The Difference Between Strategic Sourcing and Category Management
Learn the difference between strategic sourcing and category management, and how the two concepts work together to drive cost savings and value in procurement.
By Mackenzie Oakley | March 28, 2023
Strategic sourcing and category management can both be applied to optimize a procurement strategy. In fact, both should be utilized to ensure you have a cohesive sourcing strategy working in your favor.
To make sure both are utilized in the right way, it’s important to define each concept through a purchasing lens. This will help procurement practitioners understand how the concepts are similar, detect the differences, and determine how they work together.
What is strategic sourcing
Strategic sourcing is a procurement process aimed at selecting the right suppliers and negotiating the best pricing to meet business objectives. It’s also considered to be a component of supply chain management focused on spend optimization. The primary goal of strategic sourcing is cost reduction.
The steps to implement strategic sourcing are fairly universal but can be customized:
- Evaluate sourcing needs
- Analyze current spend
- Perform market research to identify potential suppliers
- RFP process and supplier selection
- Contract negotiation
- Evaluation and optimization
Both strategic sourcing and category management should be utilized to ensure you have a cohesive sourcing strategy working in your favor.
Benefits of strategic sourcing
In addition to cost reduction, another benefit of strategic sourcing relates to deeper supplier audits that determine which suppliers best meet the company’s needs. As a result, supplier relationships often strengthen because more attention has been placed on strategic selection.
Strategic sourcing also allows for regular contract analysis. The RFP process is revisited frequently to ensure the contracts in place have the most competitive and lowest pricing.
The frequent audit process allows you to stay aware of the latest supplier advancements and new suppliers coming to market. Without strategic sourcing, any contracts that automatically renew often have an “out-of-sight, out-of-mind effect.” This means your organization might be missing out on opportunities for innovation.
What is category management
Category management is an important procurement strategy that helps procurement practitioners better understand spend and how to optimize it. This allows for organizations to analyze their data to identify the best opportunities to save money, improve quality, and increase efficiency.
Common spend categories include organizational departments (think HR, IT, and Marketing) or functional themes such as facilities maintenance, technology, travel, food, and office supplies.
Once the categories have been identified, the organization can create a tailored strategy to meet their objectives. An analysis of current spend, pricing, and supplier performance will determine the best way to optimize the category.
The category management process is highly fluid and often simplified to expedite results, but generally follow this framework:
- Analyze current spend to identify categories
- Define goals, KPIs, and objectives for each category
- Develop a master strategy to achieve each category’s goals
- Break the strategy down into specific tactics and phases
- Launch and implement strategy
- Evaluate and optimize.
Benefits of category management
There are many benefits to implementing category management within your organization. It immediately segments corporate procurement resulting in a laser focus on individual spending types rather than corporate spending as a whole. The long-term effect of this segmented focus is a greater impact on overall spend optimization.
Another benefit of establishing spend categories is the breaking down of procurement silos through the assignment of dedicated category managers. Category management is a group effort and more minds at work means more ideas and solutions.
Additionally, category management results in the development of improved processes to produce faster results. Without category management, spending is addressed broadly and areas such as tail spend or maverick spend are often overlooked. A narrower lens on individual categories in their entirety allows for all stones to be turned over. According to Deloitte, “Category management should be considered as a primary pillar in a broad operating cost reduction strategy.”
Utilizing category management and strategic sourcing within your direct procurement strategy is usually a given. Are you putting the same amount of thought and consideration into your indirect spend?
The difference between strategic sourcing and category management
Category management is considered a strategy and strategic sourcing is considered a process. Strategic sourcing can actually become an element of a category management strategy. Category managers looking to optimize spend can implement a strategic sourcing process during the vendor and supplier selection phase.
Another difference is the area of focus. Strategic sourcing is focused on spending less within supply channels. Category management is focused on value and goal-based objectives that may include buying less or buying smarter.
The differences also appear in the end results of these concepts. Implementing a strategic sourcing process leads to overall spend optimization; category management leads to overall supplier optimization.
Similarities between strategic sourcing and category management
An important similarity of both category management and strategic sourcing is the emphasis on research and analysis. Both processes start and end with an evaluation stage. First, consider the current state of spend. Then, analyze your results after implementing the strategies and processes.
Another area of overlap is that both category management and strategic sourcing can be applied to supply chain management. Strategic sourcing aims to reduce costs within the supply chain. Category management analyzes each step of the supply chain to increase efficiency. In turn, this optimizes supplier and product selection.
Lastly, there is a similar indirect benefit of category management and strategic sourcing when these tow concepts work together. Focusing on working with suppliers who offer this kind of value causes a ripple effect. There will be a closer alignment of organizational values, shared objectives, and increased collaboration across the board.
How to bring the two concepts together
Utilizing category management and strategic sourcing within your direct procurement strategy is usually a given. Are you putting the same amount of thought and consideration into your indirect spend? For most companies, the answer is probably no thanks in part to limited resources like time and manpower.
Partnering with a group purchasing organization is an effective way to bring these two concepts to otherwise unmanaged areas of spend. A GPO can help facilitate indirect spend management best practices, and connect you with suppliers who deliver value and cost savings.
Outsourcing category management to a GPO reduces indirect spend, and allows procurement to rely on additional resources to reach their goals. When it comes to strategic sourcing, GPOs facilitate strong relationships with suppliers and identify potential improvements within the supply chain. Additionally, GPOs have an increased understanding of supplier markets. This means that a GPO partner can help identify potential supply chain risk factors and develop plans to help mitigate them.
The GPO team is an expert when it comes to contract negotiations, supplier selection and performance management. A true GPO partner works to maximize the value of your indirect spend.
The collective buying power of a GPO allows for organizations to access competitive pricing and improved terms and conditions with suppliers. GPOs are an invaluable partner for organizations looking to reduce indirect spend and maximize the value of their procurement processes.
Download our free Guide to Category Management to get the most value out of your indirect spend categories.