CIPS South Wales Branch

Category Management

Presented by: Dave Porter

Consultancy Negotiation Skills Development Recruitment Interim Management Asia Sourcing

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History of Category Management

Originated in marketing in the 1980s.

Grouped products into categories based on how the consumer used the product e.g.
Rekitt Benkiser products/brands are distributed across 8 categories

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Reckitt Benkiser Brands & Categories

Bang, Mortein Veet Nurofen Clearasil Strepsils Gaviscon Mucinex Scholl Frenchs

Finish Lysol Dettol Vanish Woolite Durex Calgon Airwick Harpic

19 Power Brands
Each ranked 1 or 2 worldwide 75% of net revenue

Fabric care Surface care Dishwashing Home care

22% 17% 11% 14%

Health care Personal care

13% 13%

Food Pharmaceutical

3% 7%

8 Category Groups & Revenue Share

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History of Category Management

Originated in marketing in the 1980s.

Grouped products into categories based on how the consumer used the product e.g.
Rekitt Benkiser products/brands are distributed across 8 categories

Helped retailers grow sales and profit by maximising synergies and minimising unproductive competition between their own brands and products. For example:
Michelin also manufacture Kleber tyres which are marketed as a high quality (Michelin connection) budget brand (price connection) tyre thus securing market share in 2 segments.

Adapted and adopted progressively by procurement functions

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What is Procurement Category Management?

Category management is a process which relies on cross functional teamwork to generate procurement outcomes that fully satisfy agreed business needs. Categories group products and services together based on the ability of the market to supply not on the basis of organisational boundaries. BUT - this has been the goal of the procurement profession for many years what is so special about category management? Extent of engagement and teamwork with stakeholders for all expenditure with suppliers.
Not simply allocating categories/commodities to procurement team members

Governance process which crosses organisation boundaries. Depth of category specific knowledge and expertise market & technical. Emphasis on planning and use of analytical tools.

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The Planning Issue

Upstream
Need Specification Enquiry

20%

Agreement/Contract Re-active
Downstream
Expediting Problem Solving Receiving Inspection

Available Resource (time)

80%

Excessive Contract Supervision Storing Invoice Matching

Handling Emergencies!

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The organisation was leaking like a sieve! $880m Approved Contract Value

$880m Contract Value

$210m (24%) extra Scope Growth, Claims, Variations, Use of contingency Poor post-contract mgt etc
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The Planning Solution

Pro-active
Business Objectives Supply Planning Strategy Strategic Plans Contract

80%
Negotiation

Upstream

Market Analysis

Supplier Management
Tender Improvement

Agreement/Contract
Downstream
Receive Goods & Services Manage Performance & Pay

Available Resource (time)

20%

Category Management helps invert the triangle

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How does category management work?

Category tree extends to the level at which the organisation is likely to buy.

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Category Management Structure 2009/10

SOCIAL & PEOPLE ENVIRONMENT CORPORATE

Social Care (83.4m)

People and Professional Services (33.5m)

Construction and Special Projects (62.5m)

Environment (54m)

Transport & Facilities Management (59.8m)

Corporate & ICT (34.7m)

Residential Homes (18.77m)

Agency (13.1m) Building Maintenance Services (30.3m)

Passenger Transport Services (19.9m)

ICT (11.67m)

Domiciliary Care(18.6m)

Professional Services (12.99m)

Events (8.55m) Buildings and Civil Construction Projects (61.4m) Waste Management (5.4m) Highway Maintenance and Construction (4.66m) Transport Service And Materials (10.6m)

Schools Supplies & Equipment (4.73m) Advertising, Print, Design & Post (4.16m) Office Consumables & Services (3.62m)

Supported Living (14.94m)

Consultancy (7.49m)

Plant, Tools, Equipment and Services (2.07m)

Nursing Homes (10.63m) Marine Services (1.16m)

Parks and Ground Maintenance (3.54m) Building Materials (3.02m) Highways Materials (2.26m) Traffic and Telematics (1.95m) Facilities Maintenance (1.78m) Leisure and Other Facilities (779k) Utilities and Energy (11.6m)

Fostering Services (8.6m) Supporting People (3.49m) Other Adults Services (3.14m) Other Childrens Services (2.77m) Substance misuse (2.45m)

Books and Publications (1.04m) Domestic Furniture & Equipment (915k)

Property Leases & Accommodation Service (7.9m)

Cardiff Council Category Structure

(extends to level 3 sub categories)

Catering (6.47m)

Cleaning (1.25m)

Edinburgh City Council Commodity/Category Structure

Learning and Care

Corporate Indirect

Environment , Transport & Trades

Construction & Consultancy

Exempt

L1 Sub Categories

L1 Sub Categories

L1 Sub Categories

L1 Sub Categories

L1 Sub Categories

L2 Sub Categories

L2 Sub Categories

L2 Sub Categories

L2 Sub Categories

L2 Sub Categories

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Commodity Structure
Environment, Transport & Trades

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How does category management work?

