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% ahead of the open market or incurring increased commercial, legal and health and safety risks.
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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.
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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 stakeholder's 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 where the most strategic categories lie.
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 need to be evolved 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, which could be to source 50% of direct cost products from suppliers in the local area or to source 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. These need to be supported by everyone 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 becomes obsolete, non-critical or moves from direct to indirect. The review process is critical to ensure 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 financial 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.
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