category to support the company’s mission?
  2. What is the plan to reach these objectives?

 

Strategy Implementation

  1. What programs or tactics are needed for this category to fulfill the company’s mission?
  2. Are there any specific processes or procedures that need to be developed?

 

Evaluation and Control

  1. It is necessary to evaluate progress towards the objectives on a regular basis. If making progress as expected, then action is not required. However, if the goals are not being achieved then a review is required and a new plan developed. Let’s discuss each of these briefly.

Category Value

It is necessary to determine the importance of a category at the company. There are multiple ways to do this. Certainly, the more purchases made for the category, the more intrinsic value the product or service has to the company. However, even if very little money is spent ‘in total’ on the service or product each year but the company must have this product to serve its customers, the Category will have a high value to the company.

Category Strategies

It is necessary to develop a strategy, for a particular category, that serve’s the company’s best interests. It is also possible that the amount of time spent developing a ‘closed loop’ strategy for the category may depend on the overall value that the category provides.

For example, the need for selecting an optimum small package shipping company may be minimal for a company that only spends $10,000 a year on shipping in the United States. However, a company shipping thousands of packages globally each year, with a spend of more than $2,000,000 may want to seriously consider short and long term strategies that addresses shipping time, global locations, technology and ‘total cost.’

Tactics

Tactics for a category refers to specific actions the company will take to execute the objectives that are necessary for that category.

For the shipping example above, let’s say that the strategy was to maintain service but lower overall shipping costs by 7%. The company has found a new shipping partner that will allow it to achieve the 7% reduction but maintain the same level and quality of service.

Procurement’s job is to ensure that the contract is in place, followed, and that the level and quality of service is maintained. Finally, a tracking method must be developed and put in place to review the progress towards the 7% savings.

Data Mining

The basis for many business decisions relies on the data gathered allowing for better decisions. This is especially true when it comes to Category Management.

Review

The next step, after completing the category management process, involves reviewing the performance of the activities put in place to achieve the objectives. If the company is on track, further action is not needed. However, if it is found that some dynamic or variable has changed, adjustments may be needed.

Successful Category Management as an Advantage

The category management process is the careful and deliberate segmentation of services and raw materials into different groups. This segmentation, along with necessary data, allow a company to better manage suppliers and the products and services that they are providing.

The separation of services and raw materials into distinct subject groups is typically the first step in defining the purchases and the internal customer needs for these products and services.

The main benefit derived from this process is the accumulation and organization of data that can help you make better decisions for the company. For example, once you start gathering data in each category, you will be able to benchmark your suppliers against the leading companies in that industry. Common attributes include cost, delivery, and quality. Another benefit, although less common, is ‘how much’ and ‘what kind’ of market and industry intelligence your suppliers provide. This too helps your company make better business decisions.

Related Topics

MRO Items: Organization, Control, & Spend.
It is important to have effective business processes in place. Otherwise it is very difficult to reach high performance levels. For more on this topic, please follow this link.

Reducing MRO Costs.
A company with a revenue stream in the millions, can save hundreds of thousands of dollars each year in this area by applying fundamental purchasing procedures. For more on this topic, please follow this link. Today, procurement is expected to bring value to the entire business enterprise. Some organizations have difficulty migrating their legacy processes to more advanced procurement models. For more on this topic, please follow this link.

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