Category tree extends to the level at which the organisation is likely to buy.

A Category Manager develops a Category Plan in conjunction with one or more service lines for procurement of the products or services within the category.
Categories may cross service lines e.g. legal services or desk top IT. Alternatively, a category may be an essential component in the delivery of a single service e.g. childrens care services or vehicle transmission systems.

The Category Plan gathers all relevant data to identify, quantify and prioritise improvement opportunities in conjunction with service lines/stakeholders.

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Sub Commodity (incl L1 where invoiced directly) Care Services Las Agencies & Other Bodies Uncategorised Publishing Utilities Charity Building Contractors Community Groups Recycling Construction Consulting Engineers Staff Training Health Care Training Services Consultants Financial Services NHS/Health Board Clothing Facilities Plant Hire Lights IT Hardware & Software Taxis Vehicle Sales Furniture Educational Services Fuel Telecommunications Provider Concrete Products Solicitors Security Office Equipment Vehicle Rental Electrical Contractors Blacksmiths Landscapers Asphalt & Tar Products
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Spend 24,430,228.35 17,182,613.96 13,779,485.01 10,566,345.10 10,294,622.01 8,417,679.13 6,741,115.04 5,873,978.45 5,043,594.86 4,718,777.35 3,657,616.07 3,542,526.85 3,240,109.74 2,624,570.31 2,513,996.63 2,306,458.56 1,983,075.50 1,953,417.68 1,918,545.80 1,834,079.16 1,601,897.63 1,544,424.24 1,491,135.17 1,441,703.78 1,403,641.01 1,384,859.43 1,368,003.99 1,361,794.90 1,303,213.57 1,154,833.46 1,080,304.72 963,919.93 942,590.05 911,048.72 897,275.90 896,454.72 805,952.45

Understanding Spend is Crucial

Highest spend 37 (9%) sub commodities from a total of 405 sub commodities account for 80% of total spend

90% of spend on 19% (75 No) of sub commodities

80% of spend on 9% (37 No) of sub commodities

The Tail
10% of spend on 81% (330 No) of sub commodities

Most are low value and relatively straightforward to procure but some are high value and complex. The Category Management process must accommodate both.
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The Process Must Also Take Account of Risk

Only influencable spend > 150k is positioned

STRATEGIC SECURITY

STRATEGIC CRITICAL

(21m)

General Elect Subs Process Plant Chemical Dosing

Filter Nozzles

Risk
Low value spend 2m
GRP Building Kiosks

Specialist Civils Subs e.g.Piling HV Switchgear Misc Tanks General Piling Standby Generators Pressure Vessels Filter Media Pipe Fittings

General Civil Subs Mech Plant

Building Products
Ductile Iron Pipe Fabricated Plant Penstocks Steel Pipe Mech Installation Plant Hire Steelwork

TACTICAL ACQUISITION
0.3% (150k pa)
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TACTICAL PROFIT

(12m)
6m pa

% of Total Expenditure
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Category Management Process Key Components

Establish team & governance structure

Gather data & analyse internal & market

Identify & quantify opportunities

Develop procurement strategy options

Implement preferred procurement strategy

Comprehensive category plans addressing all sub categories

Specific strategy for procurement of one or more sub categories

Category plan identifies all opportunities within a category along with the anticipated means of achievement. For simple procurement, it may also define the procurement strategy.
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Low value simple procurement may simply involve implementation of the conclusions of the category strategy e.g. use a collaborative framework/contract, change the specification and re-negotiate terms. More detailed investigation is required for high value complex procurement. This is often referred to as Strategic Sourcing or Procurement Strategy.
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Strategic Sourcing Process & Tools

Membership Clear Objectives

Establish multi-functional team

What is being purchased, why and how Existing Suppliers What works well Problems/issues

How the market works Suppliers Capabilities Trends & Developments Tools: Supply Positioning Supplier Preferencing Supply Chain Analysis Vulnerability Analysis Financial Analysis Strategy Analysis

