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Procurement Best Practices: Category Management

Used often by retail organizations, category management is a concept that’s proven to be a best practice in the purchasing field. Applicable for the electronics industry, category management finds buyers breaking their acquisitions down into groups of similar or related products (also known as product “categories”) rather than sourcing goods and services based on specific pricing and terms.

According to Chris Sawchuk, global managing principal and procurement advisory practice leader at The Hackett Group , a Miami-based business consultancy, category management goes beyond traditional strategic sourcing to align with broader organizational objectives. So, where cost may be a key purchasing norm in the strategic sourcing realm, a larger objective such as revenue growth would come into play when category management is employed.

To help electronics buyers wrap their arms around the concept of category management and figure out if it fits with their organizational goals, Sawchuk shared his insights on these key questions:

“Category management helps buyers think beyond purchase cost savings, and essentially broadens procurement’s role in the organization,” says Chris Sawchuk of The Hackett Group.
Supply Chain HQ: If I’m an electronics buyer, how does category management apply to my organization?

Sawchuk: Category management is a framework and set of practices used to optimally manage supply categories to meet business objectives. Let’s say an electronics buyer is managing a category of spend, which we define as a “category.” This category is broader than what most organizations would call a commodity. For example, a category might be information technology (IT) spend and a sub-category could be hardware, software, and services—all rolled into a single spend category. It’s a hierarchy type of model with categories typically defined a bit more broadly than most buyers are accustomed to.

Supply Chain HQ: Is category management a new concept?

Sawchuk: The term category management is not new, but that doesn’t mean organizations have been using the concept to its fullest extent. An organization will say, “We are doing category management,” but when you peel back the layers you may find that they are really just doing strategic sourcing and not broad-based category management. And while these firms may be misusing the term, the concept itself isn’t new; there are organizations that have been doing this for longer periods of time.

Supply Chain HQ: How does category management differ from strategic sourcing?

Sawchuk: Many times, purchasing organizations view sourcing as an event. They go through a process of identifying new suppliers, transitioning those suppliers and then setting up some type of performance demand over time. Category management, on other hand, involves managing a category, and it has no real “ending.” So rather than going out and saying, “We are going to save money,” the focus with category management lies in aligning with stakeholders in terms of what is important to them. That is one of the fundamental differences with category management.

Supply Chain HQ: What are the hard parts of doing this?

Sawchuk: It puts the category manager in a different position relative to the business. Category value objectives are linked directly to stakeholder objectives, and a lot of these stakeholders see procurement through a certain lens. They operate on the philosophy of, “I will call you when we need to reduce costs or find a new supplier.” So while category management sounds straightforward in principle, most organizations struggle to escape the limitations of their current sourcing processes. It’s important to remember that sourcing is only one step in a broader value chain, and by definition, can only be as strategic as the process itself allows.

Supply Chain HQ: What benefits will buyers get out of category management?

Sawchuk: Companies benefit from broader value, hopefully from both the procurement organization and from the supply base itself. One of the challenges that buyers have is continuing on the annual path of increased savings for the organization—because that’s how they are measured. When savings are being challenged—like they were in the 2005-2008 timeframe—it results in a diminishing level of return. The question then becomes, “How do we create value for our business if that value is diminishing?” The answer is that you have to broaden your focus and seek out other sources of value. Category management helps buyers think beyond purchase cost savings and essentially broadens procurement’s role in the organization.

Supply Chain HQ: Do you think we’ll see more companies using category management in the future?

Sawchuk: Absolutely, and primarily because it forces buyers to better leverage their suppliers’ capabilities while also taking a broader look at stakeholder needs.