Category managers and procurement professionals are leaving no stone unturned in their search for new category management strategies. Inaccurate data, opaque risk determinations, limited indirect spend visibility and expensive technology solutions are complicating the development of procurement strategy. Procurement professionals should consider using this list of best practices when conducting category management and developing category strategies.
Best Practices Checklist
Reexamine category definitions and streamline internal spend categories
- Managers should use standard classification systems to reorganize broad areas of spend into a specific spend taxonomy, including consolidating existing categories and category definitions to streamline the total number of categories under management.
- Common standard coding systems managers can use to establish procurement taxonomies include National Institute of Governmental Purchasing (NIGP) Commodity/Services Code, North American Industry Classification System (NAICS) and Harmonized System (HS).
Increase data and analytics visibility across key spend categories
- Procurement managers should engage internal stakeholders and create analytics dashboards with data collected from suppliers and across the firm. Managers can leverage data generated from accounts payable, contracts registers, annual budgets, general ledgers, procurement cards (P-Cards), enterprise resource planning (ERP) software and invoices.
- Managers should track category-specific benchmarks and key performance indicators (KPIs) at regular intervals, including: the total value of spend per category, the number of suppliers in each category, procurement cost savings, procurement return on investment (ROI), average payment terms per category, supplier quality rating and the rate of emergency purchases.
- Managers should build out data analytics dashboards in high-spend categories with few analytical metrics to improve category-specific monitoring. Additional data analytics and monitoring will help managers mitigate maverick spending (i.e. spending that breaks internal procedures and purchasing terms).
Allocate indirect spend category management to one manager
- Indirect spend is the procurement of goods and services not directly related to manufacturing.
- Procurement managers should streamline their purchase order systems to drive better purchasing processes, improve controls on small one-off purchases and prevent maverick spending.
- Common categories of indirect spending that should be placed under management include travel, facilities, office supplies, marketing, professional services and IT.
Consider contract renegotiation in high-spend categories
- Leverage relationships with key suppliers that account for high spend in order to negotiate more favorable terms and avoid costs. Managers should aim to renegotiate where buyer power is strongest. (Managers should reference ProcurementIQ’s Buyer Power Score.)
- A high level of spend in one category (e.g. IT) does not always cleanly translate into greater savings potential in that category. Other market realities, such as rising input costs and high market concentration, may inhibit the firm from negotiating lower costs in that category.
- Successful contract renegotiation requires rapid access to contract terms, contract renewal dates and spend analytics. Moreover, renegotiation calls for solid relationships with key budget owners that are ready to reduce spend and support savings goals.
Category managers with high exposure to tariff risks should conduct an HS code audit
- Category managers with high exposure to tariffs and international trade risks should audit their product codes to mitigate non-compliance penalties and unnecessary tariff duties.
- Managers should aim to strike a balance between using a select few HS codes across a larger number of stock-keeping units (SKUs) and using granular, item-specific codes.
- Firms that rely on a few broad HS codes typically face higher tariff rates because those goods are more likely to fall under a code that triggers a duty collection.
- Firms that rely on many granular HS codes for each item expose the firm to higher annual maintenance costs because trade consulting services are expensive and it is time-consuming to cross-check internal codes against new international standards and tariffs.
Incorporate risk assessments and market intelligence into category management
- Procurement managers should engage market intelligence in early stages of category planning to proactively identify potential bottlenecks in category strategy implementation.
- Procurement managers should use digital tools to maximize visibility throughout the supply chain and leverage market intelligence data from internal and external sources.
- Managers should create scalable scorecards to track the following sources of risk across each spend category: supply risk, market risk, delivery risk, compliance risk, vendor risk, contract risk and financial risk.
- Category management is a continuous process that requires the participation of different firm stakeholders across business units throughout the procurement lifecycle, from early strategy development to the final supplier management.
- Category management can create a host of benefits for a firm, including cost savings, better supplier relationships, improved client satisfaction, shorter lead times and faster strategy implementation.
- The growing number of technology solutions in the procurement space, such as Source-to-Contract and Procure-to-Pay software, has created immense opportunity to automate and capture important information across the entire supply chain.
- Technology in the market does not always equate to streamlined processes; therefore, managers should take their time evaluating potential technologies or be prepared to face the risk of high software license costs, onerous implementation processes and IT issues that take away resources from procurement rather than adding to procurement.
By: Riley Mallon