Globally, businesses face tough competition, heavy workloads, and unrealistic time constraints every day. This necessitates the presence of well-planned, optimistic, and methodical solutions to help them run their daily tasks smoothly. One of the major challenges in a business domain is that of product stock and resource management.
This is where category management steps in as an optimal strategy to address this concern. It helps procurement strategists to plan an approach that mitigates extra costs, maintains business productivity, and balances supply chain optimization.
What is category management?
In business language, a ‘category’ is an umbrella term for products that are similar or related to one another. This relationship can be in terms of type, cost, supplier, department, or location. Hence, the management and procurement of products based on their specific category is called category management.
Introduced in the 1990s by Dr. Brain F. Harris, this concept was meant to improve the way of dealing between retailers and manufacturers. Precisely, it promotes product management as strategic and organized business units instead of individual or isolated items. Eventually, it proved successful and helped businesses improve their functionality by enhancing customer satisfaction, optimizing product assortments, and driving more sales.
Category management and strategic sourcing: What’s the difference?
Although both are sub-categories of procurement efficiency, the terms are often confused and used interchangeably. However, it is important to understand the prime difference between the two. While category management focuses on procuring goods and services that fall under the same domain, strategic sourcing helps the business select the best supplier at the best cost. Importantly, the goal of category management is to streamline the supply chain and enhance efficiency, whereas strategic sourcing tends to minimize costs without compromising quality.
Main types of goods involved in procurement categories
Before the category procurement process kicks start, businesses first distinguish between direct and indirect resources. Direct categories include supplies that are closely linked with the production process of a business. For example, the raw material required for the final product, essential machinery, and equipment, or staff. In contrast, indirect categories include supplementary services like technology, office supplies, transportation, marketing and business consulting services.
For example, for a company that manufactures aluminum windows, the aluminum they need to source falls in the direct category. Whereas the furniture they need for their workplace is categorized as indirect supply.
Top benefits of category management
The benefits are vast, from integrating cost-effectiveness to polishing supplier relationships and product quality. To simplify, these are some ways category management aids in business growth:
Cost-effectiveness
Firstly, the segmentation enables organizations to pinpoint the most economical sources for products within each category. This is achieved by studying historical spending data. Consequently, it helps the category manager negotiate better contracts with potential suppliers in future, minimizing cost expenditure.
Data-driven approach
Secondly, category management software allows businesses to study the performance metrics of different categories. Therefore, it helps them track which suppliers match customer needs better, or which categories are the most budget-friendly. A study conducted by McKinsey indicates that data-driven insights help businesses outperform their rivals by as much as 20%.
By organizing expenditures and establishing a centralized contact for all associated suppliers, organizations can enhance their understanding of expenses, evaluate vendor effectiveness, and identify possible supply chain challenges. Furthermore, a thorough knowledge of contracts, pricing, and market dynamics can facilitate more informed and lucrative procurement choices.
Proactive purchasing
Category management empowers organizations to enhance their purchasing decisions through informed and proactive strategies. By examining expenditure data, companies can pinpoint opportunities for cost savings and engage in more effective negotiations with suppliers regarding category-specific items.
Moreover, gaining insight into the interrelationships among various categories can reveal opportunities for strategic sourcing or the bundling of categories, allowing businesses to leverage economies of scale effectively.
Quality control
Close monitoring of supplier performance allows organizations to procure high-quality products for their company. Subsequently, they can track and identify which products are most aligned with customer needs. Gradually, this improves the company’s reputation and clientele, resulting in better ROI.
Customer satisfaction
Through the alignment of product selections with customer preferences and prevailing market trends, category management enables businesses to provide a more customized and fulfilling experience for their consumers. By ensuring the availability of appropriate products at optimal times and prices, companies can significantly boost customer loyalty and retention.
Implementing category management: Procedure and steps
The founder of the concept, B. Harris recommends the following 8-step cycle to efficiently implement its process:
Step 1 – Defining categories
Initially, you need to set a criterion for product categories based on market behavior and customer preferences.
Step 2 – Assessing category roles
Then, find out how each category intersects with your broader business goals. This helps rank them based on importance and demand (Kraljic Matrix).
Step 3 – Tracking the performance
Next, evaluate the performance of categories from various perspectives. Consider their standing at the retailer level, their position within the broader market, and how they compare to other categories.
Step 4 – Setting objectives
Remember, no business can excel without clear cut objectives and goals. So, this step is important in categorizing goods based on KPIs of sales, volume, market share, and product assortment.
Step 5 – Planning strategies
Later, develop a strategic marketing approach and enhance the in-store experience for your category. This includes exploring ways to expand market share, elevate sales, and attract more customers to your location.
Step 6 – Designating category tactics
Also, navigate how to improve the three Ps of category management: Products, placement, and promotion.
Step 7 – Implementing
Finally, when you are done with the previous steps, get ready to bring your plans to reality.
Step 8 – Reviewing
Moreover, continuously keep adapting to evolving market trends to keep the process tangible and beneficial. This process is not intended to be a singular event; rather, it is structured as a continuous cycle of improvement.
Summary
In the current competitive landscape, embracing category management is crucial for achieving lasting success and growth. It plays a key role in fostering a customer-focused shopping experience, enhancing sales, and streamlining operations. Neglecting this approach may lead to unsatisfactory customer interactions, reduced profitability, ineffective operations, and strained relationships with suppliers.
To level up your business, opt for professional business consulting and strategic sourcing services. At St. Croix, we help you manage categories strategically, together with counseling you with other steps you can take for exceptional business performance.
