Competitive Procurement through Category Management

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Category Management is the concept of the Retail industry that helps for better management as well as sales of a similar category of product by bundling the same. Initially, it was deployed in the retail and sales end. Later on, it is categorically understood that for multiple sources of consumption or multi factory plants, sourcing a similar product by different persons may lead to consumption of more time, money, and resources. Hence, buyers have also adopted the concept of suppliers to bundle the requirement of multiple locations and the similar product as a category to have a better understanding, control, and volume to negotiate. It results in specialization in category for a buyer and ends up in a better deal with saving time, resources, and money.

Unlike strategic sourcing, category management takes a proactive instead of a reactive approach to sourcing activity that provides detailed insight into factors affecting the price of a service or good. Strategic Category Management is simply category management in a strategic context.

Procurement is a highly analytical and structured process that is based on the DMAIC – Define, Measure, Analyze, Improve, and Control. There is a constant focus on understanding costs and value, and looking for ways to take cost out of the product.

Category strategy excellence is a powerful tool that should be at the core of the procurement team’s work. It maximizes value, efficiency, quality, and innovation, as well as mitigating risk. The majority of category strategies fall short by not linking strategy proposals to the benefits and value that they can bring.

An effective strategy delivers value well beyond the cost reductions it can provide. It also improves speed to market, decreases supplier and pricing risks, and helps to enhance innovativeness and flexibility across the entire organization.

Category strategy can be defined as a plan of action to map each spending category’s most cost-effective and efficient procurement plan. But true category strategy excellence requires a refined multiyear plan built on a complete understanding of category needs, agility to adapt to marketplace and technology changes, and clearly defined actions to create category savings in the near and far future.

Generally, Category strategy starts with category profiling in any organization considering the factors as Business impact and Market complexity.

Business Impact – Total Purchase Cost of the category as % of Total SpendMarket Complexity – Positioning of Buyer vs Sellers relative to each other in the marketplace.

Let’s understand with an example through Category Profiling for a product category “ZINC Ingots” for a manufacturing company having production plants in multiple locations.

Zinc bars background, animation. 3D rendering

It’s a high-expenditure product having higher commercial involvement and significant business impact. Thus, it needs a meticulous plan for category excellence as well as strategic sourcing which profitably ensures quality and timely supply.

The category Management process is a three-step process;

  1. Analysis of Internal Factors – Demand Management and spend analysis
  2. Analysis of External Market Factors – Supply and Market analysis
  3. Develop Category Strategy

The art of succeeding Category strategy excellence lies in understanding and aligning the internal factors with external market factors to develop and implement the right category strategy.

Process for Category Management

It works both in terms of strategic and operational points of view as shown in the above figure. The entire process has been followed categorically to derive the final category profile and device strategy for strategic sourcing of “Zinc”.

Step 1 – Analysis of Internal Factors – Demand Management & Spend Analysis

Demand management

It is to identify the requirement of a particular product and decide the annual volume for buying based on the forecast received from the Demand Management team and based on the derived volume targeted spend for the particular category can be estimated.

To initiate the process, a month-wise demand forecast of Zinc for various plants has been carried out to derive the annual aggregate demand of the product for FY 2020-21. It is given in the below table.

Demand Forecast for FY 20-21

Monthwise Plantwise Demand in MT

Spend analysis

It is a process for analysing the historical spend (purchasing) data to understand the spending baseline and its evolution over time. But gaining an understanding of what will drive future spending can be a game-changer.

The below data shows the last 3 years’ spend analysis based on quantity and value spent and the influencing factors on that spent, which is average LME and average exchange rate derived based on detailed analysis on monthly off-take quantity plant wise & vendor wise LME & exchange rates. 

Spend Analysis Data

Step 2 – Analysis of External Market Factors – Supply and Market analysis

Supply and market analysis

It is the process of collecting and collating the data of key drivers that impact the supplies as well as product prices. We identified five important key drivers which are Demand, Supply, Market Price, Economy or regulations, and other miscellaneous factors. Data collected and collated as displayed in the below analysis.

Demand Trends – India

Further, zinc is also utilized in many other use cases, so end-usage pattern understanding is also an important criterion to look at while you want to see the scenario in totality.

Domestic End Usage Pattern

Apart from above, data collected for national and global level demand and supply too.

Supply and Demand Trends – In Lakh MT
Global Consumption Analysis
Market Price and LME Warehouse Stocks
Zinc Average LME Price Trend
Economy Trends
Global Zinc Production
Top 10 Global Zinc Suppliers Data

The impact from each of the key driver is evaluated in the below-mentioned decision matrix table concerning Indicator, Key insights and their impact on product availability and prices as unfavourable, Favourable and Neutral.

Impact of Key Drivers

Step 3 – Category Strategy

Category Strategy is to develop an action plan based on data-driven interpretations. Accordingly below table shows the level of impact from each of the key drivers on the product pricing.    

Impact of key drivers in Product Pricing

Developed strategy livers as shown below based on the impact on supplies and prices from various key drivers driving the decision-making process. The final decision would be on Commercial comparisons Local Vs Imports and other factors to arrive at TCO (Total Cost of Ownership) using the data points >> Average LME Price, Premium, Exchange Rate, Customs duty, Port handling charges & inland freight, Additional inventory carrying cost, etc.

Livers used

Upon applying all these livers, the final decision is more focused on domestic sourcing from local vendors that have the following impact.

Advantages of Local Vendor:

  • Lower inventory
  • No “FOREX” involvement
  • Supports Government initiative of “ATMA NIRBHAR” mission
  • Will help in Vendor Managed Inventory (VMI)
  • Continuity of supplies irrespective of market conditions

Disadvantages of Local Vendor:

  • Might lead to a monopoly in future

Understanding the key drivers and analysis of impact from each of these drivers with the data-driven decision-making process and finally applying the right livers to find the most value is an art in Category Management.

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