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How to improve Strategic Sourcing with category Management

Category management is a way of driving and delivering value, growth and innovation and yet most companies struggle with the transition from strategic sourcing to effective category management. Improving the category management function not only makes for a smooth handoff, it helps feed continued improvements in strategic sourcing.

 

I recently worked on a large-scale program of strategic sourcing transactions across multiple business and technology functions. The strategic sourcing team produced a considerable volume of contracts, delivering significant cost reductions along with contractual obligations for supplier-led innovation.

 

While the strategic sourcing effort followed a mature process and produced great results, there was a gap in the process for “hand-over” from the strategic sourcing teams to transition the contract relationship to the category management function. The hard-earned gains and concessions of the negotiations phase needed to be fully understood by the category manager, and then further nurtured and managed in the ongoing supplier relationships.

 

The gap in the process was understandable as the business was in a state of disruption after their acquisition, and the brand-new procurement function was immature and just starting to implement a strategy for category management. No doubt the situation will quickly improve for them.

 

However, this first-hand experience of this gap did highlight for me the impact on the procurement organization if they are unable to successfully transition from strategic sourcing to a robust category management function.

 

A broader mandate
Category management is a way of driving value that includes strategic sourcing, but is much broader than that. The Faculty defines category management as a rigorous, fact-based, end-to-end process for proactively collaborating with stakeholders to develop and implement strategies that generate significant value that stakeholders recognize from an organization’s external spend.

 

Category management is a way of driving and delivering value, growth and innovation and yet most companies struggle with the transition from strategic sourcing to effective category management. Improving the category management function not only makes for a smooth handoff, it helps feed continued improvements in strategic sourcing.

 

We define a category as a grouping of materials or services that have similar supply and usage characteristics to meet business objectives. Managing by categories is a strategic approach which organizes procurement resources to focus on specific areas of spend categories.

 

This enables category managers to focus their time on the business requirements, conduct in-depth market analyses, and supplier capability and performance analyses to fully leverage their procurement decisions on behalf of the whole organization.

 

Many CPOs understand that implementing and sustaining an effective category management process can deliver great benefits, which usually lead to:

 

  • Raising the profile and competency of the procurement function within the organization
  • Significant savings, typically 10-30 per cent
  • Reduced risk in the supply chain
  • Improved stakeholder relations
  • Improvements in service levels, quality, availability and value
  • The revelation of other sources of value and innovation from the supply base
  • Re-usable processes to leverage across other categories
  • More effective sourcing, leading to even more value from constantly optimizing the resulting contracts

 

A virtuous circle
It’s a virtuous circle that is well worth investing the effort to develop. Besides ensuring that you have an effective and seamless transition process from strategic sourcing outcomes to the business-as-usual category management function, here are some other best practices:

 

  • Develop the logical categories for your business by bringing together products or services that have the same features and are bought from similar supply markets.
  • Build an in-depth understanding of the organization’s plans and business strategies and ensure that the categories are aligned to business goals
  • Develop category benchmarks so that you can more easily identify additional improvement opportunities
  • Use big data and business analytics to undertake continuous analysis of spend, (direct and indirect), market data and performance against benchmarks
  • Undertake a program of constant price analysis on local and international markets and the monitoring of trends in the category
  • Invest in a process of gathering supplier performance data for more quality and service improvements
  • Monitor and track all the savings that have been achieved through substitutions, better compliance or contract negotiations
  • Engage with your stakeholders and have continuous discussions and reviews to ensure that all stakeholders are involved in decisions on the category

 

The bottom line for the CPO
Category management should be seen as a continuous improvement process that will inform all future successful strategic sourcing initiatives. It requires the right level of attention and a good training program. Your category managers will be the ones responsible for all things related to a given project or managed service (gathering requirements, collecting bids and negotiating contracts). Establishing them as single points of contact means better co-ordination and communication, which will vastly improve both stakeholder and supplier relationships.

 

A strong program will deliver a range of benefits, such as being able to work with suppliers to speed up the time between initial adoption and full implementation, while also providing a layer of continual strategy adjustment and opportunities for innovation.

 

Scott Stewart is a Senior Commercial Manager and Management Consultant at TheFaculty, one of the Asia-Pacific’s leading procurement advisors. This article previously appeared on the Procurious blog.

 

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