By Gregory Romney
A robust category plan and strategy will guarantee significant impact for organisations. Here are six key 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 with some of the challenges and successes experienced. This element is particularly useful when reviewing your category strategy with someone who is unfamiliar with the category and its scope.
2. Spend analysis
The foundation of any category strategy depends on a solid understanding of the historical and (ideally) forecasted spend. Without accurate and granular detail, it is hard to imagine how you can formulate any worthwhile strategy that you can feel confident in. If you did not do anything else when developing a category strategy, at least conduct a thorough spend analysis before making any type of recommendation to stakeholders or your leadership. There are a million different ways to slice and dice your data, however, at the bare minimum, you should break your spend down by sub-category, supplier, location and business group/facility. Data visualisation is worthwhile to mention 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 visualisation tools out there, such as Tableau, that can help with this, but you can also never go wrong by simply using MS Excel or PowerPoint. One of my go-to formats to visualise spend data is 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 a myriad of places and sources. Beroe LiVE is a decent place to start and it is free. Commonly-used market analysis tools are Porter’s Five Forces Model and the Structure, Conduct, Performance (SCP) Model. Personally, I feel Porter’s Five Forces Model is more useful when entering into a specific sourcing event or deal negotiation as it will help analyse the level of competition that exists at a specific point in time. Therefore, I tend to use the SCP Model as part of my category strategy development process.
4. Category segmentation
Segmentation modelling really sets you up to effectively apply appropriate strategies for the goods/services that you are sourcing and should help you to prioritise where you spend your time and with who. The Kraljic Matrix is a segmentation model that evaluates two key factors:
• The overall importance of the good/service (commonly based on total spend, profitability or value-add to a company) and
• The market complexity or supply risk
These factors are then evaluated on a low-to-high scale across a 2×2 matrix, creating 4 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 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 to help 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?
All the fact-based analyses that have been conducted up to this point should highlight and allow you to articulate two or three 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 key performance indicators (KPIs) to help measure the effectiveness of 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/KPIs could be to “achieve 15% year-over-year costs savings in x good/service for the next three years”.
6. Category plan
Now that you have this amazing strategy with lofty goals to save millions, a list of initiatives, projects or tactics must be developed that will deliver the results. The category plan should call out the name of the project, a description of the project or tactic to be used, strategy alignment, value and timing. A project prioritisation 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 is important to think about the business value and ease of implementation of the initiatives that you have listed.
In summary, a category strategy is much more than a document that answers the five Ws as it becomes the critical guide to category managers in their application of different procurement strategies, levers and tactics used to generate value for the company that they represent. By including these six elements in your category strategy, you are sure to deliver significant impact for your organisation and see transformative results.