Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy
Category Management — The Ultimate Procurement Guide for 2024
- Category Management is a split-spending method that helps procurement teams organize where to put the company’s finances efficiently.
- Categorizing spending costs helps streamline operations and acknowledge valuable data for recording company expenses.
- Professionals in charge must understand the company’s spending pattern while maximizing their analytical and communicational expertise.
Category management is a powerful method that enables businesses to go beyond simply seeing their spending. However, how can it help transform the current procurement landscape?
In this article, we are going to discuss category management. We will go see its role in procurement and how it can transform it. Additionally, we will walk you through the category management process and how it can benefit procurement.
Moreover, we are going to take a look at the role of a category manager and gain insights from seasoned procurement professionals regarding category management.
After reading this article, you will have an in-depth knowledge of category management that will enable you to use it in your procurement process effectively.
I have created a free-to-download Kraljic Matrix template. It’s a PowerPoint file that can help you classify and analyze your suppliers and products. I even made a video where I’ll explain how you can use this template.
What is Category Management?
We know that you’ve heard the word “category management” a lot of times in procurement. But what really is it?
Category management is a strategy usually used by businesses to segment their overall spending into a similar type of product. This strategy enables category managers to focus and gain deeper insights into the suppliers, products, and markets.
Additionally, category management is about bundling items at their basic level. By grouping the items within each category, procurement teams are able to save some money by allocating their purchases within specific criteria.
This approach also allows companies to buy at cheaper prices which creates a competitive advantage in the market. The segmentations in category management arrange goods and services in groups based on their function and types.
The Role of Category Management in Procurement
Category management in procurement involves organizing and segmenting procurement resources and activities around specific areas of spend.
This strategy allows businesses to segment their overall spending by similar types of products, enabling category managers to focus on and gain an in-depth understanding of products, suppliers, and market dynamics.
This approach facilitates the development of strategic plans that align with the goals set in category management. Essentially, it involves grouping items in a way that allows the procurement team to economize by making purchases within set boundaries.
The goal is to secure goods at a lower price, giving the business a competitive edge in the market, or to organize products and services according to their function and type.
Category management involves two main types of expenditures: direct and indirect.
Direct expenditures include all the materials and services needed for the company to produce its product. These items are the individual components that make up the final product and are usually obtained in bulk from reliable suppliers.
On the other hand, indirect expenditures are for goods and services that, while not part of the final product, are essential for the everyday running of the company and supporting its operations.
It is important to note that what is considered a “direct” or “indirect” cost can differ across industries. For example:
In banking and insurance, IT resources might be considered “direct” costs because they are essential for conducting major operations and interfacing with customers.
Consequently, In the food and beverage industry, these same IT resources might be considered “indirect” costs.
By segmenting spend into these categories, businesses can optimize their procurement processes, improve efficiency, and achieve better financial outcomes.
The Process of Category Management in Procurement
The following are the steps you need to do for you to have an effective category management process:
1. Determine the category
In this step, you start by figuring out what products belong together because they serve a similar purpose. Imagine you’re organizing your closet, putting all your shoes in one place and all your shirts in another.
This makes it easier to manage. You also create smaller groups within these categories to tailor your approach to different needs. For example, you might separate your sneakers from your dress shoes.
2. Evaluate the role of the category
Once you’ve grouped your items, you need to understand what each group’s job is. Think of it like this: each category has a role in a play.
You want to know how these categories fit into your overall plan. Are they the most important factor in the category or just support the other items? Understanding this helps you know where to put your resources.
3. Check the performance of the category
Now, you need to regularly check how well these categories are doing. Look at the numbers, like how many products you’ve sold and if you’ve made a profit. This helps you figure out what’s working and what’s not, a bit like a coach analyzing a game.
4. Set objectives, develop strategies, and adopt tactics
After looking at performance, you set clear goals for each category, like how much you want to sell or earn. Think of these goals as your game plan. Then, you come up with strategies, like deciding if you’ll focus on selling more products quickly, making sure you always have enough products or emphasizing high-profit items.
Finally, you use tactics, which are like the specific moves you need to do. Tactics could involve setting prices, running promotions, or choosing which products to offer.
5. Implementation
Now it’s time to put your plan into action. This step is like playing the actual game because you need to act and implement the strategies you have developed for managing categories. You organize your products in the store based on your plan, making sure they’re in the right place to attract customers.
