Strategy

Make Category Management Awesome

by Michael Koh, Head of Procurement, Asia Pacific, Dimension Data

In the late 1980s, Dr Brian F. Harris, a former university professor at the University of Southern California (USC), originated the concept of category management. He inked the term “Category Management” to reflect the ideal state where manufacturers and retailers should partner to manage a consumer-defined category and implement initiatives to grow the revenues. This alters the relationship between retailer and supplier from a cost only relationship into one of collaboration, with exchange of information, and joint business building model. The fundamental of defining a category is the focus on the consumers, instead of on the manufacturer or retailer. In 1990, Dr Harris started a consultation services firm in Cincinnati called the Partnering Group. The Partnering Group introduced the eightstep industry standard model for category management in retail.

Applying category management to organisation purchasing activities, it structures the organisation procurement resources to focus on spend families, reduce risk in supply disruption, and gain access to more industry innovation. The benefits are a highly standardised procurement supported by requisition to pay systems based on catalogue. Hence, the buying process is highly regulated to support spend analytics and shape future demand, which all are from a central platform.

According to European Institute of Purchasing Management (EIPM), category manager and lead buyer are the responsible requestors for all decisions made regarding one of more family of products. They analyse the market dynamics. They are supported by a centralised system that stores all framework and project agreement. This centralised platform is accessible by respective regional procurement who supports sales to provide proposal to meet local clients demand. In fact, public organisations have also adopted category management as procurement transformation tool.

In 2010, Sir Philip Green, Chairman of Arcadia Group, recommended that centralised procurement for common categories, producing accurate spend and consumption data, and pricing common items in his review of UK government spending and procurement in his Efficiency Review. Typical categories cited are fixed line telecoms, mobile contracts, printing, and office supplies where price and terms variations are seen across departments.

In 2014, Mr Thomas Sharpe, Commissioner, Federal Acquisition Service U.S. at General Services Administration posted in a blog, “The Future FAS: Categorically the Right Thing to do for Taxpayers”, echoed similar comments. He said, “Our current, fragmented acquisition landscape leads to many agencies duplicating efforts and establishing redundant acquisition programs. There are more than 500 different departments and agencies all making purchases amounting to more than S$500bn annually. These redundancies are driving up our collective operating costs and needlessly wasting valuable taxpayer dollars.”

Embracing six-sigma and procurement model

The “As Is” metric of organisation buying behavior form the baseline for the future model. For six-sigma practitioner, DMAIC methodology is a data and process driven improvement tool used for continual improvement. It consists of five phases: define, measure, analyse, improve and control. Recent year, there is an additional phase DMAIC-R. The R phase recognise the efforts put by the six-sigma team in pursue of excellence. In six-sigma project, operational knowledge is critical to successful implementation. Operational knowledge, such as using classification of products and services, United Nations Standard Products and Services Coding scheme, facilitates commerce between buyers and sellers. Large companies are using the code to purchase and analyse their purchases. When every purchase order is tagged with a common set of product identifiers, procurement is able to spot buy patterns across departments.

Domain expertise is important to define the scope and future model. Category experts have evolved over time to drive a strategic approach to procurement where it expand to supplier collaboration and shaping future demand. Category plans need to be segment strategic focus, and always thinking from client perspective. Category management execution base on what is valuable to client, is itself a new aspect for redefining the role of procurement. Management sponsors are absolutely necessary for embarking procurement transformation in category.

The Kraljic Portfolio Purchasing Model created by Peter Kraljic is widely used in category management. It was first appeared in the Harvest Business Review in 1983. Today, it is still a popular and useful model used in many global companies. It plots the profit potential against supply complexity. The fundamental of category management, Kraljic Portfolio Purchasing Model are commonly used together with Porter’s five force analysis in determine the supply segmentation. This structured approach helps procurement professional to understand where their products and services are positioned. The supply bases are not equal to begin with, and changes with time. Hence, it should be managed as such.

Learning from the fallen

The most recent global category management survey from Future Purchasing highlights that 72 per cent of the 323 firms that participated, admitted that their category management process had fallen short. The survey found characteristics of an organisation is doing tactical sourcing at best, not category management, if the procurement team does not

• lead cross functional teams, with business sponsorship
• have a single standardised toolkit, used pragmatically (and that does not mean ignored most of the time)
• systematically look at all value levers via a standard approach on price, cost, revenue, risk
• have the time to build up a rigorous facts and data profile to build creative strategies
• have a team capable of building inspiring and creative strategies
• have the time or inclination to move beyond tendering, negotiation and contracting activity
• does not invest in stakeholder training as well as procurement team training

In an article by Spend Matters, procure-to-pay (P2P) is an enabler to category management implementation. The system must be designed with consideration of how requestors will buy and pay for products and services in the spend category. The ease of use of the P2P systems and scalability needed to be monitored from the voice of users. This ensures that the system generates good, clean spend data that will flow into the spend analytics.

Accordingly to Procurement Leaders, respondents report that, on average, it takes 2.4 years to complete a procurement transformation, and around one-third (30 per cent) of the procurement staff’s available time is absorbed by the transformation. Therefore, it is imperative that all procurement leaders should share their stories and experiences with the industry.

About the Author

Michael Koh is the Head of Procurement, Asia Pacific at Dimension Data. As a member of the NTT Group, we accelerate our clients’ ambitions through digital infrastructure, hybrid cloud, workspaces for tomorrow, and cybersecurity. Prior to his role, Michael served as the Head of Procurement, Asia Pacific at T-Systems and Schneider Electric ITB.

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