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Category Management

Introduction 2Background 4Case study 1 8Case study 2 12

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AbstractThis CIPS practice guide recognises the importance ofCategory Management within business.Category management as it applies to Purchasing &Supply can be defined as organising the resources ofthe Procurement team in such a way as to focusexternally onto the supply markets of an organisation(as against having a focus on the internal customers oron internal Procurement departmental functions) inorder to fully leverage purchasing decisions.

IntroductionCIPS Practice Guides are designed to provideawareness and a level of understanding to the readeron selected topics, in this case on CategoryManagement. They are written for use by those with aninterest in business issues in general, and purchasingand supply management (P&SM) issues in particular.This will include full and part time P&SM professionalsas well as individuals interacting with P&SM activities.

The Practice Guide will also include information on thecontextual background to the issues, and will give abalanced opinion on issues that the reader may wish toconsider. There will also be references to other sourcesof information. The CIPS ‘Positions on Practice’ cover arange of purchasing and supply management issues.The purpose of such statements is, primarily, to providedirection for purchasing and supply managementprofessionals on what the Chartered Institute positionis on a given subject. They are not intended to beprescriptive, not least because the CIPS recognises thatpurchasing and supply management professionals workin many different environments. CIPS practicedocuments are not written to be an end in themselves.They are a collection of views on good practice withina particular subject area, in this case ‘CategoryManagement’. The reader is encouraged to extractthose parts of a practice document that they can usefor their own particular purposes such as writing andreviewing policy statements, guidance and procedures.

This range of publications is intended to providedirection on good practice along with some guidancefor context and interest. Background data and furtherreading is available from the CIPS.

Practice documents are written for use by anyoneassociated with, or interested in, the purchasing andsupply management profession.

This document is one of a series summarising the CIPSview(s) on a wide range of purchasing and supplymanagement subjects.

There should always be a comprehensive analysiscarried out on how best to deploy the always limitedresources of a Purchasing & Supply department andCategory Management is only one of several basicalternatives available to managers (added to whichthere are many hybrids giving variations on thesethemes) which each have their own advantages anddisadvantages:-

(a) firstly, P&SM could be organised by function; wherecontract negotiation, upstream sourcing,downstream contract management (i.e. relationshipmanagement); even expediting, inventory andclerical activity could be the specialist functionswithin a P&SM operation. This demarcation ofduties by function is much less fashionablenowadays because the P&S management professionis seen to be a narrow enough specialism for apractioner to be involved in without there beingfurther precision and specialization. However, inthe larger departments there is merit in allocation oftasks to individuals where a highly focusedapproach could be taken. This would achieve adeep skill level through experience in, say, researchor in negotiation or in CSR matters, where noteveryone in the team will have the same level ofexpertise.

Category ManagementIntroduction

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(b)Secondly, P&S Managers could analyse their supplymarket using a Purchasing Positioning overview toidentify market sectors: high/low risk; high/lowvalue suppliers and allocate their resourcesaccordingly. Thusa. the high risk/high value suppliers could be

looked after by the individual or sub-group withhighly developed Account Management andPartnering relationship skills capabilities;

b. the high value/low risk vendors would behandled by the Cost-Cutters who would betargeted primarily on maximising savings;

c. the high risk/low value group then beingattended to by experts in minimising supplychain vulnerability, who would thus be engagedin the active analysis of security of supply (viadeveloping alternative suppliers/materials;identifying weaknesses in the supply chain andbuilding contingencies to manage and mitigateavailability risks etc.);

d. finally, the low value low risk suppliers which, ifnot outsourced altogether, would be managed bythe short-term, shop-around, bargain-hunters ormaybe this could even be the training ground forthe junior team. Thus a P&S department couldallocate resources according to skill andexperience, albeit with the flexibility to rotateroles.

(c) Thirdly, the P&S department could be organised inaccordance with the structure of the internalcustomer base within the organisation. This couldbe fully implemented to where the members of theP&S team were decentralized and dispersed acrossthe individual locations of the organisation. Indeedmost tactical purchasing has been dispersed inorganisations these days, with very few still seekingto centralize the processing elements of P&S.

However, even with only the strategic activity ofP&S in the centre there is still a case for organisingthe department into teams which focus on thespecialisms of the business. Indeed businessmanagers will often insist on having dedicated P&Sresource identifiably allocated to their specific partof the organisation. This ensures a customerfocused approach from the P&S team however; theobvious risk is that it would be easy to missaggregating common items of expenditure. Onewould have to ensure that the left-hand knew whatthe right-hand was doing.

