The Category Management Process

By Hugo Britt | October 12, 2021

Divide and conquer, or unite and grow? Does an effective procurement strategy rely on segmentation or consolidation? The answer is both. Category management begins with a divide-and-conquer approach, but within your spend categories and sub-categories lie exciting opportunities for consolidation and savings.

The category management process

Below, we explore the six steps in a typical category management process, along with some best-practice tips for procurement success.

1. Define categories

Just like a household budget or a to-do list, organizational spend is very difficult to manage as a single unit. Splitting your spend into categories (and even sub categories) makes them easier to manage, analyze, and improve.

A helpful start is to put your categories under two headings: direct and indirect spend.

Direct spend categories

Direct spend refers to the goods or services your organization procures that are vital for the core operation of your business. For example, if your business makes toothbrushes, direct spend would include plastic and rubber for the handles and nylon for the bristles. As direct spend usually involves a large chunk of total spend and is crucial for business continuity, it is often managed directly by the central procurement team.

Indirect spend categories

Indirect spend is usually decentralized, meaning anyone in the business can do the buying. Indirect categories include anything necessary for the day-to-day running of an organization such as staffing costs, energy costs, IT, office supplies, travel, shipping and logistics, facilities maintenance, and more.

Top tip: Where possible, assign people with relevant backgrounds to complex categories. For example, assign a procurement professional with a computing degree to the IT category. This will mean a better understanding of the ins and outs of the category, and the ability to speak the language of stakeholders and suppliers. 

2. Understand the market

The next step in the category management process is to gather market intelligence for each category. This can involve understanding the supplier landscape (who are the main suppliers, where are they located, are there any local suppliers, and so on), the trends and long-term outlook for the category, average prices, and any factors such as seasonal demand.

Market intelligence can be gathered through online searches, news articles, company reports, Google alerts, and from your supplier ecosystem.

Top tip: Market intelligence gathering can be outsourced to syndicated or custom intelligence providers.

3. Analyze spend

Spend analytics is about identifying opportunities to add value.

As with all analytics, start with making sure there is a single source of truth for company spend data – that is, a central software platform or database.

Using spend analytics software, category managers can identify opportunities for consolidation, spot duplication, flag areas with high maverick spend, and identify risks.

Top tip: Don’t just gather spend data for data’s sake. Make sure all insights are actionable and support better business decisions.

4. Create your category strategy

Now that you have defined your category, gathered market intelligence, and conducted spend analytics, it is time to create a category strategy.

  • Define category objectives and milestones. 
  • Make sure objectives can be tracked and measured through KPIs. 
  • Ensure every objective is linked to your overall business strategy.

Top tip: Create a strategy that is flexible and adaptable to changing business conditions.

5. Implement improvements

While all the previous steps involved planning and intelligence-gathering, step five of the category management process is finally about applying the learnings you have gained to make improvements and add value.

Depending on what you’ve uncovered through spend analytics and market intelligence, this could involve: 

Top tip: Expand your definition of value beyond cost to include factors such as risk reduction, brand-building, sustainability, and social benefits.

6. Review

Category management is not a set-and-forget exercise. Objectives should be regularly reviewed to ensure your strategy stays relevant against a background of ever-changing business priorities. Category strategies will also need to flex in response to disruptive forces such as new technology or materials shortages.

Collect feedback and drive continuous improvement by surveying your category’s key stakeholders and suppliers.

Top tip: Use a voice-of-the-supplier survey to uncover opportunities to work better with critical suppliers in your category.

Never underestimate the time and resources required for category management. If you have a small procurement team or believe additional value could be found in a category, consider partnering with a group purchasing organization. GPOs leverage their awesome buying power to unlock volume discounts across popular indirect spend categories including office supplies and facilities maintenance. Contact Una to learn more.


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