Category management requires a segmentation of third-party spend into categories that can

be worked on individually by a cross-functional team with the aim of identifying and

implementing the optimum sourcing strategy for that category. In order to determine
categories, thirdparty spend needs to be segmented into discrete market-facing areas. This
is not as straightforward as it might seem. Even when equipped with good spend analysis
information, there are a number of factors that must be considered – in fact there are five
vital considerations here, each of which will be explored in turn:

1 identifying spend;

2 directing resources only on addressable spend;

3 directing resources on the categories where there is a worthwhile opportunity;

4 identifying market boundaries so categories become market facing;

5 the most appropriate level to work at.

NON- Tactical Suppliers with whom it is more inconvenient and/or costly to

CRITICAL avoid than do simple sourcing business with. These
organisations are kept at arm’s length until they are no longer
convenient to work with and then they are simply dropped.
Measures of performance will tend to be restricted to price,
delivery and quality.

Transactional Transactional. Suppliers who are used for basic requirements

on an ongoing basis, but who represent no significant benefits
to the organisation. From this perspective the focus is
exclusively on meeting internal needs and maximising profits
at the expense of the supplier. This often manifests itself as a
take it or leave it negotiating position. Measures are as above
with some elements of benchmarking and expectation around
the responsiveness of the supplier to fulfilling internal needs.

BOTTLENECK Transitional Transitional. Suppliers who may offer a mixed portfolio of

some significant and some basic supply requirements. The
LEVERAGE
characteristics of the relationship are difficult to define often
resulting in multiple levels of relationship being developed
across the organisation. This can prove difficult to manage
and it is often necessary to force a change in the nature of the
engagement so that it is more clearly defined. A key measure
is the number of suppliers moving in and out of this section,
with the balance of measures coming from the nuisance and
transactional or the collaborative and partner relationship
types.

Collaborative Collaborative. Suppliers who are highly visible to the

organisation and who are used regularly, but who cannot
BOTTLENECK
offer a compelling or unique value proposition. The intention
 STRATEGIC here is often to develop the relationship particularly through
senior level interventions. This approach is often enabled
through a consolidation of requirements to fewer suppliers
followed by an expansion of contracts to those few remaining.
Progress is made through a mix of working on existing issues
and developing new collaborative projects. Measures attempt
to balance the relationship investment costs against the
financial contribution that results. This is augmented by
broader programme performance and other strategic
benefits, such as time to market or knowledge sharing.

Partner Partner. Suppliers who have a significant influence over the

sustainable competitiveness of the organisation and who
need to be engaged from multiple perspective for the long-
term. Communication across all levels of both organisations is
abundant as a mechanism for protecting the relationship. The
customer is particularly careful to respond to supplier needs
and provide critical resources when required. Measures of
performance are almost exclusively strategic and
organisationally oriented; examining business performance,
customer experience, innovation and position relative to the
competition. Above all, however, is the assessment of
differential value achieved as a direct result of the
partnership. Key to the success of the whole programme is
Procurement’s ability to manage spend on behalf of the
organisation. As such, probably the most fundamental
measure is the amount of spend under strategic procurement
management - even the tactical commercial items

Is Category Management More Than Just Strategic Sourcing?

Our 2016-17 Category Management Survey demonstrated that many organisations still see Category
Management as simply another term for Strategic Sourcing. However, our research concludes that
Category Management is more than that.
1. It is a strategic end-to-end process for buying goods and services
2. It aligns business goals and customer requirements with supply market capability
3. It maximises long-term value for the organisation

Strategic sourcing is a process to source goods in the best way for the business. On the other hand,
category management orchestrates procurement and stakeholders in order to deliver business
strategy. It is a methodology to manage categories for the whole life-cycle of goods and services,
directing procurement activities such as strategic sourcing and supplier relationship management.

5.2.2 Layers of categorization

70 percent of the companies in the study aim to categorize 100% of the total third-party
spend, and 30 percent of them succeed to categorize above 90% of total spending. The
numbers are summarized in figure 15. The companies who categorize 100 percent generally
argue that they want full control over the entire spend so that they can find new
opportunities for value creation. Companies who intentionally target less than 100 percent
gave two different motivations. First, two companies aimed to have 90 percent of spend
categorized because they did not believe the value of the effort would outweigh the
additional costs. They thought it would be a huge job to categorize the tail of small suppliers
and products and that it would take time from generating value in the already defined
categories. Secondly, one company targeted 25% of spend, which was the current level of
categorization, because they did not believe that the potential synergies were large enough
to motivate a higher level. They were already a very decentralized company with a large
number of factories with their own P&L responsibility. In addition, they were increasingly
reducing the usage of standard product because of increased competition from emerging
markets. In response to 44 the market conditions, the overall strategy of the company was
to increasingly offer more specialized and differentiated products. Hence the purchased
materials also had to be more specialized, which in turn reduced the synergies between the
products. The CPO expressed the evolving strategy: “One cannot purchase water and sell
wine. As we sell more unique products, our input will have to be more unique as well, and
the potential supplier base is shrinking. It might just be one supplier in the world for those
advanced materials” In the companies who target a categorization level of 100%, the gap is
often due to a number of sites not yet being connected at all. The main reasons given is that
newly acquired companies has not yet been integrated, since there is usually quite some
manual work that has to be done by the acquired company to categorize their entire spend;
or that some smaller companies or factories has been reluctant to plug in to the category
system because they feel it is not worth the effort. In very decentralized companies the local
sites are like their own companies and tend to be stronger than the global purchasing
organization, and it is up to the chief executive of that site to decide whether to join the
category organization. Figure 15 Targeted and actual categorization The complexity of
categorization was found to be more complicated than suggested in literature however. In
fact four different layers of categorization, rather than the two or three suggested in the
literature review, were identified in the companies participating in this study. - # companies
- - # companies - Targeted spend categorized Actual spend categorized 7 3 100%

WHAT ARE THE MAIN CHALLAENGES OF CATEGORY MANAGEMENT