6. Conduct category review
Finally, you regularly check how well your plan is working. It’s like watching game replays. You might need to adjust your plan because things change. This keeps your business competitive and up-to-date.
What Does a Category Manager Do?
The average day in the life of a Category Manager is very dynamic: among data crunching, suppliers’ meetings, and collaboration with the marketing and sales teams, strategic planning cannot surely be forgotten. Many tasks and projects in function have to be dealt with, all for the best performance of his category.
The day of a procurement category manager is busy, and full of activities that require good analytic, strategic, and interpersonal skills. He has to deal with analyzing market trends and negotiating contracts. Development of strategic alliances with suppliers in the category and execution of the contract for these categories.
The work of the Category Manager is based on the ability to make strategic decisions that are relevant to the overall goal of the company. This includes the analysis of data, anticipation of changes in the market, and finally, the strategic proposal to seize chances and reduce threats.
The bottom line purpose of a category manager is to contribute toward the success of the organization, through reduction in procurement, and categories in a way that supports strategic objectives, minimizes cost, and adds value.
The Advantage of Category Management In Procurement
The following are the advantages of utilizing category management in procurement:
1. Gives Valuable Insights For Making More Smart Decisions
In any company, data analysis plays an important role in understanding the business more comprehensively.
By leveraging data, businesses can ensure that their suppliers and purchased items contribute positively to the company’s profitability, performance, and safety.
This insight enables companies to negotiate better prices and terms with precise information.
Furthermore, it allows for proactive planning to mitigate potential disruptions, such as pandemics or disasters, ensuring smooth business operations.
Focusing on data-driven insights also helps in building stronger relationships with suppliers, fostering mutual growth and cooperation.
2. Enhance Supplier Relationships And Performance
Category management goes beyond mere data organization. With a well-structured plan and a skilled team, companies can easily identify and assess new suppliers.
This approach encourages close collaboration with key suppliers, enhancing relationships and enabling more favorable negotiations.
Additionally, category management helps in identifying underperforming suppliers, allowing companies to either improve or replace them.
This not only reduces risks but also strengthens other suppliers, safeguarding the business from potential disruptions through clear performance data.
3. Improve How Businesses Buy or Sell Products
Category management enhances the consistency of purchasing practices for both retailers and suppliers. By implementing category management, businesses can streamline their buying and selling processes, ensuring a more uniform and efficient approach to procurement.
4. Complements Strategic Sourcing
Category management serves as a proactive and forward-thinking strategy that complements the strategic sourcing. Successful strategic procurement is heavily reliant on effective category management.
Both strategies depend on data analysis, which provides crucial supply market insights beneficial to category management.
The combined power of strategic sourcing and category management leads to increased efficiency, reduced supply chain risks, and stronger supplier relationships.
5. Provides More Accurate Data
Category management offers accurate insights into pricing and business spend through a detailed supplier list. This allows procurement teams to negotiate lower prices and maintain resource efficiency during purchases.
Additionally, it provides a clear view of current and future contracts, enhancing financial planning. Tracking spending across categories helps identify where money is being spent and with which suppliers, reducing uncontrolled spending and highlighting the best value providers.
Category Management in Retail
Category management is not just useful for procurement. It is useful for retailers too! The role of category management in retail is to organize products into specific groups, treating each category as a different business unit.
This approach allows retailers to optimize how they sort their products, set their pricing, make promotions and product placement to meet customer demands and maximize profitability better.
As a procurement manager who has worked within food retail, I have extensive experience with category management. Simply put, within FMCG, the procurement manager (PM) is responsible for sourcing the products, while the category manager (CM) is responsible for selling them. Within FMCG, there are primarily three different structures for the collaboration between CM and PM:
1. Procurement and Category Management as a Combined Role:
- In this case, one person is responsible for the entire process from procurement to sales on the shop floor (or online).
- Advantage: No coordination is needed between both functions.
- Disadvantage: It is harder to play the good cop/bad cop strategy where the CM can excite the supplier with great sales plans, which are then negotiated by the PM.
2. Procurement and Category Management as Separate Roles:
- This is where I have the most experience. Here, the PM and CM are responsible for a specific category.
- The PM handles everything from the supplier to the warehouse.
- The CM is responsible for everything from the warehouse to the shop floor (shelving, pricing, and promotion).
- Advantage: Both work dedicatedly on the category and can effectively play their roles to achieve the best result. They truly function as a tandem.
