How to Explain Category Management to Someone Who Isn’t in Procurement
By Hugo Britt | August 19, 2021
Category management is the organization of spend into categories so funds can be allocated properly and managed effectively.
If you’ve ever created a budget, you’ve essentially performed basic category management. By breaking your total monthly spending into categories, you can take a closer look at how much money you spend compared to how much money you make each month. Once you calculate the difference, you’ll know whether you’re living within your means, have extra funds to put into savings, or end up with a deficit.
How to explain category management in procurement
For a business, this kind of focused financial analysis has great value and can occupy an entire full-time role within a large organization. Businesses that invest in category managers can reap significant rewards.
It’s truly something everyone can benefit from, whether you’re managing your own finances or your company’s.
Here’s how category management works as compared to a personal budget.
Choose categories
In order to create a budget for yourself, you begin by calculating how much you spend each month within specific categories such as housing, utilities, food, entertainment, travel, and other important expenses.
Similarly, category management for a business begins with grouping and organizing all expenditures. A category manager collects expense reports, contracts, statements of work, and pertinent records from each department to organize spend into meaningful categories. Categories can be as simple as department names, or filter into subcategories as small as a function within a department.
Identify direct spend issues
Once your spend is organized into categories, it’s time to pinpoint what problems need to be solved. The first step is to look at areas where a lot of money is being spent and determine whether it aligns with business objectives.
For companies that produce or manufacture a product, the largest area of expense is called direct spend. It’s the most obvious area to focus on because of the spend volume and because efficiency in this area directly impacts profit margins.
In our personal budget example, a direct spend issue wouldn’t involve manufacturing, but rather your biggest expenses, such as housing. A good example would be realizing you’re paying far too much on rent, preventing you from being able to afford a more reliable car.
Identify indirect spend issues
A secondary area to examine is indirect spend, or tail spend, which is all expenses that aren’t related to producing a product. Examples of indirect spend could be office supplies, utility bills, and marketing. Indirect spend is often overlooked but if it’s optimized as part of a category management strategy, it can result in significant savings.
An example of an indirect spend issue in day-to-day life would be a smaller expense you hadn’t paid much attention to, such as how much money you could save if you didn’t stop at a coffee shop every morning and brewed your own at home instead.
Analyze contracts and terms
The next step in category management is to pinpoint areas of overlap or overspending within a category. Part of this analysis involves the arduous process of evaluating all current contracts and terms of service that are in place throughout the company. If contracts are set to auto-renew, it might be time to begin the RFP process to make sure prices are competitive.
In our budget comparison, a perfect example of contract analysis is a car insurance policy. Leading insurance providers heavily market the question of whether you’re paying too much for car insurance. Oftentimes, the time required to get quotes and compare plan details across several providers is daunting and gets put off. Category analysis means dedicating the time to fully understand what you’re paying for and whether you’re getting the best price and level of service or coverage for your requirements.
Resolve spending issues
As category managers uncover issues such as overpayment, unplanned spend, or maverick spending, they must resolve them in order to meet category goals. This can be uncomfortable as change isn’t always easy, but the results will be worth the effort.
One common issue that can occur in a large organization is duplicitous contracts that can be consolidated into a single contract to save money with a volume discount. For example, multiple individuals may have a single software license rather than a group contract with many licenses at a volume discount. Consolidation can account for significant savings. This is an area that a group purchasing organization can step in with volume discounts through pre-negotiated contracts.
In our budget example, a spending issue to resolve could be deciding to cancel subscriptions or memberships you aren’t using, such as a gym membership. It may feel counterintuitive to cancel it when your goal is to become more fit, but it can also spur positive changes such as joining a running meetup and making some new friends.
The outcomes of the issue resolution process are the best part of category management.
Ongoing category management
Once an organization has completed these steps, the job isn’t over. Category management is an ongoing process. As an organization grows, new needs arise and new contracts are introduced. A category manager needs to be involved every step of the way to ensure old habits aren’t reproduced and goals continue to be met.
The same goes for a personal budget. As you start to see extra funds in your bank account after performing your own spend analysis and optimization, it’s important to stay disciplined and keep the savings to use toward your larger goal.
Una specializes in category management for organizations that may not have the time or the staffing resources to dedicate to this level of effort. Call today for a free spend analysis and learn how Una can help optimize your categories.