(d)Some departments allocate resource randomly sothat no specialism exists and so that no one P & Spractioner becomes stale and over-focused in anyone area. Thus the senior people in thesedepartments will do the important, valuable, workand the junior people the less important. Theadvantage in this is in workload always beingevenly shared around the team on a first-in-first-outbasis. However, it does depend on the entire P & Steam all having similar skill levels and a similarworking pace in order to avoid inequalities inoutputs, which can be divisive.

(e) Finally we have a Category Management structurewhere team members specialize according to thesupply markets. Here each member of the P&Steam will focus on a particular supply market andbecome the expert in that Category. Thus, over theyears, a commodity buying approach has meant thatwe have had IT buyers, print buyers, engineeringbuyers etc. etc. This specialisation has tended tolimit a P&S professional in their career development.However, category management - albeit stillfocussing on a particular segment of the supplymarket or a Commodity - has meant much more isrequired from the P&S practitioner.

Category ManagementIntroduction

JUL 07 Tel +44(0)1780 756777 Fax +44(0)1780 751610 Email [email protected] Web www.cips.org 3

BackgroundCategory management is a phrase that was first coinedin the Marketing side of business. Here, just as forPurchasing and Supply Management, the Sales Managerhas to decide whether to organise his team in one ofseveral ways. One option may be to organise the teamgeographically where each sales person would supportthe entire product range in a region, another may be toorganise the Sales team by value/risk. Howeverorganising by product category, although mostprevalent in the retail sector, is now increasinglypopular across all marketing activity. What exactly iscategory management in marketing? At its mostfundamental, category management is a process thatinvolves managing product categories as business unitsand customizing them on a very focused basis in orderto satisfy customer needs. It has been developed as aresult of the belief that the massive increase in theintroduction of new products in the Retail sector hasmade strategic management by department toounfocused, too high level. Category managementtherefore transforms retail "buyers" into entrepreneurs,each responsible for a small business within the largerenterprise.

The first five years of this decade have confirmed whatmany have thought; that in the modern global businessenvironment, technology is being used as an enabler todeliver increasingly sophisticated products tocustomers.

Due to changing business dynamics, there has been anincreasing use of allocating goods and services tobuyers. Global research organisations, such as theAberdeen Group1 apply their Total Cost Management(TCM) frameworks to all categories of spend.

Their research shows that “companies are turning tocategory management strategies, combining standardsourcing and compliance procedures with processautomation and improved data management and spendanalytics to holistically manage the total costs of a good

or service and its associated supplier relationships”.2

Important benefits generated include thestandardisation of specifications and processes and theaggregation of demand (which is discussed in greaterdetail).

Category management often refers to the methodologyby which this ‘portfolio buying’ approach is put intopractice. It is usually defined by a number of clearlydefined stages or sequences of activities. Within astrategic procurement framework, for maximumeffectiveness, category management should be acontinuous and embedded process, and yetdemonstrate the agility to meet the demands of adynamic supply market and business.

There are a number of proprietary illustrations ofCategory Management – but generically there are fourcommon phases which describe the types of activitiesconducted, the four phases are;

• Initiate• Prepare• Deliver• Maintain and Improve

Sequencing activities in this way makes sure thatprocurement outcomes are determined by a thoroughunderstanding of business need and full marketknowledge. This will give better and more sustainableoutcomes.

Category ManagementBackground


1Website address:www.aberdeen.com2Aberdeen Group (August 2005),Best Practices in Category SpendManagement: Travel, page 7.

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Features of a structured Category Managementapproach include:

a) Developing a thorough understanding of thirdparty spend and future demand.For each category or segment of the supply marketthe P & S specialist needs to know what’s happeningin that market and also in each sub sector. Forexample: • what is growing • what is declining • what are the new developments and new

technologies • what your competitors are doing • what the supplier’s competitors are doing• what are the expected changes in demand from

his own company and in that market category• how to make a projection of what customers will

require in the future.

He can glean this information from the major suppliersin the category but, if they cannot, then you will have tocommission the major market research agencies (e.g. ACNielsen TNS, Infoscan or IRI) to obtain it. If noinformation exists then the P&S Category Manager isfaced with making some educated guesses based on hisown experiences.

b) Segmenting spend into market sectors.Deciding on what the category should include is not anarbitrary decision at all but it will change fromorganisation to organisation. There are some genericcategories (IT , print, engineering consumables etc.) butdeciding what their scope includes has to be based onboth the specific circumstances of the customerorganisation as well as the market segment the categoryitself represents. The category is based on a grouping oflike products which are compatible and which theinternal customer expects to see pulled together and inwhich a meaningful choice can be made.

