Updated: Sep 24
The term category management can be used in a retail and purchasing environment. Purchasing is usually the one used in supply chain management. In this context, category management is also referred to as strategic sourcing.
A large company may deal with thousands and sometimes tens of thousands of vendors. As you can imagine, the process of purchasing everything needed from this many vendors is a difficult task. Category management is a method of organizing purchasing so that strategic decisions can be made on the money spent. The category management or strategic sourcing process is usually broken into a few steps. There is no universal model but they should include the following activities.
Define the category – purchases are segmented into groups based on likeness, function, or some other parameter. For example stationery, IT, maintenance services, and raw materials.
Identify opportunities – research the spend on categories and prioritize opportunities that could result in spend savings. Focus your effort on categories that will make the biggest impact on, your bottom line.
Research and analyze the category – use both quantitative and qualitative analysis to learn as much about the category as possible.
Develop a strategy for the category – with the knowledge derived from the previous step. It may involve category reorganization, sole source negotiation or going out to market with a sourcing event (ex. RFP) to take advantage of a competitive market.
Execute the sourcing strategy – prepare sourcing documents, negotiation documents, internal process documents, etc. Ensure that internal stakeholders are involved in providing input and insights in this step.
Change management - the goal of the process is to make improvements; therefore, changes will be required. For example, a poor transition to a new vendor can eat up cost savings if the process is not managed
Supplier and contract management – ensure that negotiated contracts are adhered to and develop Key Performance Indicators (KPI) to keep track of supplier deliverables. This information will also be useful in the future for negotiation and future research phases. Work with internal customers to ensure needs are being met or exceeded.
Restart from step 1 – category management is not a one-time effort but a continuous process.
Strategic sourcing was one of the roles I enjoyed most in my supply chain career. You can apply a lot of creativity and use a diverse mix of skills to achieve cost savings for the organization. Even if you are a small company and do not have a dedicated sourcing department, you should be able to apply some of these methods and ideas to improve your spend.