Organisations that fail to analyse how
they spend their finances regularly may spend 16 – 21% per annum more than
organisations that closely monitor their spending patterns. To be
cost-effective, an organisation must periodically review what it spends, as
increased spending patterns may be incurred through spending ineffectively by
purchasing products and services that aren’t required, paying prices that are 7
– 9% above the open market or incurring increased commercial, legal and health
and safety risks.
Analysing what is purchased is essential
to understand how an organisation utilises its financial resources before
taking the necessary steps to ensure they are used effectively. Buying more of
what adds value by spending less and eradicating ineffective spending is
crucial to maximising spending efficiency and the effectiveness of an
organisation's financial expenditure. Increasing the visibility of
spending patterns enables an organisation to:
- Gain an insight into suppliers that offer the most
significant value.
- Reduce maverick spending.
- Create cost-saving opportunities through supply
consolidation.
- Extrapolate increased value from Suppliers through
product and service innovations.
- Increase customer service and satisfaction by more
accurately matching supply with demand.
- Ensure accurate accounting with detailed cost and
profitability pricing.
To develop and create a successful
category management strategy, an organisation must define the areas where
categorising spending and purchasing patterns will add value. Category
Management is not, however, just about managing demand patterns. It entails:
- Identifying budget managers.
- Stakeholder mapping and management.
- Supply market analysis.
- Defining organisational competitive forces.
- Supply appraisal and evaluation.
- Supplier relationship building.
- Management of Suppliers.
- Sustainable/ethical purchasing.
Category management is a systematic cost
analysis approach describing financial resource use. The descriptive process
allows the understanding of past and present spending patterns. It is used to
determine the best method for achieving cost benefits. Preserving and improving
on commercial cost savings involves the apportioning of direct and indirect
spending patterns by:
- Value.
- Supplier.
- Type.
- Volume.
One of the primary roles of category
management is guiding stakeholders using a series of targeted questions.
However, one of the biggest misunderstandings of organisational stakeholders is
that the category management process tries to take over the stakeholders' role
in purchasing. A proactive purchasing function should be working with
stakeholders by helping them to answer the critical questions about:
- Demand and forecast patterns.
- Financial and commercial
bottlenecks.
- Operational requirements.
- Quality issues.
- Legislative, Health and Safety and
Commercial Risks.
To realign category management
strategies with business needs and objectives, typical outputs of the category
management process might include:
- The examination of historical
purchasing patterns.
- Understanding critical financial
systems.
- Alignment of features and
requirements of the products or services in demand.
- A collaborative understanding of what quality looks
like.
- Deciding how quality should be
delivered.
Defining demand patterns and allocating
spending categories is a laborious task. It can entail the assimilation of data
streams and analysis to transform the data into meaningful information, which
is enacted by considering the following:
- Internal Needs: This should set a baseline for the
strategic category management process and provide a basic understanding of
sub-categories, significant suppliers, essential requirements,
stakeholders, and internal controls/policies currently in place.
- Spend analysis: The foundation of any
category management strategy depends on a solid understanding of
historical and forecasted spending. Organisations will find it easier to
formulate a practical category plan with accurate detail. Conducting a
thorough spending analysis will enable recommendations to be made to
stakeholders, the bare minimum of which should break the spending down by
sub-category, supplier, location, and business cost centre.
- Supply Market Analysis: Understanding the supply market is
critical to developing a robust category management strategy. An
organisation will gather market intelligence and benchmarking information
from various sources.
- Category Segmentation: Segmentation modelling allows
an organisation to effectively apply the appropriate strategic category
management for the products or services that are being sourced and will
prioritise the most strategic categories.
A category management plan is an
organisational tool that allows budget managers to understand how financial
resources are used to enable priorities to define the highest commercial and
legal issues, allowing the organisation to mitigate them efficiently and
effectively. The plan will define a list of initiatives, projects, or
tactics to deliver results. The category plan should:
- Initiate: Define the categories that the
organisation will manage.
- Prepare: Once the categories are defined,
plans must be developed to enable an organisation to manage purchasing
patterns in alignment with its needs and requirements.
- Prioritise: Objectives need to be set to
achieve the organisation's needs and requirements. For example, the
organisation could source 50% of direct-cost products from suppliers in
the local area or only from environmentally conscious suppliers.
- Define: The strategies that should be set
need to reflect the organisation's needs and requirements. For example, it
could be to contact all suppliers within a 50-mile radius and invite them
to tender for all indirect cost-related spending areas.
- Implement: Once strategies have been agreed
upon and approved, the purchasing function needs to work with stakeholders
to gain their "buy-in" to the Category Management strategies. Everyone
needs to support these to ensure their effectiveness in achieving the
organisation's needs and requirements.
- Maintain: The purchasing function will set
Key Performance Indicators (KPIs) or Service Level Agreements (SLAs) to
monitor and evaluate supplier performance. A typical KPI could be On-Time
in Full delivery, or "OTIF."
- Improve: Purchasing is a constantly
evolving function, so a relevant category at the start of a period may
become obsolete, non-critical, or move from direct to indirect. The review
process is critical to ensuring that categories remain relevant.
The most significant benefit of
implementing a category management process is the provision of greater
visibility of organisational spending. With visibility of how financial
resources are spent, budget managers can improve quality, leverage cost savings,
or increase the efficient use of finite economic resources.
Gaining a better understanding of an
organisation's supply market leads to budget managers having a greater sense of
and an increased focus on product and service supply collaboration and
innovation. Category management allows budget managers to take a proactive
rather than reactive approach to sourcing, allowing a more significant
influence on factors that may impact product or service pricing as they develop
a deep understanding of spend categories to reduce waste, duplication, maverick
and out-of-control spending.
Additional articles can be found at Procurement Made Easy. This site looks at procurement issues to assist organisations and people in increasing the quality, efficiency, and effectiveness of their product and service supply to the customers' delight. ©️ Procurement Made Easy. All rights reserved.
