In our last post we noted that study after study has shown that, on average, 30% to 40% of negotiated savings never materialize and this is because the “strategic” element is usually forgotten once the sourcing exercise is over. True value can only be created through category management if the entire category lifecycle is addressed and properly managed as part of a strategic category management plan. In our last post we noted that a strategic category management lifecycle consisted of at least nine phases, and labelled each of these phases. In this point, we are going to discuss, at a high level, what each phase is.

In the rationalization phase, the category team identifies the category or verifies that the category still makes sense from a sourcing / management perspective. Sometimes, categories need to be changed up a little. For example, let’s say that you had an office supplies category and you were grouping printer ink in the category but not printers, which were grouped in electronics. This may or may not still be a sensible category from a value management perspective. On the low end of the price scale, it costs more for cartridges than it does for the printer. It may be possible to negotiate a better deal from the office supplies vendor on the printers than it would be with the manufacturer. When you consider that the office supplies vendors often buy in much greater volumes, have already negotiated great volume discounts with the manufacturers, and know they are going to make a lot of money on the cartridges over time, they have a strong incentive to give you the printers at their cost. Manufacturer’s don’t!

In the supplier identification phase, you identify the suppliers who could service the category as a whole, or at least significant portions of it so that you do not have to work with more than an optimal number of suppliers (as per the strategic category plan).

In the sourcing phase, you analyze the category and come up with an optimal category sourcing and management plan, the strategic plan for the category, and then you conduct the appropriate sourcing event. It may be a simple RFX, an automated auction, a multi-round optimization-supported negotiation, or participation in a pre-existing GPO contract that leverages total volume. It depends on the category, market conditions, and specific organizational needs.

In the contract award phase, the contract is awarded and the specific service levels, performance metrics, and execution requirements are laid out.

Then the supplier management phase begins, and doesn’t stop until the last unit is not only delivered but recovered or returned. If the products come with a three year warranty, this phase could go for three years beyond the initial sourcing period.

Shortly after the contract is awarded, the procurement phase begins and delivery of the products, services, and/or product/service bundles begin.

Once the first delivery is taken, the inventory has to be managed and prepared for distribution to the end consumer at the appropriate times. In other words, the needs of the outbound supply chain have to also be identified and balanced with the savings achievable through the optimization of the inbound supply chain.

At some point, some of the products will break down and need to be recovered, repaired, refurbished, or recycled. This returns management process also has to be efficiently managed or all of the savings achieved in the sourcing will disappear in the warranty management.

Finally, if the product was returned because of a manufacturer’s defect that cannot be repaired, the product will need to be returned to the supplier for credit and/or working components (that can be reused) may have to be recovered as part of final recovery management.

This is the category management lifecycle in a nutshell. In our next post in the series, we will discuss some tips for maximizing your return.