The power of category mgmt in supply chains

CORPORATE anxiety is running high the world over. The low hanging fruits in supply chain networks were picked a couple of years back and savings are now hard to come by.

In the meantime, supply chain professionals are still expected to bring value to the corporate table. To come out of this quagmire, there is probably need for them to change the narrative by advocating for the use of other value addition strategies other than cost reduction.

In a business environment where customers are increasingly becoming more demanding and less forgiving, ongoing success within organisations will largely be contingent upon finding the right strategies that can create top line value and bottom-line value at the same time.

It is becoming increasingly clear that procurement value drivers of past success will not drive success today and worse still, tomorrow. The most recent view of reality across supply chains indicates that realising cost savings by squeezing supplier margins is no longer practical and feasible.

In an increasingly crowded marketplace where organisations are having to make do with razor thin margins there is probably more need to consider the other side of the productivity equation, which is maximising on the value that category management can do to the cost structure of the business.

Of course, it is a known truth that the theme of cost reduction continues to be relevant for all intents and purposes, but it is equally true that most savvy procurement practitioners are devoting significant amounts of time and energy in pursuit of other value addition strategies. Category management could be one of them.

Category management seeks to group products and or services with similar characteristics and which are ordinarily sourced from similar supply markets together and then treat them as a discrete group or distinct category.

The often-cited product categories include professional services, computer hardware and software, construction materials, stationery, motor-vehicles, ICT, equipment and machinery, furniture, travel and office accommodation just to name a few.

Such categories are then assigned to a specific procurement professional, who handles all procurement issues pertaining to a category. This will enable the ease of management of such categories from the procurement perspective because the items in a category require similar supplier market intelligence, the same sourcing strategies and similar supplier relationship management activities.

This will enable procurement practitioners to identify and work in close partnership with only those suppliers that are best of breed in that particular category which ideally brings high impact results.

While category management strategies have been in use for a while, there is renewed interest in pursuing this value addition strategy out of a full realisation that every product or service category has got unique features, and the dynamics of supply chain challenges vary from product to product.

Although seemingly obvious, it is an unspoken truth that problems associated with the fuel industry are not the same as in the supply of IT consumables vice versa.

Category management makes it easier for procurement professionals to be effective in their value creation efforts because by dealing with certain suppliers within a certain specific category over time results in unequalled technical appreciation of product features coupled with product knowledge acquired through experience of product use over a long period of time.

Product and supplier knowledge over time will enable procurement departments and the user departments to benefit from improved understanding of the current supply market trends of the categories that are relevant to the business’s operating environment.

However, in order for category management to really work to good effect there is need for procurement professionals to up their expertise in the gathering of granular supply chain data, which will make them understand how the historical supply chain market dynamics will affect the future supply of key materials for a specific category.

This must not be limited to a particular category used in your business only, but it would be important to also understand the dynamics that will affect your supplier’s supplier.

A line of thought almost universal in agreement is that knowing your supplier’s suppliers and your customer’s customers is now a strategic imperative.

As is often said, in today’s business environment, company X is no longer competing against company Y, but competition is now between supply chains of company X against supply chains of company Y and networks against networks. 

It, therefore, follows that the organisation’s supply chain is as strong as its weakest link hence the need to understand the dynamics of the whole supply chain in order for category management to be most relevant.

Category management as a procurement strategy can also be very useful for measuring the performance capabilities of supply chain partners. The fact that one particular procurement member of staff will be the focal point in all business transactions relating to a category, that particular individual will be able to track the day-to-day performance of that particular supplier or suppliers in a specific category.

Such continuous tracking of supplier performance and industry trends will enable the procurement department to be proactive as and when potential problems arise rather than being reactive after a supply chain disruption.

For category management to create value for the business, there is need for procurement practitioners to have an intimate detailed knowledge about supplier capabilities and their products the same way that sales representatives know a lot about their customers.

This will assist them in getting to know the emerging shifts in technology, potential new entrants into the supply market as well as trends in pricing structures that may impact on the cost structure of the business. 

Oftentimes, gathering data and making a story out of it is very critical for supply market intelligence.

The perceived multiple value of category management is often said to be resident in the fact that “its form and shape has often been used to leverage the bargaining power of group procurement which ultimately leads to a dramatic reduction in unit prices and or the significant reduction in the whole life pricing structures of certain categories”.

By grouping the organisation’s requirements, whether at subsidiary level or at group level, economies of scale will be achieved in the process because of the consolidated requirements.

Buying IT consumables for one user department is not the same as buying for the whole organisation or the whole group of companies.

As a pathway for value addition to the business, category management has often been regarded as a gateway for the exploitation of supplier driven innovation given the day-to-day interaction between certain suppliers within a category and the procurement professionals.

Daily interaction with suppliers will promote the creation of a culture of oneness over time.

Category management allows the development of procurement experts, who are regarded as repository of information gathered through innovative ideas thrown to the organisation by supply chain partners within a product category.

There is need to tap innovative ideas from every node of the supply chain network, both upstream and downstream.

Category management can also be used as a risk reduction strategy because a product category will be under the purview of category experts, who are in most cases very good at identifying supply market trends and or developments that may create commercial risks.

Because category experts heavily rely on the use of current data, they will be in the know of “significant effects” on product categories within their purview.

Unconfirmed claims from unconfirmed sources seem to imply that the world’s most valuable resource today is data not oil as previously envisaged.

The breadth of knowledge facilitated by the availability of big data will enable the business leaders to know potential new entrants in the supply chain market or those that are likely to exit whether by default or by design.

There is proven value in ensuring that best in class category management strategies “continuously monitor and re-align the business’s supply chain posture in order to exploit current business opportunities”, which will enable sales growth and increased share of the customer’s wallet, providing a decisive edge in this highly volatile but rich opportunity environment.

Because of the inventory trends observed over a period of time, the category leader will be responsible for creating the right inventory structure by replacing inventory with information.

Category leaders will often be responsible for the optimisation of demand management by asking the right questions. Is there a possibility of minimising the usage of product A or is there a possibility of replacing product B with a cheaper alternative or by a user-friendly product C.

Asking the right questions will not only take cost and time out of the supply chain, but it is a strategic route to become one or two generations ahead of competitors.

The often-told story of category management sounds like textbook theory but it is in practice straight forward common sense.

But the question we may profitably ask is whether common sense is common practice. We will leave that question for another day.

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