Category Management: Key Principles and Best Practices

What Is Category Management?

Category management is a systematic way to purchase goods and services by grouping segments of procurement spend while increasing revenue, reducing risks, and maintaining partnerships with suppliers. A successful category management process boosts the overall effectiveness of procurement efforts.

With so many suppliers, products, services, and market dynamics to keep track of, procurement teams are always struggling with the vast amount of data and decisions they need to make on a regular basis as part of the procurement process. Learn how category management can make even the most complicated markets simple and easy to work with.

Understanding Category Management

Knowing how category management functions within an organization requires understanding what a “category” is, the key principles of category management, and what a category management professional does.

Defining “Categories”

Companies purchase a wide variety of products and services every day. To simplify the procurement department’s work, it’s not uncommon for them to group similar or related products together into product categories according to demand, vendor, purpose, and other characteristics.

The nature of the groupings depends on corporate structure, industry, spending policies, and the surrounding market. Still, the general idea remains the same: applying a single standard to categorizing the goods and services purchased for their business operations.

The most well-known category system in use today is the UN Standard Products and Services Code, shortened as UNSPSC. However, some companies use their own internal classification methods known as taxonomies.

To illustrate how categories work in business procurement management, the following are some examples of categories that might be in use:

• IT
• Security
• Human resources
• Professional services
• Transportation and travel
• Medical services

If you’re ever responsible for splitting your transactions into categories, it’s worth knowing how categorization works and what it involves. Specific approaches include:

• Direct and indirect products: Direct procurement refers to the raw materials required to manufacture a company’s product output intended for sale to consumers. These purchases are often ordered in large quantities and require strict diligence to obtain them from trusted suppliers. Indirect purchases are made to support the daily operations of the company. Things like professional services, marketing, telecommunications, consulting, and utilities don’t directly contribute to the creation of products but are still necessary to keep the organization running.
• Similarities among the items: Transactions can easily be categorized by the amount spent, the supplier or vendor they were made from, the nature of the products, or the volume of the purchase.
• Inventory categorization techniques: Specific techniques used in inventory management include ABC Analysis, which measures how strict the spending and physical cycle count controls are for those items. “A” includes the most strictly controlled transactions and product inventory categories, while “C” involves far less control. Another example is the Pareto Principle, which states that 20% of your transactions will be responsible for 80% of your results.

Procurement departments work with categories because they help determine through data analysis where costs are coming from. Category management assists decision-making to show where the focus should be placed to optimize the procurement of the right products. 

By identifying core areas of spending with breakdowns by spend categories, it’s now possible to apply shared best practices and policies to all products in a single category. Small businesses and mid-sized or larger companies need an ERP system module or third-party add-on with this data management functionality to make their work more efficient and increase real-time spend visibility. 

Defining “Category Management”

The category management process is a strategic approach to enterprise procurement. As mentioned, you can implement controls on your transactions across an entire category of purchases, simplifying the task of optimizing your spending.

With so many transactions made regularly, even larger companies aren’t able to afford granular control over every little purchase. Categories can:

• Eliminate redundancies
• Consolidate your procurement efforts
• Simplify negotiations with multiple suppliers
• Generate insights from supply chain data
• Create opportunities to reduce prices and implement supply chain risk management
• Boost the quality of service you provide to customers and build brand reputation
• Ultimately result in getting more value out of your materials and services

You can overall expect better compliance and more sustainability of supply chains when your procurement teams work with categories.

3 Key Principles of What the Category Management Process Entails

We can summarize what category management entails by looking at the three main areas that it contributes to a business:

• Categorizing and classifying purchases from across the organization
• Gathering similar purchases together into a single group, which can then be used to cut down on costs by effectively ordering in bulk and reducing the number of supplier contracts necessary to get the job done.
• Standardizing procurement policies and procedures, which result in more cohesive teams working together to optimize purchases across the business. A consistent sharing of procurement information through categories enables stakeholders to work together more closely in this regard.

Category management might even help identify tasks that you can outsource to third-party service providers. This way, internal staff have a chance to spend their time on more important core activities.

What Category Management Is Not

Do not make the common mistake of confusing category management with strategic sourcing. The distinction is a subtle but important one to make, yet many mistakenly use the terms interchangeably.

Strategic sourcing is a process by which a business unit obtains the goods and services it needs at the lowest cost to itself, which is not necessarily at the lowest price. To do so, spend managers consolidate purchasing power to get the best possible value out of their transactions. It’s essentially a one-time consideration that fulfills immediate demands and encourages cost savings.

By contrast, category management is a more long-term approach that must involve analyzing the current market and building supplier relationships to provide lasting value. It also involves the entire company’s supply chain of business units rather than that of a single department.

Think of category management as an evolution of strategic sourcing, applying those same principles to build a holistic, end-to-end perspective of company spend. In other words, working with categories makes you more proactive rather than reactive when it comes to addressing procurement concerns. Upper-level executives also take stronger hands-on control of category management compared to strategic sourcing.

