What is it that sets apart the Best-in-Class procurement organizations from the average organizations? After working with several Fortune-500 Companies globally over the last 19+ years, I have observed that a Key Differentiating Factor that sets them apart is that they follow a robust process for the development of sound Category Management Strategies.
So, what is Category Management? It is a structured approach to the procurement of goods, services and capital equipment. It happens when Category Managers and their teams actively develop and execute category strategies by following a structured process and methodology.
While many large Companies typically have their own internal process for developing Category Management strategies, they all tend to contain the following 3 key steps:
1. Strategy Development
2. Strategy Execution
3. Contract Management
In my experience, it is only the Best in Class organizations that perform all the 3 steps well, while the majority of other procurement organizations tend to put maximum effort and resources on Step 2 – Strategy Execution, which primarily entails conducting the sourcing event (negotiations) and awarding the contract. These organizations dedicate limited time and resources for the development of the Strategy and virtually no time and effort on Contract Management resulting in mediocre performance. These organizations view Category Management as a tactical function rather than a strategic function that can add tremendous value to an Organization’s top and bottom line.
Now comes the million-dollar question – why do we need to perform all these 3 steps to create value and become Best in Class? To answer this question, let’s understand the activities that are performed in each of these 3 steps:
1. Strategy Development – this is the foundation on which a good Category Management Strategy is built, and it includes the following activities:
i. Assess Internal Needs
Procurement typically sources the various products and services on behalf of internal users from various functions such as Operations, IT, HR, Finance, etc. Unless, procurement takes the time and effort to understand the needs and requirements of the internal users, there will be a big disconnect in what they want (for example, latest technology, no compromise on HSE, longer payment terms) and what procurement is focussing on, which is typically obtaining the lowest price. It is very common to find that the internal users and procurement do not get along because of the perception that procurement only cares about the price. Therefore, it is critical to spend time to understand the internal needs and requirements.
ii. Analyse Supply Market
Once we understand the internal needs, the next activity is to analyse the supply market. This involves understanding the supplier’s market, identifying the list of potential suppliers (incumbent and new), evaluating the suppliers and understanding market trends and dynamics. This activity is especially more critical in today’s extremely competitive global marketplace where companies are constantly looking for suppliers from low cost countries that could give them a competitive advantage.
iii. Understand Costs
The third activity is to understand the overall supply chain cost also known as the Total Cost of Ownership (TCO). A lot of times, companies tend to focus only on the Purchase Price and end up developing the wrong strategy as they fail to take in to account other elements of TCO such as Acquisition Cost, Usage Cost and End of Life Cost. Understanding the TCO ensures that we consider the overall financial impact of any sourcing strategy.
iv. Develop the Strategy
Only after completing the above 3 activities, are we truly ready to make sourcing decisions such as inhouse vs outsource, single source vs multiple source, country of origin, etc. based on facts and knowledge. This will lead to the development of robust Category Management strategies that will deliver tremendous value to the organization.
2.Executing the Strategy –this involves carrying out the Sourcing and includes the following activities. As stated earlier, most companies execute this step well.
i. Prepare for Sourcing Event
This includes activities such as developing the selection criteria, creating questionnaires for Request for Information (RFI) and Request for Proposal (RFP), developing the RFI and RFP packages and identifying the RFI pool of suppliers
ii. Conduct Sourcing Event
This includes activities such as sending out RFI to potential suppliers, evaluating responses and shortlisting suppliers, sending out RFP to short listed suppliers and clarifying supplier’s questions
iii. Select Supplier(s) and Award Contract
This includes activities such as evaluating responses to RFP, selecting supplier(s) for negotiations, conducting negotiations and awarding the contract
3. Post Award Contract Management – This is where procurement organizations can create exceptional value beyond negotiations by working proactively and collaboratively with suppliers to manage the contract. This is a key component of Supplier Relationship Management (SRM). This step includes the following activities:
i. Initiate Contract Management
This activity involves the development of a governance plan for managing the contract and includes creation of a RASCI matrix assigning clear roles and responsibilities, developing a performance measurement system with clearly defined KPIs and a performance measurement scorecard.
ii. Manage Contract
This includes activities such as conducting periodic Supplier Performance Reviews to measure the performance against the established KPIs, managing contract pricing (price adjustment clause) and implementing a program to work collaboratively with the supplier(s) to identify value creation opportunities using a process such as Anklesaria’s AIM&DRIVE® process.
iii. Close Out Contract
Once the supplier has fulfilled all its contractual obligations, the final step in the Contract Management journey is closing out all legal and contractual obligations and capturing the lessons learned to improve future performance
What are the benefits of Category Management?
a) Minimize risks in the Supply Chain
b) Early identification of opportunities that can be exploited in a dynamic environment
c) Develop long-term partnerships with suppliers for strategic categories
d) Deliver cost savings and value enhancement through demand management, standardization and rationalization of specifications
e) Improvements in quality, service levels, delivery and supplier responsiveness
What are the key enablers for successful Category Management?
a) Organization and Structure with clearly defined responsibility, authority & accountability and top management support and buy-in
b) Cross-Functional Team that includes all the key stakeholders such as Procurement, End-Users, Production, Finance, etc.
c) Processes and Systems that facilitate the development of these strategies in the quickest and most efficient manner possible
Do you agree with our approach to Category Management? Do let us know what you think in the comments. And for more on Category Management and Anklesaria’s AIM&DRIVE® process, kindly visit our website www.anklesaria.com or write to us at firstname.lastname@example.org.
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