Understand current supply arrangements

Market Analysis What the business really needs Business Needs

Technical/Functional Spec

Strategy Development

Confirm Business Needs

Option Analysis

Preferred Procurement Strategy

RFP / RFQ / Negotiation EU Procurement Process Select Procedure Selection & award criteria Contract Notice Supplier selection Tenders and assessment Negotiation plan where appropriate Contract documentation Contract management plan Contract award

Select preferred Option

Implementation Planning Detailed Business Case Endorsement to implement

Implementation

Contract Management

Review

Delivery Management Relationship Management Contract Administration Continuous Improvement

Lessons learnt
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Category Management and Strategic Sourcing

Category Management Process Flow
Identify Communications Plan
Stage 1 Stage 2
Workshop 1

Develop

Stage 3
Off Line Analysis

Stage 4
Workshop 2

Stage 5
Workshop 3

Stage 6
Workshop 4

Stage 7
Face 2 Face

Kick Off

Gather Category Information

Opportunity Analysis

Category Development Plan

Initiation

Business Needs & Market Analysis PESTLE Analysis Porters Five Forces Trends & developments Supply chain & vulnerability analysis PPCA cost drivers Portfolio Analysis Supplier analysis incl Preferencing Market Management Matrix

Strategic Options

Category Grid Governance

Spend Data

Milestone Plan

Risk & Contingency Planning

Cat Man and Service Strategy

Confirmation of Scope

Intro to Category Insight Report

Category Insight Report

Category Development Plan

Form cross functional team & confirm scope

Category Analysis

Market Analysis

Business Needs Analysis Stakeholder Analysis Business Needs Analysis

Analysis Summary & Conclusions

Strategic Option Generation, Evaluation & Selection

Strategic Option Definition

Sourcing Strategy Sign Off

Responsibility Questionaires Interviews Opportunity Analysis

STP Spend/Supplier Analysis Demand/Supply Analysis Current process

High Level Implementation Plan

Governance Opportunity Plans Sustainability Assessment

Initial Stakeholder identification

Initial Stakeholder Engagement

SRO Sign Off 1

SRO Sign Off 2

SRO Sign Off 3

SRO Sign Off 4

Strategic Sourcing Strategy

In how many ways can we organise procurement?

Centralised

De-centralised
CLAN or matrix management Devolved There is no right answer choice of organisational model depends on the nature, culture and needs of your business.

Commodity teams
Collaborative Informal networks Formal consortia Informal consortia Mandatory & non mandatory

Agency arrangements or outsourced service

Category management can be accommodated within any of these organisation models.

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What is the impact on organisation structure?

Procurement teams reflect defined categories.

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Category Based Structure Single Organisation

GSC Director 129 PA

Head of Supply Chain 88 Support Pool 4

Head of Supply Chain 16

Utilities Sustainability Mgt

Head of Supply Chain 21

Supply Chain Development Supply Integration/CRM Risk & Governance

Change Project Leader 1

Communications Leader 1

Head of Product Category 30

Head of Product Category 16

Airport Logistics 25

Travel & Transport 4

Maintenance 4

Facilities 4 Maintenance

Product Teams Construction Account Mgt 2 Baggage Systems 2 Infrastructure 1 Fit-out 3 Consultants 4 Baggage Operation 3 Shell & Core 3 Building Services 3 Total 21 Product Teams P2P Process & Systems Lifecycle Mgt Process Total

Product Teams IT & Telecomms 8 Mkting & Business Services 5 Cleaning 2 Total 15

7 1 8
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What is the impact on organisation structure?

Procurement teams reflect defined categories Category teams are multi functional Procurement is a member of the team normally the category manager Other team members will include representatives of the services who will be strongly affected by the outcome plus those with relevant specialist expertise. Governance arrangement must ensure endorsement and ownership at an appropriate level Service lines must remain accountable for their service

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Category Management and Strategic Sourcing

Category Management Process Flow
Identify Communications Plan
Stage 1 Stage 2
Workshop 1

Develop

Stage 3
Off Line Analysis

Stage 4
Workshop 2

Stage 5
Workshop 3

Stage 6
Workshop 4

Stage 7
Face 2 Face

Kick Off

Gather Category Information

Opportunity Analysis

Category Development Plan

Initiation

Business Needs & Market Analysis PESTLE Analysis Porters Five Forces Trends & developments Supply chain & vulnerability analysis PPCA cost drivers Portfolio Analysis Supplier analysis incl Preferencing Market Management Matrix

