The role of Procurement is to capture value from the supply chain, network, or ecosystem.
Some years ago, the primary method of achieving this was via the individual competence of professional buyers in respect of negotiation. A competent negotiator would, more often than not, secure better deals than a less competent one.
The ‘game’ (as much as we could call it a game) was about whether each buyer was able to out-negotiate their respective supplier counterpart in Sales. It was the age of ‘win/lose’ or ‘zero-sum’ negotiating. But really, it was a haphazard approach to procurement, despite the outstanding ability of many professionals who could demonstrate that negotiating competence.
Procurement was becoming more complex (and more important) as spend percentages rose and outsourcing became fashionable. There then developed an idea of ‘best practice’ in procurement and practitioners began informally benchmarking their practice with others in their own and other sectors.
What emerged was the practice of ‘strategic sourcing’ – a new, more systematic approach to investigating the supply market, negotiating and selecting suppliers – and many organisations across a wide range of sectors, adopted strategic sourcing as their method.
As this practice matured it added the post-contract activities of contract management, performance management, and supplier relationship management; morphing into an end-to-end process – what we now know as ‘category management’.
Let me explain what Procurement means when practitioners refer to a ‘category’.
Over the years, as companies embraced outsourcing and procurement, the typical company now spends on average 70% of its revenues in the supply chain.
Procurement separates this spend into ‘direct’ materials (that which goes into the company’s end products) and ‘indirect’ materials and services (required for business operations).
Imagine a passenger airplane manufacturer. There will be some split between ‘direct’ and indirect’ – depending on the type of business it could be 60/40, 70/30, 80/20, or some other combination.
’Directs’ are segmented into a range of different categories. Only a few are represented here, and the number could run into the dozens.
Here we see engines, interiors, flight controls, undercarriage, and the airframe itself. But Procurement segments to the next level, and we see many more categories, each of which will have a specialist ‘category manager’ (these are the professional buyers), who will be responsible for ensuring best value for money is achieved.
Category segmentation can, and often does, go to a greater level of granulatory, into ‘sub-categories’, and then into even sub-sub-categories!
The story is the same for ‘indirects’ – again, specialists are deployed to manage their portion of the procurement spend.
This segmentation activity is called ‘Category Planning’ (shown as ‘Phase 0 in the graphic shown below) and is usually refreshed every financial year, when savings opportunities are sought as part of the budgeting process. And savings targets will be agreed between the CFO and CPO, and Procurement’s category managers.
Category Planning forms the base activity of the category management process, and is essentially a prioritisation activity for the Chief Procurement Officer. From this he or she can allocate resources to category projects across the Procurement team. Stakeholders from other business functions will be part of those teams.
From this point, the category management process is repeated for each spend category subject to review. It is worth adding that not every category will be reviewed annually, as (1) some will have contracts in place covering multiple years, or (2) they’re low value, and so not a priority.
Phase 1 of the process is about determining business requirements – what the company hopes to get from the category – savings targets, regulatory requirements, project milestones, the required volumes, etc.
The category manager will need to secure agreement on these (some will be standard procurement policy, others specific to the category or project), before embarking on phase 2, which is supply market analysis. This is about determining what is happening in the specific business sector, using Porter’s 5-Forces analysis to understand how much competition exists between suppliers, and macro issues around politics, economics, environmental, etc.
Once the supply market is well understood, the category manager will begin to consider sourcing options (phase 3) – how many suppliers does the company ideally wish to work with, and whether local, regional, or global suppliers are preferred.
In this phase there are tools such as portfolio analysis, power analysis, and ‘make versus buy’ analysis, each of which will deepen the category managers insight and begin to guide their sourcing and relationship management strategies.
Phase 4 is about tendering and market testing, to get initial responses in from suppliers that have been invited to participate. This will require the development of bid evaluation criteria and an agreed process for reaching a collective decision on which suppliers are selected for further negotiation.
Phase 5 is about pursuing the optimum commercial deal through that negotiation with those preferred bidders, before the contract or contracts are awarded to the winning supplier or suppliers.
The category manager now enters the post-contract phases of the process, with Phase 6 focusing on ensuring the contracts are in place, the administration around the contracts is well-managed, and that internal stakeholders comply with what has been agreed.
Phase 7 is about assuring performance to contract, and continuous improvement of value. I’ve said much more about supplier relationship management here in other blogs, but also on the Four Pillars YouTube channel, but for now it is worth stating that professional buyers have high expectations of their ability to improve deals even after they have been signed.
Research has suggested that today’s customer is typically around 65% through this process before the first face-to-face contact takes place.
Most salespeople engage with the category management process at Phase 4, when they should be targeting Phase 1, especially so if they are the incumbent supplier. This makes it doubly-difficult for a new supplier’s salesperson to engage Procurement early enough to in any way influence the specification. Indeed, if first contact is at Phase 4, then depending on the category and the competition in the supplier’s market, then the chances of successfully winning the contract is very low indeed. Some say less than 1% probability.
This category management approach by Procurement has been highly successful and is deployed widely. It can be incredibly challenging for sales people to feel any sense of control during the process, but it represents modern-day reality when it comes to the job of Sales. Dealing with this uncertainty has become a fact of life.
But there are things the salesperson can do:
Firstly, do some research to find out how your customer executes its procurement activity. Many CPOs are open about their category management process.
Secondly, understand how each customer defines the ‘category’ your company serves. If, for example, you’re a ‘facilities management’ company, what does each key customer have in the scope for that category? It may be different.
Thirdly, review the customer’s contract renewal timetable (as far as you’re able to). You don’t want to receive an invitation to tender when you’re the incumbent supplier.
And finally, do everything to engage with the category management process as early as possible. Plan how you will get ahead of your competition by engaging with the customer earlier in the process, and work to influence the customer’s business requirements.