Category Management 101: Why CPOs Can Use Categories to Add Value to Organizations
Building a best-in-class procurement organization is no small feat. Your procurement organization is delivering tangible cost reductions, producing a considerable volume of contracts, and stipulating contractual obligations for supplier-led innovation.
Depending on your procurement’s maturity level, your teams may be grappling with new questions like:
- Are cost savings the only benefit we can deliver?
- How can we collaborate with other stakeholders to align on business needs and objectives?
- Are there better and faster ways to gather information on goods, services, suppliers, and the overall market trends?
- Can we get better at making commitments to finance and knowing when those commitments will hit the books?
- How can we execute better, track performance against our goals, and ensure that the expected value is actually realized?
This is when procurement leaders should take the next step on the journey to best-in-class procurement — specifically, establishing a category management capability that enables and accelerates your overall business objectives.
Keep reading to discover:
- What is category management?
- What are categories in category management, and why do they matter?
- How is category management different from strategic sourcing?
- How do companies benefit from category management?
- What are some best practices in category management?
At Coupa, we define category management as a capability that maximizes the value of Business Spend Management (BSM) by aligning disparate tactical activities into a comprehensive strategic management approach. Instead of optimizing tactics and operations for a single department or to meet immediate demand, procurement teams use category management to maximize long-term strategic value for the entire business.
Category management teams typically:
- Research and evaluate the market, current and historical spending trends, the impact that spending on goods and services have had on the business, and potential risks
- Collaborate with key stakeholders (the business owners who need the goods and services) to drive value for the business
- Identify opportunities to reduce costs, improve efficiencies, reduce risk and drive ESG, and evaluate financial impact
- Work with FP&A teams to perform demand planning, establish budgets, and implement spend approval policies.
- Manage category plans and oversee key initiatives such business requirements refresh, specifications rationalization, strategic sourcing engagements, supplier onboarding, and catalog implementations
- Ensure value is realized by continuously monitoring and measuring results, managing supplier relationships, and implementing effective change management practices
- Maintain and optimize category classifications and taxonomies (at least once a year)
- Collaborate with IT teams to ensure the proper systems and tools are set up to support the business’ spend management needs.
By expanding the procurement function to include these activities, CPOs often discover that their teams require training or, most often, a new role altogether — a category manager.
Successful category managers bring more than just advanced operational skills to a team. They offer deep industry knowledge, can build strong relationships with stakeholders, are effective storytellers especially with articulating opportunities to pursue, and have a knack for making data-driven decisions. Read more about the role of category managers here.
Category management sets up procurement to innovate and deliver lasting value. It represents the next stage of a company’s path to procurement maturity. As the procurement function stops prioritizing the lowest price, it starts improving the entire S2P process and aligning itself to the business needs as they change, such as pivoting from supporting growth to driving profitability.
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In very simple terms, categories are groups of goods and services that companies purchase. These groups are created to help companies optimize how they manage spend and maximize business value. Categories help procurement teams understand where costs are coming from, identify areas that need improvement, and manage spend effectively.
A category taxonomy is essential for defining categories. Some companies use industry standard taxonomies, such as UNSPSC, but most companies define their own custom taxonomies. Common approaches include defining categories by:
- General ledger accounts
- Suppliers that offer similar goods and services (like Amazon AWS, Google CGP, and Microsoft Azure might be “Managed Hosting Category”)
- Business unit, purchasing organization, or cost center (such as marketing, finance, or IT)
Although the category taxonomy you develop will ultimately depend on your business structure, industry, spend culture, and operating model, you should apply a single category taxonomy consistently and across the business. To maximize business value, your category taxonomy should be based on:
- How your business consumes the goods and services and the language your stakeholders use
- The common industry offerings suppliers provide in the category
- How you plan to manage the category
At Coupa’s recent Executive Summit in New York City, Anthony Posillico, Head of Procurement at Carvana, shared that breaking down spend into more granular categories, such as “tires” helped operating managers compare costs across locations and drive those costs down (compared to a general ledger category which might be too broad, such as “parts”).
A final note on why categories matter: Organizing your spend into categories helps you avoid missing the forest for the trees and carry out strategic, high-value initiatives. By creating categories, you can better understand which categories have the greatest impact on your business. This will allow you to focus, prioritize, and execute your spend management activities on those categories which in turn will drive greater efficiency and effectiveness.
Category management is sometimes described as a way to add value to strategic sourcing, but it has a broader mandate. Companies which move out of the tactical and operational stage of procurement maturity almost always aim to achieve what we call “sourcing mastery” — excelling in basic sourcing practices, spend analytics, strategic sourcing, and contract management. In category strategy, the next phase of maturity, the procurement function typically has the core tools and processes in place and can prioritize more strategic category optimization.
