Category-based Procurement
Published March 2020
Introduction
This is the third article in a series. The first two articles covering Bespoke Procurement and Project-based procurement.
Category procurement is perhaps the most common break down for Procurement teams and certainly is the most focused on in terms of written articles. Often these articles are focused on specific categories and their respective challenges.
It would be a very long article if I were to try to cover category by category and explore all aspects. I, therefore, chose to keep this article at the highest level and explore the nature of category-based procurement.
There are three primary areas to category procurement.
- The sourcing of products and/or services within the Category;
- the management of suppliers associated with the category;
- and strategic planning for this category.
CIPS define category management as: “the entire science of the procurement subject applied to a single genre of expenditure”. “As such, a category manager is the ‘CPO of their category’ and carries a weight of responsibility for their organisation’s application of the category – especially for direct categories that support strategic supply lines.”
The Strategic Nature of Focusing on a Category
Focusing by category allows optimisation of the supply chain for that specific category. Leveraging the knowledge and expertise of category specialists to develop a specific strategic approach to each category.Typically, the focus is on value and cost, not just on cost. Assessing the risks and impact on profitability for purchases within any Category.
Depending on the nature of the purchase, within a category, there will be different levels of a supplier relationship. From a very close relationship focusing on supply chain optimisation, innovation and risk mitigation, through to a simple contract management process or establishing multiple competitive supply arrangements.
The level of engagement across an organisation will also vary. With key strategic purchases involving cross-functional senior team members. With the emphasis placed on key business initiatives.
Typical Steps Associated with Category Purchasing
- Risk and impact assessments associated with the supply of the goods and services within a given category.
- Supplier and Market research. Including identifying any areas to be focused on at the Category or a Strategic level within the business.
- Engagement in supply chain optimisation and innovation with key suppliers
- Monitoring of the supply chain and the environment. The environment is used in its widest context and could include economic, competitive, geopolitical and weather-related risks, to name some of the key ones.
- Throughout all of the above, focus on sustainability within the total supply chain and any impacts associated with this.
Table of the key differences between Category and Project based procurement
The following table outlines some of the key differences between Project and Category based procurement processes.
Category Management
Project Procurement
Focus
Focus is on purchase demand and consolidation. Sourcing based on volume and supply across the business Focus is on a project specific objective. Ensuring overall project delivery Strategic or Tactical Typically strategic to achieve lower unit prices and supply chain optimisation Tends to be tactical , though for larger repeating projects these can be strategically managed
Centralised or devolved
Centralizes the purchasing administration and lessens miscommunication with suppliers
Devolves the administration towards the project team. Supplier engagement emphasises quick wins and timely results.
Compliance handling Compliance activities are centralised within, and specific to, the category. Centralises compliance around the project. Relationships Focuses on longer term supplier relationships, optimisation over the longer term and volume discount structures Focuses on a project based relationship and engaging suppliers around a specific project objective Timelines Supplier relationships are typically over the longer term and involve engagement and optimisation on supply. Typically, supplier relationships are short – the duration of the
project. The focus is on project timelines and leveraging a suppliers’
capability and potential cost savings during the projectSustainability Emphasis is over the long term and across all aspects of the lifecycle of purchased goods and services Sustainability is focused on the project impact. It is by no means
less important; however, it is more difficult to achieve substantive
gains given the short duration of the engagement. If projects are large
or repeated the opportunity is similar to that of a Category focusChange Management All changes can be discussed and mutually agreed over an extended time to achieve a long term need Changes tend to be associated with a specific scope of work, drawing
or specification. Possibly affecting other project purchases and the
overall project timelines.Price Typically, unit and volume-based pricing Mostly, based upon specific delivery milestones associated with the project. Professional services may be fixed or time and materials based.
Payment Based on delivery of a product or service Milestone or percentage of completion based. Though, for some aspects, it will also be delivery based. Delivery Agreed by the parties and typically to a fixed location Mostly will be to a specific project location, though there may be need to vary delivery locations Competences Helps to develop capabilities to locate suppliers with key category
competencies. Category focused expertise develops and knowledge of
supply chain optimisation specific to this category.Helps to develop a sound project procurement process. Ad-hoc
procurement situations become easier to manage. Strong change
management, project and expediting skills tend to develop.Category and Project-based procurement should be used as appropriate
to the nature of the purchase. The use of one should not eliminate the
use of the other. They serve different purposes and should be used
within a procurement organization appropriately.
Category-based Procurement Examples
The following chart has some examples of categories and purchases within these categories. (Note: this is not an exhaustive list of all possible categorisation of purchases of goods and services. It does though capture the key categories that Claritum can help to manage.)
Note that the common theme, of all of the above, would be that any individual category can be managed from a Procurement and organisation perspective in a similar way.
The Inherent Challenges of Category-based Procurement
One of the biggest challenges facing Procurement overall is the fragmentation of the supply chain creating a very diverse supply market from which to source: there exists a large number of suppliers, now on a global basis, with which any firm may do business in the delivery of their requirements (from small specialist companies to large multifunctional firms delivering complete solutions). The challenge is to know which supplier could offer an advantage in the supply of a specific requirement.
In addition to fragmentation, there are many possible challenges for a category specialist. The significance of each of these, of course, varies by category…
Category Procurement Challenge Areas:
- Risk mitigation.
- Dark purchasing (items purchased outside of standard processes.)
- Long process cycles.
- Inaccurate or incomplete data on which to base decisions.
- Managing Supplier-related issues.
- Supplier identification, onboarding and development
- Miscommunication (both internal and external)
- Lack of transparency from suppliers
- Cross-functional buy-in and focus on any transformation or change
- Ensuring adherence on CSR
- Brand image and reputation
- Sustainability
Characteristics of good Category Procurement Activity
Companies that consistently capture the most value from category procurement typically have these critical procurement capabilities:- Superior supply-market expertise for procurement of category-based goods and services.
- Automation for Sourcing through to Payment transactional activity.
- Data Analytics linked to business planning and action.
- A category-specific strategy for each category.
- Strong Supplier Relationship Management.
- Awareness of innovative solutions and engagement of suppliers on innovative approaches.
- Early assessment of procurement risks.
- Strong scenario planning and analysis of future trends
- A cross-functional sourcing focus to optimise on efficiency, cost and sustainability. This includes engaging key external stakeholders (for example suppliers)
- A focus on TCO associated with all purchases and the impact of change on profitability.
- Use of RFQs and Contractual terms that are designed to optimise the efficiency and cost of the overall supply chain.
8: Associated articles