In October I reviewed the three levels of category management; basic, enhanced, and transformative, and the value each level can deliver. The November post reviewed the 7 company characteristics to assess before embarking on category management. In this post I address the question “Which categories are most in need of category management?”—where to get started?
First and foremost—selection of categories should be conducted as a team activity with procurement involving key stakeholders in the process. Early engagement with stakeholders builds buy-in, trust, and confidence in procurement. It is an opportunity for procurement to discuss and prioritize the value proposition for each category including total cost, assurance of supply (risk reduction), quality, service, and access to innovation. Sustainability can be found in all of these and should also be considered. Resist the tendency to focus solely on price savings.
The framework to use in the dialogue with stakeholders is category segmentation based on the Kraljic matrix. The Kraljic matrix is the most widely taught and used matrix in the procurement community and one which stakeholders readily understand and embrace.
The category segmentation framework has four levels to match the Kraljic matrix:
There can be exceptions to the category management level applied by segmentation level. For example, an outstanding leadership development candidate once used enhanced category management in office supplies (a non-critical category in that company) to radically reduce the supply base (from over 350 to 5) and generated huge value improvements. The resulting strategy automated ongoing purchases to lock-in the value.
Every category strategy must include a continuous scan for quick wins. Quick wins drive team and stakeholder enthusiasm, enable rapid value delivery, and demonstrate successful progress.
Stakeholders generally start from a perspective that all of their spend is strategic. Procurement must introduce the distinction between business important spend and strategic spend. Almost all spend is important (or it would not be occurring) but in reality, a small amount is truly strategic. The dialogue between procurement and stakeholders to agree category segmentation is invaluable and should be a positive step along the stakeholder – procurement relationship journey.
Once category segmentation is complete the next steps are closely related and inter-dependent:
- Determine how many category strategies and implementations can be supported.
- Select which categories should be addressed first.
The correct answer to the first step is very few—even for a global major corporation. The goal of the initial categories is to rapidly demonstrate the value possible through category management. Too many category management teams dilute the overall effort which invariably slows the process. Each enhanced and transformative category team’s resources require 5-7 stakeholder members, a business sponsor, and the category manager to lead the team. Each team will further engage business stakeholders throughout the process and then drive implementation of the approved strategy—there are finite limits to the number of category implementations that any business can support.
The second step builds on the first—pick a mix of categories at different segmentation levels that represent the value requirements of the business. It is common to select 50% of the categories at the base level to deliver total cost savings and the remaining 50% split between key and strategic to deliver access to supplier innovation, reduce risk, et cetera. The remaining categories can be time-phased in an agreed ‘wave plan’. Some stakeholders are more receptive to change than others—focus on categories where senior stakeholder support is present and spend governance is already functioning. Hold the remaining categories for a later date when the organization is ready.
Summary thoughts on category team selection:
- Stakeholders must participate in the category segmentation and selection process.
- The initial categories must deliver the value promised within the agreed timeframe.
- Managing the tempo of change is critical—it is better to start with fewer teams that over deliver than to start with too many teams and overload the company.
- Each selected category should move quickly—speed is your friend.
- Measure the baseline thoroughly and then reassess the results to prove improvement.
- Measure validity is critical—ensure finance, quality, and regulatory, et cetera are aligned with the measures.
Thank you for reading this post. I look forward to your comments and inputs. In the meantime, if you’re looking for additional reading on these topics, I recommend you consider one or both of the following:
- For everyone in procurement, Purchasing Must Become Supply Management, Peter Kraljic, Harvard Business Review, September 1983
- For procurement vice-presidents and rising directors, The Global Procurement Leader’s Handbook.
- For category managers, rising procurement managers, or a leaders of category managers The Global Category Manager’s Handbook.
Both books are available on Amazon and The Global Category Manager’s Handbook is available on Lulu.com in a handy coil-bound addition (lays flat on a desk).