By The Hackett Group
Procurement Executive Insight
Category Management: Beyond the “Strategic” in Strategic Sourcing
By Pierre Mitchell
Building a category management capability that crosses organizational boundaries puts the “strategic” back into strategic sourcing. Category management fundamentally differs from strategic sourcing and builds on the creditability that strategic sourcing professionals have created for themselves over the years. For the most part, differences between category management and strategic sourcing center on the former’s longer time horizon and the broader scope and scale of its activities. Category management is aligned with the life cycle of the processes which consume the products and services in those categories. It involves not only a more comprehensive internal customer management and supplier management approach, but a broader, more facilitative way of constructing solutions that support both category and business objectives.
Procurement executives are looking to provide greater value to the enterprise beyond cost reductions, but, markets can only offer so many savings using traditional ‘strategic sourcing’ methodologies. So, their focus from price reduction has gone towards TCO reduction and spend reduction – but more is still needed. Firms must get more “bang for the buck” (measured by broader business outcomes) as opposed to just reducing expenditures. Safely harnessing supply-market power to create competitive advantage is the mission of a world-class procurement organization. Yet, few companies have the capabilities to make that happen. The primary vehicle for extracting value from the supply base has been the strategic sourcing methodologies pioneered in the 1980s and 1990s. Sourcing managers used it successfully to rationalize suppliers, aggregate buying power, drive down pricing and even improve supplier performance against a contract. Strategic sourcing also proved invaluable during the recent recession to recalibrate pricing to the supply markets when they took a nosedive alongside demand markets.
However, as companies try to shift their attention toward innovation, globalization and profitable growth, the implication for the Chief Purchasing Officer (CPO), sourcing managers and other staff becomes clear: expand the value objectives of categories beyond purchased cost reduction to provide broader support for strategic business objectives. Otherwise, the runway for savings will exhaust itself, taking procurement’s reason for having a “seat at the table” with it.
The strategic sourcing process is typified by a set of periodic processes and projects that seek to reduce purchased costs by aggregating demand and rationalizing the supply base in selected commodities. This n-step process typically starts with procurement-led analysis to identify target commodities and opportunities – and then culminates in a preferred-supplier contract:
This price-centric methodology is highly effective for garnering initial savings if implemented well (i.e., a rational and streamlined cross-functional process creating a solid, price-effective contract), but it is still a sourcing methodology and geared toward creating contracts. Category management, on the other hand, evaluates not only the full cycle of a contract or supplier life cycle, but also looks holistically at the life cycle of the value chains which consume the goods and services in the spend categories. The differences between strategic sourcing and category management are shown in Fig. 1.
Both strategic sourcing and category management organize processes and resources around supply markets, but category management not only sources these market categories, but also manages them on an ongoing basis. Category management involves building a clear understanding of the organization’s key value objectives for the category (themselves based on business objectives) and then developing a set of executable strategies. Procurement’ role is to come to the table with ideas as to what value is possible to capture, even if Procurement might itself not be measured on all those benefits.
Unfortunately, Most Organizations Struggle to Break Through to True Category Management. While it sounds straightforward in principle, most organizations struggle to escape the limitations of their sourcing process. One reason is that the strategic sourcing methodologies used by sourcing managers (including those called “category managers”) are, frankly, running out of gas. Sourcing is only one step in a broader value chain, and by definition, can only be as strategic as the process allows.
Category management doesn’t start with a corporate procurement group creating ‘waves’ of strategic sourcing projects to support its functional savings goals. Rather, it is tied to the cadence and lifecycle of the primary stakeholders’ processes that consume the products and services in those categories. Therefore, it is not surprising that, while the majority of procurement organizations have at least a basic strategic sourcing process, less than 5% have classified it as truly strategic, and have adopted a truly comprehensive category management process2. Most have “hit the wall” in terms of going beyond purchased cost reductions because their current strategic sourcing methodologies inherently let them go only so far. Some organizations even make the problem worse by renaming their sourcing methodologies as category management, without changing the fundamental approach.
When implemented properly, category management is a client-friendly framework. It involves building a clear understanding of the organization’s key value objectives for the category, then developing a set of executable strategies that meet those objectives (Fig. 2). If objectives are defined too narrowly (e.g., hard cost savings and low time/risk to implement), the default will lead down the path of basic sourcing and exclude too many potential opportunities.
Still, identifying and scoping this bigger prize is only half the battle. Companies must actually seize the prize, and that requires capabilities not currently possessed by most procurement organizations. The strategies shown Fig. 2 pull a variety of value levers that are needed to extract that value from the supply markets and inbound supply chains. For most commodities in a category, transformation might start with strategic sourcing to rationalize the supply base. After that, however, some strategic commodities might move toward a strategic SRM and “design for supply” path, while other, less-strategic ones might adopt an outsourcing and integrated supply approach (i.e., using value-added aggregators and/or the suppliers themselves).
The methodologies in are diverse and it is not advisable to try to force-fit all of them into a sourcing methodology because they are outside the bounds of a sourcing process and part of a life cycle management process (i.e., that of the value chain rather than the sourcing process). However, they must both be pursued vigorously and coordinated explicitly because of their benefits (e.g., world-class procurement organizations deliver over 3.5X the savings from non-sourcing-related supplier collaboration benefits than their peers).
SRM shouldn’t happen in isolation from strategic sourcing. The two should be highly integrated, and category management is the perfect vehicle for doing so when companies haven’t brought them together. So, while it shares many of the attributes of strategic sourcing (e.g., cross-functional teaming, stakeholder alignment, organizing around supply markets, using techniques such as low-cost country sourcing), category management most definitely is not about simply putting a new veneer on the strategic sourcing methodology.
Strategic sourcing is a methodology and associated techniques and tools to optimally source goods and services to meet business requirements. Includes category sourcing as well as general/ tactical sourcing activities and cross-category sourcing support activities (e.g., competitive bidding techniques and e-sourcing tools).
Category sourcing is the use of strategic sourcing processes and techniques to optimally source a category and its constituent commodities/ sub-categories. A category is comprised of lower- level commodities/ sub-categories, which can be products or services. A commodity (a.k.a. sub-category) is a well-defined product or service bought and sold in a supply mar- ket. It is typically characterized by the availability of functionally equivalent substitutes.
Category management is a frame-work and set of practices used to optimally manage supply categories to meet business objectives. The framework sits above and guides the content and sequencing of low- er-level methodologies like strategic sourcing and supplier relationship management (SRM) to satisfy category objectives and business objectives. A category is a grouping of materials or services that have similar supply and usage character- istics to meet business objectives.
About the author
Senior Director, Research & Advisory, The Hackett Group
Mr. Mitchell is responsible for leading the development of research and other intellectual property within Hackett’s Procurement Executive Advisory Program, where he also serves as an adjunct business advisor. He has over 20 years of industry and consulting experience in procurement, supply chain and information technology. Mr. Mitchell is quoted widely in the press and speaks at numerous industry events on supply management trends and technologies. Previously he was vice president of supply management research at AMR Research and a manager at Arthur D. Little, here he led numerous sup- ply chain and procurement transformations at Fortune 500 companies. Other industry positions include manufacturing project manager at The Timberland Company, materials manager at Krupp Companies and engineer at EG&G Torque Systems.
The Hackett Group (NASDAQ: HCKT), a global strategic business advisory and operations improvement consulting firm, is a leader in best practice advisory, business benchmarking, and transformation consulting services including strategy and operations, working capital management, and globalization advice. More information on The Hackett Group is available: by phone at (770) 225-7300; by e-mail at firstname.lastname@example.org or on the Web at http://www.thehackettgroup.com.
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