Category Management: A Complete Guide

Understanding  Category Management

Category Management (CM) is an effective approach widely used in procurement that gives the opportunity to businesses to increase their revenue and growth opportunities by creating segments of similar spendings or products. 

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Category management works so well because it’s orientated towards higher levels of efficiency within procurement teams.

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The Basics of Category Management

When you walk into a supermarket, you probably notice that all the products are cleverly organized into aisles. If you need baking flour, you’ll find that right next to it are available a lot of related baking products. Now, this is not only clever but it also simplifies the life of customers by putting similar products at the same location. 

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Category management is something like that, more specialized, of course, but still parts from the essence of managing products into categories, thus creating business units that are aligned with the general goals of the company.  It’s a well-organized process that brings a list of benefits like better cost management, and  higher levels of quality

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Key Components of Category Management

 Category Definition: 

This is the most essential feature, when products or services are grouped, a category is formed. Things to bear in mind when creating a category are the characteristics of the products, their purpose, and in general a clear comprehension of what roles this category plays in the company’s list of products. 

Strategic Sourcing: 

The process where you go and carefully search and identify the best vendors for your business is called strategic sourcing. You want to obtain the most competitive price along with the highest quality. In category management, you not only find these suppliers but also develop long-term relationships by settling the best practices. 

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Supplier Relationship Management: 

Also known as SRM.Following what we mentioned above, this practice focuses on fostering positive and productive relationships with suppliers, this is done with a mindset of mutual benefit, open and constant communication, aligned goals, and performance reviews. 

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Data Analysis:

The key part of any effective process, data analytics is crucial to understand patterns around consumer behavior, market trends, and gaining product insights. With this information, leaders are prepared to make better decisions based exactly on what’s happening in the industry. 

Performance Measurement and Optimization:

Something essential to know if category management is working as it should be, it’s to carry out performance measurement and optimization of processes. Establishing core metrics is the first step on the journey toward improvement and growth. 

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Strategic Sourcing vs. Category Management

Although there are situations where both concepts are used interchangeably, strategic sourcing and category management aren’t the same. Just like we discussed above, strategic sourcing is a process designed to develop and maintain strategic relationships with suppliers. Category Management, on the other hand, is a complete approach built to oversee the whole life cycle of products or services.  

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Defining Procurement Categories

A procurement category is more than goods grouped because they have similar features. There has to be also a similarity across supply/demand drivers and vendors.  Ideally categories will be formed either by using a global standard, i.e : UN Standard Products and Services Code or an internal method defined by the company. 

There are two main categories: 

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• Direct: These are usually raw materials and the sort of items used to produce goods. Direct spend management refers to the process of purchasing all the materials that the business requires to manufacture the ultimate product.  Think for example, of all the miniature parts a computer needs to be created. 
• Indirect: These are goods or services that a company acquires to support daily operations. They are general in nature but aren’t directly related to a product. For example, the maintenance of the office or a consultant in marketing services. 

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Benefits and Best Practices 

So far, we have seen what category management entails but what about the advantages? 

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Advantages of Category Management

Saves Money

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One of the main benefits category management brings to the table is cost-saving. It’s quite logical if you think about it. Sourcing the right vendors, forming contracts efficiently, and optimizing your inventory, definitely have a positive impact on your operations costs. 

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Better Collaboration

This is specifically true for business-suppliers relationships. Category management creates the ideal space for companies to have closer associations with their suppliers. This at the same time, promotes clearer data insight and identifies growth opportunities.

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Customer Satisfaction 

If your company offers the right product at the right time, you can imagine how happy customers are going to be to know that their preferences are listened to. By managing categories based on market drivers and preferences, you can ensure an increase in customer satisfaction levels. 

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Operational Efficiency 

Naturally, the consequence of all the points just discussed is that businesses will benefit from seeing their procedures streamlined, complexities reduced along greater productivity. Managing your operations has never been easier. 

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Best Practices

• Make sure your operations are aligned:  An operation that’s not aligned with the pain points and needs of a company’s department or that’s not included in the opinions of key stakeholders is doomed to fail from the beginning.  Before deciding on a new procurement strategy don’t forget to involve in the conversation all the possible stakeholders. 
• Cross-functional collaboration: Have you ever found out about a change in operations management too late to give your opinions about it? That’s something leaders must avoid as communication across the organization is an essential part of positive collaboration
• Data analytics: How could you know if category management is working or not? Where you can gain precise insights from your customers? The answer lies in data analytics. 

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How to implement a successful Category Management strategy?