A key milestone in progressing from strategic sourcing to category management comes when your organization enables its procurement, contracting, sourcing, and category teams to be in lockstep with the business stakeholders their work supports. By engaging with stakeholders early and often, category managers can ensure that needs of the business are being met while still exploring new and creative options to buy what the business needs in smarter ways.
Other considerations when moving to the next step of maturity, from strategic sourcing to comprehensive category management, include:
- Scope. Category management is more comprehensive and considers an enterprise-wide view across multiple categories while strategic sourcing is typically focused on a single or very narrow set of goods and/or services.
- Timelines. Strategic sourcing tends to be short-term since it focuses on meeting immediate demands, whereas category management involves a long-term approach to keeping an eye on market trends and building relationships with suppliers.
- Executive support. Senior management plays a more active role in category management because it’s more closely aligned with larger business objectives.
- Change management. Consolidating spend in a category means driving spend to existing suppliers in that category. This can mean a change for end users who are accustomed to selecting their preferred supplier first and then getting procurement involved.
Today’s CPOs are joining forces with CFOs to understand how to rein in costs right now and deliver better financial results. According to a recent McKinsey report, a 1% improvement in the cost of goods sold increases EBITDA by an average of more than 18%. As we explain in this post, broad cost-cutting is not the ideal way to make those cost improvements. Category management helps procurement take a more targeted approach.
CPOs can also practice category management to make a bigger impact at the executive table and solidify procurement’s reputation with finance and other functions through:
- Building agility and resilience by proactively managing your supply-base and allowing it to adapt to changing dynamics in the business
- Significantly improving profitability and cash impact with every dollar saved going directly to the bottom line (unlike other initiatives in the company) and less controversy compared to reducing headcount to increase profit
- Mitigating risks by proactively managing third-party sources and reducing the negative impacts they may have on business operations before they happen, such as planning for production downtime, inventory shortages, or supply chain bottlenecks
- Boosting operational performance by improving the quality and performance of goods and services procured, outsourcing inefficient business processes to third-party service providers or eliminating unnecessary business processes altogether
- Supporting continuous organizational change management by acting as a better partner
- Meeting ESG commitments and ensuring that social responsibility and economic goals are achieved simultaneously, not the expense of one another
If excellence in strategic sourcing is becoming second nature to your procurement function, category management is the next logical step. As we outline in our updated procurement maturity model, category management is the stage when companies are looking to unlock the full potential of their Business Spend Management (BSM) solution. Manual and paper-based processes and even spreadsheets simply don’t offer the visibility, control, process management, and data that category managers need to save costs, source effectively, and collaborate across the business.
“We now have billions of dollars of our annual indirect spend under management. Our category managers understand and can source and negotiate in a much more informed way than they possibly could — and it’s driving cost savings and opportunities on a scale that simply wasn’t achievable prior to the Coupa implementation.” — Frank McKay, SVP, Chief Supply Chain & Procurement Officer at Jabil Inc.
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Knowing how and when spend occurs across the business asks you to go beyond automating distinct areas and focus on harmonizing a range of spend-related processes. On its own, automation leaves gaps in the picture of how, when, and where spend occurs. A BSM approach digitizes, automates, and connects processes in procurement, invoicing, payments, cash management, and expenses, creating a single source of financial truth for the organization. You can finally see the complete picture of spend by category and be able to answer crucial questions such as, What contracts are in place in each category and when do they expire? How much spend has occurred against each contract? When category managers select categories to manage actively, they’ll know exactly where procurement is in that process and how to move forward.
A single investment in advanced BSM technology makes it easy to follow best practice and set up your category management for success:
- Harness AI and the community to spot hidden patterns and set benchmarks. BSM capabilities like Coupa’s Community.ai help procurement teams leverage AI insights from nearly $4 trillion of anonymized spend data. It creates complete visibility into spend by categorizing all spend — even spend that isn’t managed on the Coupa platform. You can also access community-level pricing insights and a directory of suppliers by category, including DEI status. And you can connect with other professionals across the community to share expertise on specific or unfamiliar categories.
- Spend smarter, sooner. Community.ai also powers prescriptive recommendations, templates, and content that help you establish best practices early on, giving you even more opportunities to generate and maximize value quickly.
- Work smarter together in procurement. BSM breaks down data silos and helps you unify disparate tactical activities into a comprehensive and strategic management approach. Complete spend visibility allows you to perform critical activities, such creating the right categories and monitoring and tracking all the savings that have been achieved through substitutions, for example, and better compliance.
- Drive high-value activities with guided workflows. Just one example: using BSM to spend smarter and mitigate risk through contracts. BSM aligns spend and contracts within categories. You’ll know which contracts are being used (by seeing which spend is going through which contracts). And you’ll be able to proactively renew or source replacements since you can see when key contracts will expire. BSM also makes it easy to roll risk protections outlined in contracts into your overall risk mitigation measurements, which should include supplier vetting and any other mitigation plans you need.
To learn more about adopting category management for your procurement organization, please refer to our post on getting started.
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