What a Category Management Specialist Does

Category management is such a vital business function that specialists are often employed specifically for it. Each category can actually have its own specialist, such as one to handle professional services and another to work with logistical procurement.

The job of a category management specialist plays a large role in the overall procurement function of a business. It involves:

• Gathering information on the market and current procurement procedures, such as historical spending patterns
• Defining the categories
• Crafting a plan for strategic sourcing and overseeing its implementation in the field
• Measuring the results of category management through KPIs, metrics, and spend analysis

Category managers can be focused on purchasing products and services for the company in a way that maximizes sales and profit, or they can be more retail-focused and decide which product displays and promotions appeal the most to consumers.

Either way, many hard and soft skills are required to manage procurement categories effectively:

• Knowledge in the specific category: For instance, an IT category manager must know about computing needs and technology trends.
• Operational experience: A deep understanding of how procurement is generally handled within the business (spending, demand, suppliers, etc.) is necessary to implement a strategic category management plan with spend management and the goals of the organization in mind.
• Analytical skills: Just like with any other procurement process, categories require large amounts of market data to parse, which naturally involves a lot of numbers and graphs to understand.
• Other soft skills: Communication and negotiation are also required skills for a category manager in order to collaborate closely with external suppliers as well as internal stakeholders.

Subsets of the category management position include interim category managers, who are temporarily employed to help manage the procurement of a short-term project. These contracts last from a few months to a year. These professionals usually become full-time category managers in the future.

Category executives, in addition, work alongside category managers and help them identify opportunities and generally take a supporting role.

What are the Four Pillars of Category Management?

The four pillars of category management are:

1. Planning
2. Procurement
3. Performance
4. Promotion

These four Ps of category management will help a procurement department meet its business needs as a new or existing customer when buying products in the marketplace. By offering excellent products, timely order fulfillment, and exceptional customer service, suppliers can earn customer loyalty.

Planning

The procurement department defines its strategy and tactical product categories for category management. Midsize and larger companies determine how to staff the purchasing department with assigned product category responsibilities and collaborate with HR. 

The modern purchasing department assigns a taskforce to begin its software evaluation of ERP-integrated add-ons for procurement category management. 

Procurement

Make purchases through excellent sourcing analysis to determine the top 3+ contenders and best overall product and supplier. Negotiate pricing and payment terms. Collaborate with internal stakeholders before finalizing the purchase. Where possible, get volume discounts. 

Look for excellent ratings, customer references, and testimonials. Use category management to classify and accumulate spending data by product category. 

For the procurement organization, the seller’s product, pricing, and the promotion element of discounts are important. The seller’s placement will help make the procurement department aware of the product for consideration.  

Performance

To ensure procurement achieves competitive pricing, quality, on-time delivery, customer service, and business spending optimization, complete vendor or supplier performance ratings periodically. Track supplier performance scores to see where performance can be improved. Replace underperforming vendors that aren’t sole suppliers. 

Promotion

Promotion in category management is an awareness-generating activity to gain familiarity with products being offered by selling suppliers in specific categories. Sellers can gain promotion and placement awareness through trade shows, advertising, press releases, Internet placement, and purchasing directory listings. 

Category Management’s Role in Procurement Optimization

You may be wondering whether category management adoption is worth the effort. This modern purchasing process in procurement has an immense number of benefits for the companies that choose to focus on it. From greater savings and revenue to more useful data-driven insights, there are many reasons to start thinking about categories in procurement management.

• Enabling a holistic approach to spending to find ways to buy in bulk for the long-term, cutting down on repetitive transactions, and reducing maverick spend.
• Unlocking new cost-saving opportunities to get more value out of your purchases. Market research and negotiations involved in category management help you make the most efficient use of your budget.
• Enhancing supplier relationships through better planned-out contracts. Once you’ve mastered the procure-to-pay process for one supplier, it might even be possible to apply that same P2P across an entire category.
• Controlling vendor risks on a categorical basis.
• Organizing procurement resources by centralizing all spending data and reporting on categorical procurement.
• Generating actionable insights that can be used for future spending and supplier negotiations. A category manager who knows the ins and outs of the market is more suited to this task.
• Working with the goals of the organization in mind, particularly through stronger collaboration with all functions of the business.

Category management overall results in a streamlined business strategy with better spend control. Since you’re getting more value out of your money and reducing supply chain risk, choosing to focus on category management is a no-brainer.

Steps Involved in the Category Management Procedure

That being said, the next step is naturally to jump-start a category-based procurement management initiative. Here’s how.

Preparing and Gathering Information

A category manager’s first task is usually to designate what categories and subcategories will be used. Doing so requires a deep understanding of the strategic procurement goals of the business.