- Disadvantage: Suppliers like Unilever, Nestlé, and Procter & Gamble deliver across multiple categories. From a CM perspective, this is not an issue as the goal is to grow the category together. From a procurement perspective, it is more complicated because contracts are made at the supplier level. During negotiations, PMs collaborate extensively with other procurement managers and category managers from other categories, requiring additional coordination.
3. Procurement Organized at the Supplier Level:
- Similar to option 2, a CM is responsible for a specific category. However, procurement is organized at the supplier level.
- Advantage: There is a dedicated focus on supplier relationships.
- Disadvantage: The tandem dynamic of option 1 is missing, and PMs work with multiple CMs, and vice versa.
If your company is large enough, I would always consider using option 2 or 3. To truly empower procurement, it should be a separate function that can intervene and choose to temporarily reduce sales if necessary during supplier negotiations.
In option 1, this is always more sensitive due to the direct sales responsibility. While you need to consider this in options 2 and 3 as well, the separation of functions makes it easier to use this strategy as a threat to suppliers.
Procurement Expert’s Advice on Category Management in procurement
For this article, we asked an experienced procurement expert to share her insights to help answer common questions about the phases of negotiation.
Founder/Owner, M. Fuchs Consulting GmbH
LinkedIn Profile: linkedin.com/in/miriam-fuchs
1.In your perspective, what does category management procurement entail?
“I believe that category management is a concept that comes into play when there’s a genuine division of categories within the procurement function of a company.
Whether this division is on a global or regional scale depends on the company’s size and scope of operations. To be a category manager within a single company, one must possess a comprehensive understanding of the entire category or category.
This role demands a certain level of business partnership, and there’s some overlap between this concept and the idea of business partnering, especially concerning the supply side of operations.
The role extends to external functions and includes engaging with product management and even research and development (R&D) teams. Managing a category requires the ability to oversee innovation, product development, and even aspects related to sales.
In essence, category management can be seen as an evolution from the traditional concept of strategic procurement. Older terminology used to describe this function included “strategic procurement.”
In contrast, there’s also operational or tactical procurement, which is often structured as shared-service centers in many companies.
I firmly believe that category management is either an integral part of strategic procurement or, conversely, it does not fit within the scope of procurement at all.“
2. Can you provide examples of how category management within procurement can differ from one company to another?
“Certainly, let me offer some examples to illustrate the variations in category management within procurement across different companies. In my previous company, category management was integrated into the procurement function, and it represented a truly global, strategic procurement role.
In this setup, it made sense because it was positioned above multiple categories, or even a single extensive category, with full spend responsibility. The category managers in this context were closely linked to specific product managers responsible for finished products that utilized the majority of items within their respective categories.
However, in the same company, there was another usage of the term “category management” within the sales division. In this scenario, it referred to the overall product managers responsible for several categories of various products or even one category of finished goods.
This dual application of the term can be problematic when used within a single company. In essence, what was previously referred to as “strategic procurement” has now been relabeled as “category management in procurement.”
Follow-up question: So, should category management always be strategic?
“Yes, it should. If category management doesn’t have a strategic focus, it begs the question of what its role or purpose is.”
Follow-up question: Are there challenges associated with this diversity in the application of category management?
” Absolutely, this diversity in applying category management is a common challenge. It’s often observed in companies that maintain decentralized procurement functions or possess a combination of regional, local, and global procurement roles.
In these cases, the global function might suddenly adopt the label of “category management,” but decision-making authority remains dispersed, sometimes with local autonomy. This can lead to confusion, both internally and externally. It’s crucial to establish clear definitions of roles and decision-making authority within category management.
Without this clarity, the term can create ambiguity, and it might be more appropriate to use alternative titles such as “procurement coordinator.”
Conclusion
Category management is an important strategy in modern procurement that allows businesses to segment their spending and focus on detailed insights into products, suppliers, and market dynamics.
It is not useful only in procurement but also in retail. Category management helps optimize product organization, pricing, promotions, and placement to meet customer demands and maximize profitability.
Furthermore, understanding and implementing category management can significantly transform procurement practices. It offers a comprehensive framework that enhances efficiency, fosters strategic partnerships, and drives better financial outcomes.
Frequentlyasked questions
What is category management procurement?
A category management procurement streamlines the process by segmenting similar products in a business.
What does a category manager do?
Category managers facilitate and handle the entirety of category management procurement.
How much does a category manager make?
The median salary of a category manager is around $100,000 per year according to LinkedIn. Although salary depends on the country you live in.
About the author
My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.
