Formally, category management is the strategic approach to procurement in which large organizations analyze their spending and change their behavior to obtain better outcomes, in terms of a combination of pricing or the sourcing of goods and services that more accurately serve their needs.
This involves analyzing their spending, by category, and applying market analysis to find better solutions, better suppliers, and increased competition. Execution of textbook category management across the breadth of an entity’s purchases is expensive using conventional techniques.
In practice, in part because this exercise can be expensive and time-consuming, category management reduces to a simplistic consolidation of purchasing across entities within the organization, or in partnership with other organizations.
“At its most basic level, category management is about bundling items. Buyers look for items purchased across the company and consolidate disparate agreements into a single contract (and price).”
By rolling up duplicative purchases made by different groups within the organization (e.g. the purchase of stationery by different divisions) into a large consolidated purchase, the straightforward logic is that buyers can get better prices in bulk. One doesn’t need to do all the textbook category management analysis of an individual segment such as paper to produce these bundled cost savings.
“Suppose now that we employ a buyer to consolidate these disparate deals [say, across factories] into a single, global contract. If you want to sell paperclips to the company, you have to go through one person, who arranges a single price and distributes the stationery to the factories. GMs are liberated from a tedious task and the company saves time and money.”
There are even groups that will help you consolidate purchasing across organizations.
There are three implications of this lazy approach to strategic sourcing.
You don’t do it for everything. Not everything an organization buys adds up to something with meaningful savings, so cooperative purchasing only applies to a subset of an organization’s total spend. It is an approach with limited positive impact. You can only purchase so many pens.
Strategic sourcing is no longer strategic. One of the key trends in large organization buying groups is the move to take a more strategic role. Chief Procurement Officers argue that members of their team need to be at the table earlier to participate in new market identification, product development, and finance, influencing the long-term decisions organizations make about the bets they take. Cooperative purchasing doesn’t fit this bill and its use makes it marginally more difficult to argue that sourcing teams are adding value beyond brute force cost savings.
You only purchase from large suppliers. Most organizations, even some of the smallest, have corporate social responsibility targets, or set-asides, expressed as targets for purchasing from small and medium-sized businesses, often owned by minorities, women, and other members of historically disadvantaged groups. Cooperative purchasing is a significant barrier to these up-and-comers because they lack the scale or scope to respond to larger, consolidated requests.
In fairness to the buyers, they are stretched to the limits of their capacity by staff shortages and growing volume and complexity in procurement.
“’The percentage of government purchasing staff that report being over-worked has steadily climbed in our survey from 35 percent in 2016 to 42 percent in 2018, and to some extent, is starting to look more like a tech start-up than a government bureaucracy in expectations for hours and workloads,” Paul Irby, principal research analyst at GovWinIQ SLED says.”
However, technology, in the form of network-based sourcing™ offers a less expensive alternative. For those who want to continue to roll up their purchases, network-based sourcing™ permits suppliers to form joint ventures and bid on projects of larger scale and scope. By networking suppliers who individually lack scale, who have complementary geographic footprints, or who have non-overlapping but adjacent product sets, network-based sourcing™ levels the playing field, consolidating both supply and demand.
The bigger benefit of network-based sourcing™ is that it enables the textbook category management by giving buyers affordable access to data, market intelligence, and pricing information that helps them understand the dynamics of individual markets without spending an arm and a leg, all while sharing information across networks of buyers and suppliers. Consolidating purchasing activity within the organization or across multiple organizations to address capacity constraints no longer becomes necessary to obtain better sourcing outcomes. We’d love to talk to you about EdgeworthBox. Give us a shout.