Many companies fail to reach the full potential of category management for various reasons. In this article, we share the foundations that we believe must be included for companies to have the greatest opportunity to succeed in their development and realization of the category strategy.
The concept of category management in purchasing is nothing new but has been developed and adopted by companies all over the world since the late 1980s. Despite this, many companies fail to reach the full potential of category management for various reasons. Developing a category strategy is one of the most important tools for companies to be able to identify and deliver based on their purchasing goals, but success is largely determined by how good the companies are at executing the strategy in their daily work and getting the effects to last. During a time when the purchasing function can be heavily burdened but still expected to “raise its sights”, we share in this article the basics that we believe must be included for companies to have the greatest opportunity to succeed in their development and realization of the category strategy.
Category management in short
Central to category management is dividing all the company’s purchasing costs into logical purchasing categories and to appoint those responsible for each category who will work with planning, execution and follow-up in a way that supports the company’s overall goals and creates the most value.
Among companies that are mature in category management, the development of the category strategy is an important planning tool and the subject of an annual process where the strategy is revised as needed and is well coordinated with the needs of the business. The category strategy is important both towards internal stakeholders, to agree on the same goals, and externally towards suppliers in order to communicate what is to be done and expected in the form of, for example, innovation and savings.
A pragmatic view on category management
Axholmen advocates a pragmatic approach to category management where priority should be given to larger or critical categories and where the most important thing about the strategy is that it can be executed and anchored in the business. Our experience is that an initial hypothesis for the target image should be established early on to guide the development of the strategy and that the most important deliverables are:
Clear target picture: An overall target picture of what should be achieved for the category at a defined time (usually 2-5 years ahead depending on the industry) and which is communicated among stakeholders
Clear focus areas: A few strategic areas that are most important to focus on in order to achieve the target picture (e.g. create competition, increased spending control)
Detailed initiatives: Concrete initiatives per focus areas broken down at activity level (eg RFx process, renegotiation, value analysis/value engineering)
To get there and be able to create a relevant category strategy, one must first establish the internal and external fact base such as:
Current situation: Understand what the category looks like today and how it has developed historically based on e.g. volume, price, supplier base and contract situation
Business requirements: Understand the requirements of the business today and if we see that their needs will change
Value chain: Understand what the value chain looks like today and what opportunities there are to act differently
Supplier market: What suppliers are active on the relevant market, what are their capabilities and what is their position of strength
Trends: What are the trends and how do they affect the way we make purchases and our requirements for the supplier base
To realize the value of the strategy
The category strategy itself does not create value, it must be executed, and the following effects must last. According to Axholmen, the largest opportunities to realizing the value emerges if the purchasing organization:
Consists of the “right” people and skills: Running the category work requires people with a broad toolbox. The modern purchaser needs to have both traditional skills such as analytical skills and negotiation techniques, but it is almost even more important with business acumen and high social ability to gain the organization’s trust and get initiatives implemented
Allows an iterative process: Often one realizes that certain targets cannot be achieved or that the activities are deviating from the defined category strategy. Then there must be room to revise the strategy and think differently
Establishes the strategy: A good way to establish the strategy internally, and that to avoid surprises later, is to involve relevant stakeholders at an early stage in the actual development of the category strategy.
Has a dialogue-based approach: Suppliers, both existing and new, are often the most important source for identifying new opportunities and creating a good factual and knowledge base. Therefore, it is crucial to keep an ongoing dialogue with the supplier base
Creates commitment: New agreements and work procedure do not reach full effect if the desired behaviors are not complied with. Different types of incentives (e.g. exclusivity, long-term contracts, SLAs) are often a good solution as long as the fulfillments of these goals are within the suppliers’ own control.
Uses facts: Presenting facts, regardless of whether it is a negotiation or not, shows that you have done the “homework” and forces the supplier to respond to the arguments with facts. In the best case, the supplier accepts our view and in the worst case, it at least contributes to increasing our level of knowledge
The importance of “knowing your category” becomes even more important as purchasing is expected to contribute more and more to value creation and the category strategy is one of the main planning tools for getting there. The category strategy does not necessarily have to be developed for all categories but should be prioritized for the larger and critical categories where it can create the greatest return, as the strategy often requires an initial investment in time. The ability to execute the strategy will then become the key to creating the intended long-lasting value.
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