In simple terms, a category strategy answers the 5 W’s (Who, What, Where, When, Why) and the How of a particular group of like expenditures. Ultimately, it will guide the Category Manager in his/her application of different procurement levers and tactics to generate value in the assigned spend area. I want to dive a little deeper on this topic by discussing six core elements that make up a robust category strategy:
1) Internal Needs Assessment: this should set a baseline for the category and provide a basic understanding of sub-categories, major suppliers, key requirements and stakeholders, internal controls/policies currently in place, and a brief category history and some of the challenges and successes that it’s had. This section is particularly useful when reviewing your category strategy with someone unfamiliar with its scope.
2) Spend Analysis: the foundation of any category strategy depends upon a solid understanding of the historical and (ideally) forecasted spend. Without accurate and granular detail, it’s hard to imagine how you can formulate any worthwhile strategy that you can feel confident in. If you didn’t do anything else in developing a category strategy, at least conduct a thorough spend analysis before making any type of recommendations to stakeholders or your leadership. There are a million different ways to slice and dice your data; however, you should break your spend down by sub-category, supplier, location, and business group/facility at the bare minimum. Data visualization is worth mentioning here, and a skill in itself—how do you take data and transform it into an eye-opening story that opens the door to powerful business insights? There are several data visualization tools like Tableau that can help with this, but you can never go wrong by simply utilizing Excel or PowerPoint. Here is one of my go-to formats to visualize spend data, the infamous Pareto!
3) Supply Market Analysis: understanding the supply market is key to developing a robust strategy. You can begin by gathering market intelligence and benchmarking information via many places and sources; however, Beroe Live is a decent place to start, and it’s free. Commonly used market analysis tools are the Porter’s 5 Forces model as well as the Structure, Conduct, Performance (SCP) model. I feel Porter’s 5 Forces model is more useful when entering a specific sourcing event or deal negotiation as it will help analyze the level of competition that exists at a specific point in time; therefore, I tend to utilize the SCP framework as a party of my category strategy development process.
4) Category Segmentation: segmentation modeling sets you up to effectively apply the appropriate strategies for the goods/services you are sourcing and should help prioritize where you spend your time and with. The Kraljic Matrix, developed by Peter Kraljic, is a segmentation model that evaluates two key factors: 1) the overall importance of the good/service (commonly based on total spend, profitability impact, or value-add to the company) and 2) market complexity or supply risk. These factors are then evaluated on a Low to High scale across 2 x 2 matrix creating four quadrants or categories: Strategic Items (High Value + High Market Complexity/Supply Risk), Leverage Items (High Value + Low Market Complexity/Supply Risk), Bottleneck Items (Low Value + High Market Complexity/Supply Risk), and Non-Critical Items (Low Value + Low Market Complexity/Supply Risk). Similarly, this tool can also be used to segment your suppliers. This is important to note because your counterpart on the other side of the table has most likely engaged in a similar segmentation process in helping them evaluate the strategies to deploy with their customers. Do you know where you fall in their model? Does your supplier/category segmentation align with how your supplier views you as a customer?
5) Strategy: all the fact-based analysis that has been conducted up to this point should point to and allow you to articulate 2-3 high-level strategies that will guide all procurement activity that will occur (I highly recommend anyone engaged in Category Management to read “The Purchasing Chessboard” as it is a great tool to stimulate thinking around category strategy, procurement levers, and tactics that can be deployed). It should also include goals or KPIs to help measure the effectiveness of its implementation. Leveraging one of the four general strategies in The Purchasing Chessboard, if my strategy is to “Leverage Competition Among Suppliers,” one of my goals or KPI’s could be “Achieve 15% year-over-year costs savings in x good/service for next three years.”
6) Category Plan: now that you have this amazing strategy with lofty goals to save millions, where the rubber meets the road is by developing a list of initiatives, projects, or tactics that will deliver the results. The Category Plan should call out the name of the project, description of the project, or tactic to be used, strategy alignment, value, and timing. A Project Prioritization matrix is a useful tool here to help you through this process. Although you may not formally develop criteria to plot your project on the matrix, it’s important to think about the Business Value and Ease of Implementation of the initiatives you have listed.
In summary, a category strategy is much more than a document that answers the 5 Ws as it becomes the critical guide to the Category Manager in his/her application of different procurement strategies, levers & tactics to generate value for the company they represent. By including these six elements in your category strategy, you are sure to deliver a significant impact for your organization and see transformative results.
Link to Category Strategy template: https://drive.google.com/file/d/180dGllTMuTzvL_Q8ayDrMrFNefPhaeC_/view