Data is also involved, from supplier performance information to past organizational spending. An updated catalog of pricing for products and services can also be used to identify prevailing trends in the market.

Identifying Opportunities Through Market Research

How much is the business spending? And what needs do internal stakeholders have to address? Category managers fulfill procurement demands by conducting spend analysis and market research before the business adjusts its purchases.

Spend analysis determines exactly how the company is spending money in each category of goods and professional services. It’s complemented by a market analysis to see what the market for each category looks like.

A category manager in this case would identify opportunities in the market (deals, contracts, and potential purchases) and prioritize them. Then, a category-based strategy is implemented to begin the procurement process.

Building Up Business Relationships with Suppliers

Vendor relationships are vital in today’s corporate world. Part of category management is reaching out to new sources of products and services in the market and screening prospective vendors for better deals.

Part of a category manager’s job is to negotiate payment terms and proposals using his specific knowledge of the category and the goals of the company. Supplier onboarding also requires a degree of due diligence to focus on supplier relationship management and healthy supplier relationships, as well as risk management to cut down on vendor risk.

Focusing on Objectives and Strategies

Imagine you’re a retail store looking to apply categorical organization to its product lineup. In this case, from a seller’s perspective, you would:

• Look at categories of the products you offer and sort them by purpose, price range, and other characteristics.
• For each category, you would apply overarching promotions and special pricing in order to boost sales for that category.
• From there, you can increase traffic from customers and boost revenue and reputation for your store.

This specific instance is an example of how managing a business by dividing products into groups helps boost efficiency. Instead of tweaking prices for every single item on the shelf, you effectively manage multiple at once using categories.

It’s important to set realistic and achievable goals for yourself. Think about what category management should be doing for you. Are you trying to raise sales volume or profit margin? Or are you trying to boost the variety of products and services you obtain? In doing so, a category management aligns procurement efforts with the overall objectives of the organization.

Utilizing Techniques to Your Advantage

Organizations of various industries have come up with tried-and-true tactics for approaching category management.

• SWOT: For an overall category of procurement, identify the strengths, weaknesses, opportunities, and threats (SWOT) involved in your company’s current approach to it.
• PEST: Analyze the political, economic, socio-cultural, and technological (PEST) risks involved in each category of goods and services. What industry trends and sentiments will impact your ability to operate in these markets?
• A/B testing: This strategy is used in web design, advertising, and SEO content ranking, but it’s also effective for monitoring the interactions your customers have with your brand. This way, it’s possible to evaluate the effectiveness of your category strategy.

There are far more options than listed here, of course, but your exact approach to managing categories of procurement comes down to your own preferences and corporate structure.

Always Focusing on Continuous Improvement

Procurement departments often find that they need to change the scope of their work or find entirely new vendors after running the numbers. Perhaps money is better spent in another category to reflect current market conditions and consumer demand.

The idea here is that collecting and analyzing data is a necessary part of category management, as it enables continuous improvement of your strategic sourcing and procurement efforts. KPIs and benchmarks are used regularly by category managers to gauge performance, especially if a brand-new category has recently been introduced into the workflow. You might even end up recategorizing certain items to better fit into your portfolio.

Addressing the Challenges Along the Way

Category management is a company-wide function and will result in procurement changes that will impact every aspect of the business. Experienced category managers know that friction is bound to happen when you announce potentially controversial changes to the products and services your teams rely on.

For instance, some departments will be skeptical of a new supplier. Others will be concerned that you’re trading quality for cost, while others will simply be resistant to change and want to have full control over their own operations.

Category managers address these concerns by encouraging open communication with all internal stakeholders, including requester, procurement and finance collaboration. They must also ensure that the value proposition of category management is clear, and be ready and willing to answer any questions or concerns on the spot. This step is where the soft skills of communication and negotiation come in.

Best Practices for Implementing Category Management

Let’s end with some best practices to get your effective category management strategy off on the right foot.

• Align your operations together: Siloed operations are always detrimental. Always aim for a new procurement strategy that can apply to every department, and don’t leave any stakeholders behind. Only then can you develop a plan that will work in action rather than flounder.
• Emphasize collaboration: It’s almost impossible to overemphasize the importance of effective communication and synergy when it comes to cross-functional procurement. Category management must involve internal and external stakeholders working together towards a common goal.
• Take advantage of data analytics: Data is the lifeblood of many business processes, and procurement is no exception. It can both catalyze a category management initiative and help it improve over time by guiding in the right direction and measuring how effective it is out in the field.

And finally, don’t be afraid of change. Category managers, much like procurement professionals in general, will always have to adapt business operations to new market dynamics. In order to evolve and keep yourself competitive in the future, revolutionizing procurement with digital automation will be necessary. 

Tipalti Procurement automation software lets your business increase visibility and control spend with category management. Learn more about how to use best-in-class practices for purchasing with Procurement automation.