Category management: Why bother?

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Shortly, Grosvenor Management Consulting will be releasing a second CPO study survey on procurement effectiveness. The 2015 CPO study will focus on the tactics available to procurement practitioners, and the benefits derived from deploying these tactics. It will complement the 2014 CPO study on the procurement function and procurement team efficiency. Here, Grosvenor’s Peter Macfarlane sets the scene for the study and sheds light on the importance of category management.

 

Is category management all it’s cracked up to be or will it just turn out to be another management fad?
Does category management deliver benefits beyond just doing good procurement practice? Does it involve new techniques or practices? Or worse, is it just a fad word to make procurement practitioners or management consultants sound cutting edge?

I have seen much said and written about category management, its importance and its benefits. Most of what I have read could be described as just good procurement practice that has always existed in some form, including strategic sourcing, good contract management and supplier relationship management (SRM).

So why do we need a new term if it just delivers what good practitioners have always delivered?

Yet there are ample examples of some organisations and even category managers delivering material benefits beyond what could be delivered with a strategic sourcing or procurement process and good contract management and SRM.

What is it that they are doing differently?

The answer is that they have turned their attention internally and dedicate as much if not more effort on controlling internal drivers as they do on suppliers and the supply market. Our experience, is that this approach delivers considerably

Lack of evidence and research on category management practices, benefits and savings

However, there is scant evidence and research on category management practices that deliver results. There is even less research or evidence on the additional benefits and savings it delivers.

We plan to change this.

Shortly Grosvenor will be releasing a second CPO study survey on procurement effectiveness. This study will complement the 2014 CPO study on the procurement function and procurement team efficiency.

The 2015 CPO study will focus on the tactics available to procurement practitioners, including the category management tactics, and the savings and other benefits derived from deploying those tactics. The objective is to provide tangible evidence of what tactics deliver results, and the additional benefits (if any) of tactics that go beyond traditional procurement and contract management and SRM.

We hope that you will look out for the survey and participate to ensure we get the data to provide credible evidence of what tactics deliver results. The results will be published in combination with PASA around August this year.

What are the additional tactics deployed by leading category managers?

While category management can deliver significant improvements to the supply and consumption of goods and services within an organisation, and can further reduce supply risks, it is often targeted at better managing cost, or extracting further savings.

Essentially there are four cost control levers that are available to procurement / category managers to better manage and/or reduce cost. For completeness, I have included the use of aggregating spend and market testing (eg. tendering) to get better prices.

The four cost control levers are:

  1. Pay less

Aggregate volume and market test, using competition and market leverage to obtain more competitive pricing and terms. This tactic is well known and is best exemplified by organisational wide, or even group buying, of procurement of goods and services such as energy or labour hire. It also involves ensuring buyers within your organisation use the deals put in place (minimise leakage) and suppliers charge based on the negotiated rates.

  1. Buy less

Manage consumption to reduce demand. This tactic involves looking at ways to reduce what is consumed. It frequently involves use of policies, changes in processes and use of alternatives to consume less. Simple examples are double-sided printing to reduce paper consumption and video conferencing to reduce travel.

  1. Buy cheaper

Manage buying behaviour to avoid buying niche or premium goods and services, including avoiding add-ons and variations. Simple examples include avoiding full economy airfares or buying IT systems off-the-shelf without extensive modifications.

  1. Buy smarter

Or implement other efficiencies. Reduce costs in the process of consuming the good or service. This tactic requires a total cost view of the process and involves process engineering skills typically beyond the traditional procurement practitioner. It involves looking at reducing overall cost through such things as reducing waste, duplication, rework and internal processing costs.

Simple examples include streamlining purchasing to payment processes for an expenditure category. In many cases it involves paying higher prices to reduce overall cost. A simple example might be buying business cards in smaller batches (at higher cost) to avoid the need to throw out a large number of cards when the inevitable change in name or title occurs.

How do you identify these opportunities?
The elements of identifying a category management strategy that captures all of the above cost control levers include:

  • spend analysis – this includes analysis of consumption to identify opportunities to buy less and buy cheaper
  • market and supply chain analysis – including to identify how suppliers and their systems might help implement some of the cost control levers
  • value chain analysis – including to identify opportunities to buy less, buy cheaper and other efficiencies in the process of consuming the good or service
  • risk and stakeholder analysis to identify what resistance to change might be encountered; after all, we are talking about implementing changes internally to better control and reduce spend
  • defining the category scope, category strategy, the go to market model and approach, and the implementation plan.

We plan to publish more on these cost control levers and the steps to implement them across the coming 12 months. Register here to receive more information on best practice in procurement and category management.

Grosvenor delivers management consulting services across the public and private sectors. Read more here: http://www.grosvenor.com.au/

About Author

Procurement and Supply Australasia (PASA) is the leading provider of information and education to procurement and supply professionals throughout Australia and New Zealand. PASA supports the largest community of engaged procurement stakeholders in the region, through its renowned series of events, publications, awards, plus various community and network building activities. PASA is a trading name of BTTB Marketing, for many years recognised as the leading producer of conferences and events for the procurement profession in Australia and New Zealand. Whether producing under the BTTB, CIPSA Conferences or now PASA brands over the last ten years, our events have consistently led the market in terms of both educational and networking opportunities.

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