What is category management? A comprehensive guide.
Category management is an approach to procurement where similar products and services are grouped into categories – to consolidate spend and maximize savings.
With constant fluctuation in global supply markets – and rapidly changing business requirements – procurement has become incredibly complex. Companies need a better way to proactively manage their supply base and optimize their purchasing spend. This is where category management shines – and why it’s become a critical best practice for so many businesses today.
Category management definition
Category management is the process of procuring goods and services by grouping them into categories based on similar characteristics – such as type, value, supplier, risk, location, or department. This process makes it easier to understand and control the total cost of ownership for each category, and to maximize savings and value for each purchase. With category management, companies can also streamline the procurement process, strengthen supplier relationships, improve spend analysis, mitigate risk, and more.
“Firms that fully optimise category management could potentially achieve as much as US$114m in savings and more than a 500% return on investment, in addition to reducing risks.” – Future Purchasing
The evolution of category management
Category management was developed in the 1980s and has historically been a manual endeavor, with disconnected and time-consuming steps carried out in isolated spreadsheets, documents, and presentations. The time spent manually collecting data – and analyzing and reporting on it – meant procurement teams had less time to spend on strategy and value realization.
Fast-forward to today: software for category management can automate and expedite many of the steps in this process. It helps category managers analyze large quantities of data and streamline the development, execution, and monitoring of category strategies – so they can become far more efficient and strategic in their day-to-day tasks. Modern solutions offer category insights, process guidance, templates, AI-powered recommendations, and more to help managers meet, and often exceed, their spend management goals.
Category management vs. strategic sourcing
The terms category management and strategic sourcing are sometimes used interchangeably, but they are not the same thing. Strategic sourcing is a procurement process focused on selecting the right suppliers and negotiating the best prices to meet short-term organizational goals. The primary objective of strategic sourcing is cost reduction. Category management, on the other hand, segments purchases into categories to help managers identify opportunities to save money and improve quality, supplier performance, and efficiency. Category management is a continuous process conducted over the long term, and often includes strategic sourcing as an early step.
Top 6 benefits of category management
Thanks in part to fewer redundancies and simpler supplier negotiations, category-led procurement offers a host of distinct advantages that can help purchasing teams run a tighter ship and identify new opportunities:
1. Improved insights. With categorized spend and a single point of contact for all related suppliers, companies can gain greater insight into costs, vendor performance, and potential supply chain issues. Plus, deep familiarity with contracts, prices, and market trends can be used to make better, more profitable procurement decisions.
2. Increased savings. Drawing on their category expertise and insights made possible through categorization, managers can negotiate better prices and improve performance to reduce costs. And since managers are buying for the long term, they can take advantage of economies of scale to further save money.
3. Reduced risk exposure. With an in-depth understanding of each vendor and effective longer-term working relationships, category teams can take a more proactive approach to supplier management and reduce the risk of dealing with unknown or fly-by-night vendors.
4. Greater procurement efficiency. With time-tested, digitalized, and automated processes, teams can respond faster to market changes and free up time for value-added activities.
5. Better adherence to ESG and SR commitments. Category goal alignment, transparency, and monitoring make it easier for companies to adhere to environmental and social responsibility commitments.
6. Increased spend under management. Through intelligent automation, procurement can manage a higher number of categories and ultimately increase spend under management.
Types of procurement categories
Category groupings can vary from business to business depending on their industry, spending policies, and particular market. Generally, each procurement category consists of a group of products or services that have similar characteristics – such as type, supplier, value, location, or department. HR, technology, maintenance, and travel, for example, are common categories.
It’s also common to split direct spend (items needed for core business products and services, such as raw materials and packaging supplies) and indirect spend (goods and services that support day-to-day business operations, such as office supplies) into their own categories. Grouping indirect spend, which is often managed in silos across the business, can help standardize and lower indirect purchasing costs.
Some companies turn to a global standard like the United Nations Standard Products and Services Code (UNSPSC) for guidance to determine their categories, but most will create their own internal spend taxonomy. Regardless of the exact makeup of categories, successful category management involves applying a standard framework for segmenting the goods and services needed to run a business.
3 key steps in the category management process
Though the process can vary across organizations, category management typically includes three steps:
- Define category profiles. To begin, teams analyze current spend and weigh a range of factors – from risk and regulations to straight up business logic – to identify categories. The result is a consolidated category taxonomy for purchasing that can be used across the organization.
- Outline and plan strategy. In this step, teams evaluate their categories based on pricing, supplier performance, supply and demand forecasts, and other factors – and identify opportunities to optimize spend and increase value. Based on this information, they create a master strategy to achieve each category’s goals, broken down into specific tactics and phases.
- Execute strategy and monitor outcomes. Lastly, the strategy is launched and outcomes, suppliers, business needs, and markets are continuously monitored – so teams can rapidly respond to change and optimize category strategies as needed.
What to look for in category management software
Category management software is designed to centralize, digitalize, and streamline processes for all category strategies – and to provide actionable insights to hone and improve them. To accomplish this, the best solutions contain the following capabilities at a minimum:
Automation. Intelligently automated processes for creating category spend profiles and developing and executing strategies.
Step-by-step guidance. System-based recommendations, guided processes, and best practice templates, tools, and frameworks.
Real-time monitoring and analytics. Ability to monitor and analyze market intelligence, categories, prices, supplier performance, outcomes, and more in real time.
Strategy execution. Tools to easily convert strategies, plans, and initiatives into sourcing projects or events.
Integration. Seamless integration with source-to-pay and other supplier management solutions.
AI. Built-in, AI-powered opportunity analysis and recommendations based on spend data and other factors – as well as a plan to integrate with large language models such as ChatGPT to assist with strategy creation.
Best practices for an effective category management strategy
Developing a winning category strategy can be accomplished faster with the following best practices:
Establish a dedicated category manager and team. Since large categories and strategic areas of spend require time and specialization, having a dedicated team made up of knowledgeable stakeholders from relevant departments makes for a more effective process. The category manager is responsible for overseeing and understanding the market, regulations, and pricing trends for an entire category, as well as for developing short-, mid-, and long-term plans.
Create a consistent taxonomy across the organization. This is a crucial step for gaining better insights and visibility into spend. Some organizations will use universal standards like the UNSPC as a guide, but more often companies will create their own internal categories that are better aligned to their unique goals or industry needs.
Use automated solutions to centralize spend data. With one place to track and monitor data, it’s easier to find and report important insights – and to bolster governance practices.
Harness category management technology. Using tech like AI, teams can more easily spot patterns, automatically categorize spend, organize suppliers by category, set benchmarks, make recommendations, automate tasks, and more.
Keep stakeholders engaged and in the loop. With analytics tools and software to communicate wins and opportunities, it’s easier to get stakeholder buy-in and align with organizational goals.
Build dynamic supplier relationships. Focus on overall value – rather than just costs – and collaborate openly to create good working relationships.
Incorporate third-party data. Develop a mechanism for using relevant external datapoints from third-party providers to complement your category strategy.
Continually hone the category lifecycle process. Improve internal and external data analysis, by gathering category-specific intelligence, enhancing strategy, and conducting periodic reviews.