1. Understand Your Business Objectives

• Define Goals: Clarify what you aim to achieve through Category Management (e.g., increase sales, improve margins, enhance customer satisfaction). To do this you’ll need to rely on documentation, data, and survey internal and external stakeholders.   Ensure your category strategy aligns with broader business objectives and market trends. Market research is especially important here. 

2. Conduct Category Assessment

• Category Definition: Clearly define each category (e.g., product types, customer segments) based on a solid evaluation of the market, the last thing you want is to create a category that lacks of real value. To prevent such a scenario evaluate current category performance using key metrics, you can always perform a needs assessment or a spend analysis.

3. Build Strong Relationships with Suppliers 

• Vendor Relationships: What’s at the core of a positive relationship? Trust and mutual benefit. For both cases, communication is essential. In the business world, this couldn’t be more important. To make category management work, you’ll need to rely on the best suppliers out there. 

4. Develop Category Strategies

• Strategy Formulation: Create strategies tailored to each category’s goals and characteristics. Determining the right mix of products within each category to meet consumer needs and maximize profitability is normally at the forefront of all the strategies but you shouldn’t forget about the marketing side of things. Decide on pricing strategies, promotional activities, and placement within stores or online platforms.

5. Techniques that Work 

• SWOT:  If you want to be sure that your strategies are the right ones, you can use a SWOT analysis-Strengths, Weaknesses, Opportunities, and Threats. 
• PEST:  In the wake of the challenges faced by global supply chains, it’s a good idea to be aware of the PEST- Political, Environmental, Social, and Technological risks that could affect your categories. 
• A/B Testing: Yes, this is more associated with digital marketing, but it could also be useful to determine if your current category strategy has he desired effect on your customers. 

6. Implement and Monitor

• Implementation Plan: Develop a timeline and action plan for executing category strategies. Remember that for a goal to work it has to be settled within a measurable timeline. Monitor key performance indicators (KPIs) regularly to assess the effectiveness of strategies. Continuously refine strategies based on performance data and market changes.

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Different types of Category Management strategies 

Exclusive Category Management 

This strategy aims to create customer loyalty, retailers carry solely one product from a given supplier. 

Selective Category Management 

Here retailers acquire products from multiple vendors for a specific category. It has the advantage that companies can offer higher product diversity to their customers.

Non-Selective Category Management 

This strategy goes beyond the previous one, retailers purchase products from all the possible suppliers. 

Private Label 

If the retailer aspires to offer unique products, this is the best alternative, they can sell the products under their brand’s name. 

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Challenges in Category Management 

Data Management  

Overseeing large amounts of data can be daunting for category managers. From gathering the right numbers to understanding them correctly, data management might pose a serious challenge for leaders. On the bright side, this can be solved by investing in data analytics skills and programs. 

Integrations 

Large organizations can see themselves trapped in their own hierarchy at the moment of deciding to implement category management processes. For small business, on the other hand it could be a bit too complicated. In both cases, aligning the objectives of the company with your category management strategy to prevent that. 

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Alignment 

Speaking of alignment,  the principle of having everyone and everything on the same page goes further than strategies and revenue. After all, it’s going to be the departments and their teams the ones in charge of performing category management. 

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What a Category Manager do?

Taking into account, how specialized the implementation of category management is, it’s no wonder that there’s a specific role for Category Manager. In bigger companies, it’s common to hire a specialist for each category. However, the main functions of a CM will revolve around the following:

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• Collecting information, to review past data and formulate relevant predictions for the market.
• Establishing the categories
• Designing a solid strategy for all the steps involved. 
• Reviewing short and long-term results.

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How does Category Management impact Procurement?

Yes, category management might sound interesting and have all the key points to attract you, but it’s really going to benefit your procurement efforts?

The short answer is a big YES

Let’s see in detail why. 

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It changes the way resources are spent 

Positively

How? By establishing the most effective strategies to source the best suppliers and buying goods efficiently. 

Improves relationships with suppliers 

If both parties, businesses and vendors have their demands met, their relationship can grow without difficulties, maximizing the benefits for everyone. 

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Organizes procurement resources 

All the data that matter is easily accessible so procurement teams know exactly what’s happening with categories. 

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Provides Insights 

It provides an awareness of records and trends so future needs can be covered beforehand. 

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The role of AI in the future of Category Management

It’s still amazing how artificial intelligence keeps reshaping the business world, and of course, category management isn’t the exception. And if you’ve reached this far with the blog-we hope you do, you probably can guess why. 

The complexity surrounding customer preferences, and the role data intelligence plays on top of a market that seems to be inversed in a never-ending evolving cycle, creates the ideal scenario to seek the assistance of AI. 

Final Thoughts

In simple terms, category management is a partner to consider if your organization wants to have better product handling, provide the right service to its clients and promote spaces for growth. 

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