Daily Archives: July 9, 2019

Comprehensive Category Management: Are You Still Doing it Wrong?

As we said five years ago (and probably even earlier than that), spot buying individual categories at market lows or evening running reverse auctions at opportune times is NOT category management. And for that matter, neither is a strategic sourcing event that throws everything in the category into a strategic negotiation, especially if the category is metals and you are including the kitchen sink.

And you might be thinking that the doctor needs a psychiatrist because how could it not be category management if you are addressing the whole category? Category Management isn’t just about grouping all seemingly related items and running an event. Category management is about grouping items that have related characteristics that allow the items to be sourced effectively under the same strategy.

For example, while it might make theoretical sense to group printers, ink, and paper together —- because you use them together, from a sourcing point of view, ink and paper often go better with office supplies and printers with hardware. You can probably get them thrown in for free with a server purchase. But that’s just the start.

For example, if you source a lot of metal parts, you should probably start by grouping them by primary metal, since the price of steel, aluminum, etc. will largely dictate the price of those parts. Furthermore, it might even make sense to not only source all of the parts from the same supplier but even buy the metal on behalf of the supplier with your better negotiating power and/or credit rating.

But that’s just the start. Then you have to make sure the parts are (best) produced using similar processes, because giving a part to a supplier that is only easily produced by laser cutting when the supplier only has traditional machining / cutting is not going to be a good decision. Even though the volume will lower their cost of metal, the extra work will increase the cost per unit.

So sometimes you will need to group the category into sub-category by metal and production style and get bids separately and together (from any supplier that can offer both) and do a multi-level analysis to find out the best approach. (And this is yet a another reason that SI has been telling you since DAY ONE that you need an optimization-backed sourcing platform as this is the only way you can effectively analyze all the options.)

And sometimes you will have to ignore items with a large demand or core material component because they are cheaper when sourced as part of a different category buy as they can be produced by other suppliers or bundled for a larger volume-based discount.

For example, consider an organization-wide UPS replacement. They are technically a power transformer with a battery, but you wouldn’t source them from the manufacturer that manufactures custom transformers for your on-site renewable solar and wind farm since you’d source them from your hardware supplier who supplies you with the rest of your office electronics as they would be buying such units in bulk from a manufacturer who produces them in bulk and gives you a better deal.

Comprehensive category management is looking at a category from a holistic perspective and finding the right segmentation to get the best overall value through the right sourcing method at the right time.

It’s not just a one-time slice-and-dice, it’s a continual analysis of the category from a multi-dimensional and current market perspective to make sure each time an event is run, the right strategy is used across the right sub-category of products and services which are offered to the right prospective supply base.

And it requires up-front market analysis before the event as well as optimization-backed analysis during. So you need a good analytics platform, preferably with some automation that can constantly pull in market data, analyze it to current cost, plot and predict the trends, and provide the necessary market intelligence that can be compared to a best-practice knowledge base that will indicate the event type that has been the most historically successful under current conditions. (And in the spirit of our recent Applied Indirection series, this is not AI, this is RPA with parameterized suggestion look-up.)