Category management (purchasing)

This article is about category management in a purchasing context. For category management in a retail context, see Category management.

Category management is an approach to the organisation of purchasing within a business organisation. Applying category management to purchasing activity benefits organisations by providing an approach to reduce the cost of buying goods and services, reduce risk in the supply chain, increase overall value from the supply base and gain access to more innovation from suppliers. It is a strategic approach which focuses on the vast majority of organisational spend. If applied effectively throughout an entire organisation, the results can be significantly greater than traditional transactional based purchasing negotiations, however the discipline of category management is sorely misunderstood.

The concept of Category Management in purchasing originated in the late 1980s. There is no single founder or originator, but the methodology first appeared in the automotive sector and has since been developed and adopted by organisations worldwide. Today Category Management is considered by many global companies as an essential strategic purchasing approach. Category Management has been defined as “an evolving methodology that drives sourcing strategy in progressive organisations today”.

The Chartered Institute of Procurement & Supply defines Category Management as:

"Organizing the resources of the procurement team in such a way as to focus externally onto the supply markets of an organisation (as against having a focus on the internal customers or on internal Procurement departmental functions) in order to fully leverage purchasing decisions”.

Jonathan O'Brien, author of Category Management in Purchasing, defines Category Management as:

"the practice of segmenting the main areas of organisational spend on bought-in goods and services into discrete groups of products and services according to the function of those goods or services and, most importantly, to mirror how individual marketplaces are organised. Using this segmentation organisations work cross functionally on individual categories, examining the entire category spend, how the organisation uses the products or services within the category, the marketplace and individual suppliers."

Mark Webb of Future Purchasing makes three statements in defining Category Management:

"It is a strategic end-to-end process for buying goods and services; it aligns business goals and customer requirements with supply market capability and it maximises long-term value for the organisation."

Peter Hunt, partner at ADR International, writes

“the term category management can mean different things to different people, so a working definition is needed. A ‘category’ is the logical grouping of similar expenditure items, such as spend on advertising agency services or IT hardware. Category management is the sourcing process used to manage these categories to satisfy business needs while maximising the value delivered from the supply base”.

Many public sector organisations have recently adopted category management as a strategic transformation tool. Sir Philip Green, in his “Efficiency Review” of UK government spending, recommended that “centralised procurement [should be] mandated for common categories to leverage ... buying power and achieve best practice”. In the United States, the federal General Services Administration, working with the Office of Management and Budget's Office of Federal Procurement Policy (OFPP), adopted Category Management as an operational tool for purchasing in April 2014.