Dividing the category further, based not only onproduct types that the internal customer can relate tobut also on the customer decision making hierarchy isthe next step.

It would be good practice to have as many levels aspossible in the hierarchy – in retail marketing at least 5levels are examined with often up to 10 if possible. Then,starting at the top with basic groupings that tend to bepurchased together, for example office supplies, one canthen break the category segment down further into sayfurniture, storage, stationery etc. and then further againfor stationery into pens, pencils and envelopes etc andthen even further for envelopes into internal brownenvelopes and high quality pre-printed envelopes etc.Being able to move into analysis of third, fourth and fifthtier suppliers may be the luxury of the super-large P & Sdepartments but the core reason for implementing acategory management structure is to allow this level ofanalysis and indeed familiarity with the supply market.

c) Developing market sector sourcing strategies.Once comprehensive Market Analysis is completedand all of the category data reports and the marketresearch is available, it can be used strategically todeliver a sourcing strategy taking account of, forexample: • all the latest market movements • how your suppliers are doing• how your suppliers’ competitors are doing • compare and ‘league table’ the suppliers in the

category• recommendations for improving the purchasing

situation • your category aims and objectives: will you

partner or double-source or vertically integrateetc.

• how far can the suppliers in the category bedeveloped (and have you the resources andcapability to do it)?

• Delivering other business objectives, for exampleCSR.



d) Supplier selection and segmentation The P&SM practioner will need to decide on who is thebest supplier to fit with the business ideals, find out allthe products they supply to identify any synergies andthen, using the knowledge gained from the marketresearch and analysis, the perfect scope range for thecategory and decide who are the best suppliers todeliver strategically.

e) Supplier performance management, includingstrategic supplier partnering.

Category development uses all of the knowledgegained from the market research and analysis to createa Category Development Plan . Considering what thesituation may be in 5 years time will provide the focusfor decisions on the type, style and number ofsuppliers and on the sourcing processes to be. It ishere where vitally important issues such as a decisionto Partner in this particular market will be effected andthen tested. Each category will have its own timetablebut at least annually this whole process should becompletely reviewed.

Effective strategic category management will beembedded within the complete procurement/supplychain management process chain, with the involvementof the category management team right through to anevaluation of supplier performance. To maintain theeffectiveness of the process, feedback would begenerated and fed back into the earlier stages of thesupply chain.

The strategic activities that have been described areapplicable to both the supply of goods and services.They will vary by business sector and the markets theyserve. In public sector the methodology forms part ofthe OGC Gateway™ Process3. Figure 1 applies thesupply chain methodology framework in amanufacturing context, which is then drilled-down tothe micro-level to provide the basis of the first casestudy (procurement at Rolls-Royce Aerospace in Derby,UK).

Another generic framework is given by Umicore, amaterials technology group. They define categorymanagement as ‘a concept in which a team (headed bya category manager/product co-ordinator) is responsiblefor all purchasing aspects of a specific product/serviceor a group of products/services, for more than oneBusiness Unit and/or one site.4 Umicore’s activities arefocused on four business areas: advanced materials,precious metals products and catalysts, precious metalsservices and zinc specialities. Each business area in turnis divided into market-focused business units.

Category Management should not be confused withexpenditure segmentation. It is a structured frameworkof activities that is designed to deliver superiorprocurement outcomes.

Figure 1 A typical commodity based organisational



3 The (Office of GovernmentCommerce) OGC Gateway™ Processis described athttp://www.ogc.gov.uk/index.asp?id=3774 Extracted from presentation onCategory Management by Alain Bols,at The Conference Board, EuropeanCouncil on Purchasing, Brussels, `9-10 February 2006, slide 4.

structure (drawn from the manufacturing sector).



BuyerPackaging

BuyerOther Raw Materials

BuyerCapital Equipment

BuyerMRO Items

Supplies Director

Chief BuyerTop 20 ‘A’ Raw Materials

Category Management and Rolls-Royce AerospaceRolls-Royce Aerospace is a global provider of power systems solutions. This table has been adapted from theoriginal document, and is illustrative of the categorisation of machined forged material procured by the Machiningand Components division in the Procurement Department. Each category of material has a unique material codeand ‘Concept Code’ allocated to it.

