What is category management? (With process and benefits)

By Indeed Editorial Team

Published 5 September 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Procurement is one of the many important functions within a business, allowing it to acquire the inputs necessary to conduct essential business activities. There are also strategies for organising procurement, such as category management. If you're interested in procurement or business development, then understanding category management can be useful. In this article, we answer 'What is category management', list its major principles, the process involved and discuss its key benefits.

What is category management?

Finding the answer to 'What is category management' can help you to determine if this is the right approach. It's an approach to procurement whereby an organisation separates its various spend areas into distinct categories based on defined criteria. This could be because these categories of goods are similar or because they complement each other. Other ways of categorising spend areas could be direct versus indirect. Direct means procurement of goods which are directly related to the end-product or service that the organisation sells to consumers, and might include raw materials, components and other product-related expenses.

Indirect costs are those which lack a direct relation to the end product or service. These spend areas relate to the overall functioning of the organisation itself, such as gas, electricity, water, insurance, rent and other such costs. A contributing theory is the Pareto Principle or 80/20 rule. In the context of procurement, this means that 80% of procurement expenditure is going to be with 20% of suppliers. By understanding this, the organisation's procurement professionals can identify the external partners to focus on and develop good working relationships with them.

Related: What is the Pareto analysis? (With steps for completing one)

5 key principles of category management

Here's a list of five of the key principles which help guide professionals who are adopting a category management approach:

1. Categorisation

Categorisation of spend areas is one of the primary principles of category management. This is typically going to differ from one organisation to another, as the basis for categorisation depends on the nature of their products and who their suppliers are. Doing so allows the organisation to better understand how its various spend areas relate to each other and develop solutions for making their procurement processes more effective.

2. Standardisation

In the context of category management, standardisation means the existence of set standards for the management of procurement activities. The ability to develop these standards derives from how the organisation categorises spend areas, as this can help them set standard procedures for acquiring groups of items together or managing expenditure. This also helps the organisation track the benefits of its approach, as standardisation makes comparisons easier over time.

Related: Procurement management: a step-by-step guide (with tips)

3. Aggregation

Although categorisation by definition requires an organisation to split up its spend areas into distinct segments, aggregation is still crucial. This principle stipulates that the totality of business requirements is still the primary consideration, despite the categorisation of procurement. By considering the totality of an organisation's requirements, it's possible to make some acquisitions in large quantities and save on costs.

4. Outsourcing

For many organisations, the inputs they require to function are a combination of internally and externally sourced. For category management to yield the greatest benefits, it's also typically a good idea to consider whether there are opportunities to outsource some internally-sourced inputs, based on their belonging to a particular category. Doing so can save costs over time and allow an organisation to focus its efforts on those pursuits which it's best at, such as core business activities.

Related: What is outsourcing and how does it work? (Plus advantages)

5. Relationship management

In the context of procurement, relationship management refers to relationships with external suppliers. Managing these relationships effectively means exchanging information and expertise with these suppliers to ensure the organisation has a reliable source of inputs and makes the best procurement decisions. In many cases, relationship management can also refer to relationships with other key stakeholders who can add value.

Related: What does a relationship manager do? (Including skills)

The category management process

The process for implementing a category management approach typically includes the following activities:

Definition

Typically, the first step towards category management is defining the categories of the organisation's various spending areas. One approach is direct versus indirect costs, in terms of their relationship to the final product. Whether some costs are similar or complementary is another way of creating these distinct categories. In some scenarios, it might even be useful to develop both categories and sub-categories.

Related: What is ABC analysis? (Plus how to use it and pros and cons)

Market analysis

Market analysis in the context of category management and procurement relates to the market for the supply of input goods. This involves assessing the various potential suppliers in the market, how these inputs relate to customer requirements and comparing prices at various spend levels. Another part of this is identifying suppliers who can provide multiple similar or complementary goods or services, allowing the organisation to focus on developing good relationships with fewer suppliers and adhering to the 80/20 rule.

Related: How to do a strategic analysis: important tips and advice

Spend analysis

A spend analysis means the amount of spending the organisation expects on certain inputs. It can also categorise these in the usual manner as either fixed or variable costs. A common approach is to develop estimates and records over time for each of the categories and sub-categories that the organisation has for its procurement. If these categories contain a mixture of fixed and variable spending, then sub-categorisation on this basis can also be a good idea.

Related: What is vendor management? (Definition, benefits and tips)

Advancement

The various insights from the market and spend analyses are part of a process of improvement. The organisation's procurement professionals or category managers use this information to make alterations to the procurement process, such as using new suppliers, changing specifications and altering the scope of work for certain staff. The insights regarding spend areas and market analyses might even lead to new activities, such as searching for new suppliers to meet specific requirements. It's also crucial that this advancement process continues over time, allowing the organisation to continue improving its procurement and related activities.

Related: Types of approaches to business process improvement

Benefits of category management

Successfully implementing category management can allow an organisation to enjoy certain benefits. Some of the common advantages of using this approach include the following:

Better supplier relationships

By more effectively managing its procurement activities, an organisation can develop better supplier relationships. This means the relationship is both more positive and more beneficial to the organisation. It's more positive because the organisation has a clear policy and approach for its purchases, which makes communication easier and its requirements easier to predict for suppliers, who often appreciate the consistency.

It's more beneficial for the organisation because the existence of this approach usually means there's a category manager in charge of it. This individual acquires expertise over time, which allows them to make better decisions, find better suppliers and optimise the procurement process.

Related: A complete guide to supplier relationship management

Cost saving

By identifying the best ways to procure certain goods or services together and focussing on good relationships with suppliers, an organisation can save costs. This is partly through better identification and use of economies of scale. The application of the 80/20 principle in a lot of category management approaches can also encourage the organisation to concentrate on its best suppliers for a large number of inputs, which helps generate these economies of scale.

Related: 10 examples of operating costs in business (with definition)

Predictability

By definition, category management is a proactive approach to procurement. It involves identifying the key categories for an organisation's inputs, identifying the best ways of meeting these needs and then developing good relationships with the best suppliers on this basis. By being proactive, an organisation can determine what it's going to require in advance of new initiatives or expansions. It does this through the category management process, which involves a lot of research into the supplier market and related information.

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