Category Management – Making it into the Spending Bucket List
“Category Management” is one of those buzzwords chief procurement officers and procurement people love to use in relation to business spending.
It is one of those important sounding labels we use in procurement.
So what is category management and why is it important in business?
The history of category management
Despite it being thrown around like a new buzz at times, the term originated in the retail sector during the 1980’s.
The first person to coin the term was Brian F. Harris.
Brian developed his eight step model of category management:
- Determine specific spending categories and determine what is in/out;
- Specify the role of the category within an organisation.
- Evaluate current performance and spending.
- Set objectives and targets for each specific category.
- Devise an overall strategy.
- Plan specific tactics.
- Implement and execute.
- Review and improve.
In the 1980’s we seemed to have more time and could follow the eight steps. These days, life is a bit more fast-paced and we combine a few of the steps but in essence, we still follow the same steps as was originally formalised by Brian F. Harris in the 1980’s.
Category Management Explained
In essence, category management is when business:
- looks at where and how it spends its money
- organise its spending in buckets
in order to manage its procurement, buying and contract management more effectively.
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At a strategic level, the buckets are divided into the following categories such as goods, services and indirect spending.
Each of the strategic categories, then get broken down into different categories and organised into different subcategories.
The idea therefore is to place as much spending into a bucket as possible to:
- improve management and oversight of a particular category;
- increase buying power;
- create competitive leverage;
- build key business “partnerships”; and
- minimise the number of contracts and vendors to manage.
Category management is a strategic decision and forms an important part of business planning.
It helps to improve productivity for your buying and procurement teams in order to be able to focus their attention and skills to the areas of spend where it will increase business leverage.
Furthermore, by understanding the buckets of spending and the complexity around the different categories, you can allocate the right people to the right buckets.
Potential pitfalls of category management
The concept is a great one.
However, if not managed correctly, category management potentially creates more risk and pitfalls by failing to:
- take into consideration the complexity involved in certain areas of spending;
- accept that not everything covered by the same bucket label, will fit into the same bucket;
- allow time for data cleansing before “global” buckets are put in place;
- recognise and maintain current key business relationships with specialist providers or small business;
- implement category management in a structured and planned manner.
I have seen too many short term gains deliver long term pains. Category managers only focus on short term cost savings, without doing proper change management and not taking into consideration long term sustainability. value for money and total cost of ownership considerations.
Making it into the spending bucket list
Category management makes sense for all businesses, notwithstanding size or how much money they spend.
From a procurement perspective, it always makes sense to at least categorise spending in the main categories of goods, services and indirects.
However from the selling or tendering side, I don’t think business always understands the impact of category management and the risk it can pose to a business.
Remember the buckets as I explained it above…. and also the idea to place as much spending in a bucket as possible….
Thus, if a business does not understand:
- in which bucket it fits;
- what else is in the same bucket;
- where competitors fit into the bucket
it certainly runs a risk of not making it into the spending bucket list and losing current and future business opportunities.
Incorporating category management spending opportunities into your business planning
As a vendor, it is important to understand your own category management and where it fits into the overall spending buckets of your customers. You will then have the opportunity to grow its business in a planned and strategic manner.
How can you manage this?
Make sure you can categorise your spend
Firstly, by ensuring that your business spend is categorised and managed in a structured manner, you will be on top of your business spending.
You will identify opportunities for:
- key business relationships;
- business growth;
- key contract management requirements; and also
- downstream acquisitions.
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Understand where you fit into your customer’s spending bucket
Secondly, by understanding where you fit into your customer’s spending bucket, you will be able to identify:
- the risks in relation to the specific bucket;
- what other spending the bucket holds and what makes up the specific category;
- areas for building key customer relationships;
- opportunities for expanding your customer offering;
- potential collaboration and partnerships;
- competitor analysis and management;
- key contract management reporting requirements; and
- in addition, upstream acquisitions.
Keep it Simple
Interestingly enough Brian F. Harris developed his software program called Apollo Space Management System as part of his category management program and process.
But category management really is not rocket science.
If you remember the buckets, you will make a great start.
Our recommendation is to keep it simple and start with the areas of:
- firstly, majority spending and
- secondly, the low hanging fruit of inventory management.
If you get the simple things right, with the right people on board, then you will see significant improvement, be able to manage the performance of contractors better and opportunity.
However, when you get stuck with your category management or business planning or do not know where to start, please feel free to contact us to support your category management requirements.