Category ManagementCase Study 1


Material code Concept Code Description

191339101 M1L Machined Forging Other Met Irregular shape 0-75mm cube

191339202 M1M Machined Forging Other Met Irregular shape >75 - 250mm cube.

191339303 M1N Machined Forging Other Met Irregular shape >250 - 550mm cube

191339414 M6O Machined Forging Other Met Irregular shape >550 - 750mm cube

191339435 M6P Machined Forging Other Met Irregular shape > 750 - 1500mm cube

191339436 M6Q Machined Forging Other Met Irregular shape > 1500mm cube

191339507 M1R Machined Forging Other Met Pred. Round 0-75mm dia

191339618 M1S Machined Forging Other Met Pred. Round > 75 - 250mm dia 0-15 long

191339629 M1T Machined Forging Other Met Pred. Round > 75 - 250mm dia 15 - 75 long

191339632 M1U Machined Forging Other Met Pred. Round > 75 - 250mm dia 75 - 250 long

191339713 M1V Machined Forging Other Met Pred. Round 250 - 450mm dia 0-15 long

191339724 M1V Machined Forging Other Met Pred. Round 250 - 450mm dia 15 - 75 long

191339735 M1W Machined Forging Other Met Pred. Round 250 - 450mm dia 75 - 250 long

191339736 M1X Machined Forging Other Met Pred. Round 250 - 450mm dia 75 - 250 long

191339747 M1Z Machined Forging Other Met Pred. Round 250 - 450mm dia >250 long

191339818 M1A Machined Forging Other Met Pred. Round 450 - 750mm dia 0 -15 long



Material code Concept Code Description

191339829 M1B Machined Forging Other Met Pred. Round 450 - 750mm dia 15 - 75 long

191339830 M1C Machined Forging Other Met Pred. Round 450 - 750mm dia 75 - 250 long

191339831 M1D Machined Forging Other Met Pred. Round 450 - 750mm dia >250 long

191339842 M1E Machined Forging Other Met Pred. Round 450 - 750mm dia >250 long

191339933 M6F Machined Forging Other Met Pred. Round 750 - 1500mm dia 0 - 15 long

191339934 M6G Machined Forging Other Met Pred. Round > 1500mm dia 0 15 long

191339935 M6H Machined Forging Other Met Pred. Round 750 - 1500mm dia >15 - 75 long

191339936 M6I Machined Forging Other Met Pred. Round 750 - 1500mm dia >15 - 75 long

191339937 M6J Machined Forging Other Met Pred. Round > 1500mm dia > 15 - 75 long

191339938 M6K Machined Forging Other Met Pred. Round > 1500mm dia > 15 - 75 long

191339939 M6L Machined Forging Other Met Pred. Round 750 - 1500mm dia >75 - 250 long

191339940 M6M Machined Forging Other Met Pred. Round 750 - 1500mm dia >75 - 250 long

191339931 M6N Machined Forging Other Met Pred. Round 750 - 1500mm dia >75 - 250 long

191339972 M6O Machined Forging Other Met Pred. Round >1500mm dia 75 - 250 long

191339943 M6P Machined Forging Other Met Pred. Round >750 -1500mm dia > 250 long

191339984 M6Q Machined Forging Other Met Pred. Round > 1500mm dia > 250 long

In this example, category management has enabled thefollowing:

1. The product commodity/categoryAs part of the order fulfilment process, generation ofthe customer order sets in motion a series of processesincluding generation of a ‘bill of materials’. This is a listof all the assemblies and sub-assemblies required tomake the product for the customer.

As each commodity has been allocated a ‘ConceptCode’, management information is generated detailing:

• The quantity of the material required for production • The type of material required

2. Assessing the supply situationInformation from all the material codes will help in theassessment of the supply situation. Potential issuesaffecting delivery of the product can be identified at anearly stage and resolved.

Rolls-Royce plc is typical of companies who sourceglobally. Commodities may be managed by aninternational sourcing team, with the lead buyer beingbased in the United Kingdom, and the support buyerlocated in the USA.

3. Determining the spend/value of the commoditySpend analysis will generate business criticalinformation enabling the organisation to compete moreeffectively in the marketplace. Typical information ofvalue that is collected will give visibility to:

• The type of commodity being bought• Which suppliers, under what contract terms• What duration and over what frequency.

Knowing and understanding the cost drivers enablesresources to be allocated against activities, and supplychain process improvements to be developed,implemented and monitored. The company has beenable to take advantage of the benefits of scalegenerated by using category management. The aim isto sustain and enhance customer service levelagreements, thereby generating greater value for thecustomer. This is particularly important in a retailingenvironment, which forms the basis of the second casestudy.

