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Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy

Category Management — The Ultimate Procurement Guide for 2024

Key take-aways

  • Category management in procurement is a method where spending is split into product groups to save money and enhance procurement.
  • Direct costs are vital for products, while indirect costs support daily operations.
  • Category managers must manage specific product groups and require deep knowledge, analytical, and communication skills.

Category management procurement seems to be a new term for beginners in the procurement industry. It may seem a topic that is tough to tackle. But hey, we are here for you to guide you every step of the way.

For this article, we will discuss category management procurement. We will study how it works and how it is used in the business. 

After you read this article, you will be able to utilize this strategy in your business. This will allow you to effectively plan your business direction and stay focused on your objectives. Let’s now start to wander the world of category management procurement. 

Definition of Category Management in Procurement

Category management procurement is a strategy wherein the overall spending of a business is segmented by a similar type of product. 

This strategy allows category managers to concentrate and gain a deeper knowledge of the products, suppliers, and markets. Through this, category management procurement develops a strategic plan that aligns with its objectives.

Category management procurement is about bundling items at its basic level. Bundling items in each category in the market allows the procurement team to save some money by allocating their purchases within fixed parameters. 

It also enables companies to buy at cheaper prices which create a competitive advantage in the market. The segmentations in category management procurement arrange goods and services in groups based on their function and types. 

Listed below are some of the categories in which the organization typically focuses their expense:

  • IT
  • Security
  • Office management
  • Human Resources
  • Professional Services
  • Medical
  • Industrial products and services
  • Transport

In category management, you must know the two broad groups of spend which are the direct and indirect costs or categories.

Direct categories encompass the essential materials, resources, goods, and services that a company needs to create the products it intends to sell. These items are critical for the core operations of the business and are typically acquired in significant quantities from trusted suppliers.

Indirect categories, on the other hand, encompass goods and services that are not directly integrated into the production of a specific product but play a crucial role in supporting day-to-day operations. These items enable the business to function smoothly but do not become part of the final product.

You must take note that the classification of items as “direct” or “indirect” can vary depending on the industry. For instance, in industries like banking and insurance, certain things like IT resources are deemed “direct” because they are vital for the core business functions and customer service. However, in sectors like food or beverage, these same IT resources may be considered “indirect.”

Importance of Category Management Procurement

Category management goes beyond purchasing goods and services. It guides the strategy of a business to develop and build a relationship with the supplier. This allows the business to create a deeper understanding of negotiations and program development. 

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Going back, category management builds a stable connection between you and the supplier. It balances the relationship between the clients and vendors as it relies heavily on open communication and honest negotiation. This allows you and the supplier to come to a compromise where both of you can achieve a positive resolution. 

The Roleof Category Manager

You may wonder who handles the category management procurement. This is where the category manager comes in. A category manager handles a certain category of goods and services. It is the one who manages and develops strategic plans, and category plans, and provides insight into the category of products. 

Category managers manage supply chain relationships for their specific roles. This requires category managers to have a background on the specific category that they will be assigned. 

Category managers should be an expert in their specific category. Additionally, they must have the skills to be one. The following are some of the skills that a category manager should have:

  • Should have a deep understanding of spend, demand, providers, and markets. 
  • Hard analytical skills
  • Ability to implement a strategic plan that is aligned with the objectives and goals of the business.
  • Communication and negotiation skills for the benefit of internal and external stakeholders. 

Stepsof The Category Management Procedure

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.

Benefits of Category Management Procurement

Below we’ve listed down some of the benefits of category management procurement.

1. Increase in performance of vendors

Category Management helps big and small businesses to work with vendors efficiently and secures the time between the start and end of their process. It also helps the business to gain a deeper knowledge of each vendor. 

2. Build a better relationship with different suppliers

Category management creates an opportunity to make contacts within the structure of the business. This allows the business to delegate tasks effectively at the functional level. Thus, creating better communication that aids in building a better relationship between its diverse suppliers. 

3. Provides better Insight regarding spending and negotiating

Category management helps maintain the category of products which provides crucial insights into the accuracy of price, cost, and spending. It also identifies the full list of vendors that makes the complete expenditure known by the business. 

4. Implements purchase to pay process

Dealing with suppliers is a tiring task, especially if you use different processes for each supplier. Category management enables the process of dealing with a supplier in a specific category to be done perfectly. 

This allows the business to replicate the process they do from a specific category of a supplier to another supplier. Therefore, streamline the process of dealing with your suppliers. 

Difference Between Category management and Strategic Sourcing

We now know that category management is a strategic approach to procurement to segment the spending of a business into similar products. Although it is a strategic approach, it must not be confused with strategic sourcing. Below are some of the differences between category management and strategic sourcing:

Category Management
The spend analysis in category management is continually refreshed.
It has an end-to-end process.
It includes supplier management programs.
One of its key components is supplier development due to its process.
Strategic Sourcing
The spend analysis is conducted for quick requirements.
One-time process.
It sometimes lacks the aspects of supplier and contract management
Commonly, it has no supplier development programs.

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.

Miriam Fuchs

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 in procurement is a strategic approach that involves segmenting a company’s overall spending by grouping similar types of products. This strategy empowers category managers to gain in-depth knowledge of products, suppliers, and markets, enabling them to develop strategic plans aligned with the company’s objectives.

It simplifies the process by bundling items within each category, resulting in cost savings and a competitive advantage through bulk purchasing. Goods and services are organized into groups based on their function and type, often including categories such as IT, security, office management, human resources, professional services, medical, industrial products, and transportation.

Additionally, category management extends beyond procurement, fostering strategic relationships with suppliers. It relies on open communication and honest negotiation to achieve positive resolutions.

A key figure in category management is the category manager, responsible for managing specific categories of goods and services.

Category managers should possess skills such as understanding spend, demand, providers, and markets, analytical abilities, strategic planning, and strong communication and negotiation skills.

Furthermore, it helps you decide what to buy, find the best deals, and build good relationships with suppliers. It’s not just a simple trick; it’s a vital tool to make your business better.

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.

Marijn Overvest Procurement Tactics