The Difference Between Strategic Sourcing and Category Management
By Hugo Britt | July 20, 2021
Category management and strategic sourcing, while very different concepts, can both be applied to optimize a procurement strategy.
Let’s define each concept within the lens of purchasing and then take a look at how they’re similar, how they’re different, and how they can work together.
Spending less, buying smarter
Category management is a procurement strategy that organizes spend into focused categories. The goal of creating spend categories is to identify the needs and objectives within each category to optimize spending through tailored strategies and analysis.
Examples of common categories are organizational departments such as HR, IT, and Marketing or functional themes such as technology, travel, and office supplies.
The steps to implement category management are highly customizable and often abbreviated 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. An immediate benefit is that it segments corporate procurement resulting in a laser focus on individual spending types areas 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.”
Strategic sourcing is a procurement process aimed at selecting the right suppliers and negotiating the best pricing to meet business objectives. It is also considered to be a component of supply chain management focused on spend optimization, as the primary goal 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
Benefits of Strategic Sourcing
Aside from the primary spend reduction benefit an organization receives from a strategic sourcing strategy, other benefits include deeper supplier audits to determine which suppliers best meet organizational needs. As a result, supplier relationships often strengthen because more attention has been placed on strategic selection.
Another benefit of strategic sourcing is regular contract analysis. In order to maintain the lowest costs within your organization, the RFP process is revisited frequently to ensure that the contracts in place have the most competitive pricing.
The frequent audit process also yields the benefit of having your finger on the pulse of the latest supplier advancements as well as awareness of up-and-coming suppliers new to the marketplace. Without strategic sourcing, longer-term contracts that automatically renew often have an out-of-sight, out-of-mind effect and can cause your organization to miss opportunities for innovation.
The difference between strategic sourcing and category management
The primary difference between these two concepts is that 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 seeking to optimize spending within their category can implement a strategic sourcing process during a vendor and supplier selection phase.
Another difference is the area of focus. Where strategic sourcing is focused on spending less within supply channels, category management may focus 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. The result of implementing a strategic sourcing process is overall spend optimization versus the result of category management which is 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 implementation processes kick-off and conclude with an evaluation stage, first to consider the current state of spend and lastly to 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 within the supply chain aims to reduce cost, while category management provides analysis of each step within the supply chain to find areas to increase efficiency, and in turn, optimizes supplier and product selection.
Lastly, there is a similar indirect benefit of category management and strategic sourcing. The scrutiny and laser focus on finding suppliers who offer value and cost often causes a closer alignment of organizational values, shared objectives, and increased collaboration.
How Una can help
These are areas that Una aligns with our members as well. We provide analysis and consulting to understand your organization’s goals in the areas of spend and supplier relationships.
Una also serves as a category manager for our members who outsource certain categories to us.
Reach out for a free consultation to find out how we can help your category management strategy and strategic sourcing process.