4. Aiding the business processCategory management may also lead to simplificationof the management process. Management informationgenerated on operational efficiency is used to assessthe effectiveness of departmental and organisationalstrategy. Category management may enable some or allof the following:

• Pareto/ABC analysis• Supply positioning/portfolio analysis• Evaluation of suppliers’ performance, as part of a

way of managing the market• The general identification of future product

development (based on real time information ofwhat is selling and what is not)

• Enabling leverage in the marketplace• Ways to improve the total supply chain • It is increasingly seen as a way of segmenting

workloads and resources into business streams • A vehicle to influence change within the

organisation and industry.



5. Category Management as a means of generatingspecialist skills amongst the procurementworkforce

The increasing sophistication of the procurementbusiness discipline has led to the requirement forspecialised competencies. The use of categorymanagement in the retail environment is a goodexample of this.

6. Category Management to aggregate knowledgewithin the category

There is also a benefit in terms of aggregatingknowledge within the category to applying consistencyand focus to the category. For example ‘consultancyservices’ would be a part of ‘professional services’, butcould be further sub-divided into ‘legal services’.

The Benefits of Category Management The CIPS Supply Chain Group identified severalbenefits gained by aggregating the procurement ofsimilar goods and services. The most obvious of theseare using category management according to thedifferent modes of segregation.

In the context of this dynamic economic environment,category management is increasingly used within theprocurement environment. Aggregating theprocurement of similar goods and services creates anumber of benefits. These include:

• demand or supply side scale benefits • simplification of the management process • benefits of taking advantage of synergies within

categories. For example, a category covering‘containers’ instead of ‘glass’ would focus theattention of the person managing the commodity tothe various substitution benefits of moving from‘glass’ , and maybe leverage information in terms offilling technology. Further downstream in the supplychain, the possibility may exist of shared distributionand logistics.



Category Management in the Retail EnvironmentThe retail industry is among the pioneers of categorymanagement.

Category management is viewed as an integralcommercial function involving the buyer and salesdepartments within the organisation. As has beenmentioned, in retail companies the buying decisionsmay, to a large extent, determine the sales potential fora specific product (and vice versa).

In relation to the product management process, acustomer led focus has resulted in the categorymanager interfacing with both customers and suppliers.In effect this is the management of a greater part of thesupply chain than previously …….The categorymanager must therefore exhibit personal andprofessional skills in being a marketer, a buyer and asales person; in essence, a true cross-functional role. Inretailing the term merchandiser is commonly given tothose undertaking this task. This restructuring of theorganisation to operate on a commodity basis hasdelivered tangible benefits.

Arjan J van Weele refers to this integrated commercialfunction as category management,5 and links it toPorter’s value chain.6

Implementing Category ManagementThe CIPS Supply Chain Group has identified a numberof factors that should be taken into consideration priorto and during the implementation phase. These include,but are not limited to:

• Conducting a pareto analysis to ensure the correctcommodities are targeted first

• Ensuring that a managed internal and externalcommunication process is in place

• Linking category management to strategic sourcingand the wider corporate strategy

• Involving the use of cross-functional teams • Using appropriate information technology to

manage the categories• Bearing in mind that a change in business direction

will impact on the sourcing strategy • Ensuring the supplier base can meet the

needs/demand of the new strategy• Considering the impact on the supplier base of

implementation failure• Not underestimating the length of time required for

successful implementation of a sourcing strategy • Recognising that the strategy will evolve over time

and will require periodic maintenance• Continual analysis of demand to cover medium and

long term timescales. This would incorporate newtechnologies and skills to meet market demands, forexample, as part of a CSR programme.

ConclusionCIPS believe that effective Category Management canenable organisations across business sectors to gaincompetitive advantage in the global marketplace. Itshould be cautioned, however, that to the unaware, thisapproach has been seen to detract from vital post-contract supplier development by encouragingprocurement professionals to have a narrow,commodity focused, approach. There should beparticular focus therefore by the category managementteam for responsibility and accountability for supplierperformance management, which is communicatedeffectively within the organisation. Realising thelimitations should enable the buyer to work atmaintaining support both internally and within thesupplier base for category management.

Further information is available from the CIPSProfessional Practice Team or the CIPS website(www.cips.org).



5 Van Weele, AJ, (2002), Purchasingand Supply Chain Management,Third edition, Thomas Learning,London. 6 Porter, ME, (1985) CompetitiveAdvantage, The Free Press, NewYork, pp45-48.

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