Strategic Options

Category Grid Governance

Spend Data

Milestone Plan

Risk & Contingency Planning

Cat Man and Service Strategy

Confirmation of Scope

Intro to Category Insight Report

Category Insight Report

Category Development Plan

Form cross functional team & confirm scope

Category Analysis

Market Analysis

Business Needs Analysis Stakeholder Analysis Business Needs Analysis

Analysis Summary & Conclusions

Strategic Option Generation, Evaluation & Selection

Strategic Option Definition

Sourcing Strategy Sign Off

Responsibility Questionaires Interviews Opportunity Analysis

STP Spend/Supplier Analysis Demand/Supply Analysis Current process

High Level Implementation Plan

Governance Opportunity Plans Sustainability Assessment

Initial Stakeholder identification

Initial Stakeholder Engagement

SRO Sign Off 1

SRO Sign Off 2

SRO Sign Off 3

SRO Sign Off 4

Strategic Sourcing Strategy

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What is the impact on organisation structure?

Procurement teams reflect defined categories Category teams are multi functional Procurement is a member of the team normally the category manager Other team members will include representatives of the services who will be strongly affected by the outcome plus those with relevant specialist expertise. Governance arrangement must ensure endorsement and ownership at an appropriate level Service lines must remain accountable for their service Collaborative arrangements Consortia may be organised around categories

Can be challenging when decision making authority does not cross organisational boundaries
Particularly problematic for direct areas of spend i.e. when service line success depends on the quality of the category plan & sourcing strategy
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Collaborative Consortium

User Intelligence Group signs off category allocation, sourcing scope and strategy
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Implementation and Benefits Delivery

Establish team & governance structure Gather data & analyse internal & market Develop procurement strategy options Implement preferred procurement strategy

Identify & quantify opportunities

Programme and project management infrastructure and expertise

Sourcing Programme

Management of frameworks & contracts

Delivery Management

Relationship Management

Contract Administration

Continuous Improvement

Ensuring that the contract is delivering what has been agreed to the required performance standards.

Handling the formal governance of the contract e.g. change control, cost monitoring, payment, management reporting etc). Aiming for improvement over the life of the contract. May include incentive mechanisms.
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Building open and constructive relationships that enable problems to be identified and resolved early.
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Benefits of Category Management

Closer and more constructive relationship with service lines and stakeholders

Enables productive procurement engagement without compromising service line ownership of strategies and outcomes.
Focuses attention on the planning phase which offers the greatest scope for improved performance and ground breaking solutions

Provides the toolset and process to support a strategic approach to procurement and helps create a supportive environment
Enables realistic targeting of savings and other benefits which are agreed with and owned by service lines. Minimises off contract spend through service line engagement, ownership and sign off Enhances procurement capability within the procurement function and across the organisation
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Are there any risks or disadvantages?

Narrow focus on categories may obscure interdependencies and associated cross category opportunities

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Interdependence & Missed Opportunity

Professional Services Construction Services Maintenance Services

Category Tree
Sub categories excluding professional services

Engineer

Architect

QS

H&S CDM

S1

Sn

M1

Mn

Aggregation & Standardisation Opportunities Integration & Standardisation Opportunities e.g design, build and maintain Planning
Engineer

Design
Engineer Architect QS M&E H&S CDM

Construction
Engineer

Maintenance
M&E

Usage

Value Chain

S u p p l y

C h a i n s

Architect QS Estates Fin/Econ

Architect
QS M&E H&S CDM

H&S CDM
Prof Services Trades

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Contractor & Sub Contractors

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What risks do we need to manage?

Narrow focus on categories may obscure interdependencies and associated cross category opportunities. Overly optimistic view of current skills gaps.

Heavy workload initially but this diminishes significantly once category plans are approved and sourcing is underway.
Law of diminishing returns reduces savings opportunities over time and political direction may change. Pursue savings and other benefits

A narrow category focus could be career limiting in organisations which need staff with broad experience and expertise. Loss of local expertise where categories are assigned to collaborative arrangements. Too much emphasis on process and too little on outcomes.
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Pre-requisites for Success

A need for improvement Visible top level support categories cross organisation boundaries Change management expertise not just procurement and project expertise Establish acceptance of the need for change Clearly set out and sell the category management approach Gain stakeholder understanding, support, engagement, participation and ownership of outcomes Build procurement capacity and capability in parallel with the category management process Achieve quick wins and build credibility Maintain the stamina and determination to bounce back from setbacks

Progress to more complex procurement

Share the gains and the pains Remember that procurement supports service delivery
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For more information on

Category Management or Strategic Sourcing

please contact

dave.porter@pmms-group.com

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