Transparent and successful increase in procurement performance – Correct use of Category strategies
Nowadays, a tender or inquiry does not present a challenge for a procurement department. Is this allocation in line with the Category strategy? Clear specifications are compared with the procurement market, potential suppliers are selected and the request for quotation is placed on the market. By means of a price (cost) comparison, the optimal offer is selected, and an order is prepared.
So far so good. But what is the position of this awarding of contracts in terms of risk and supplier management? How does the awarding of contracts fit in with the bundling initiative of procurement? Does the awarding of the contract comply with the requirements of sustainability and social responsibility of the company? Does another site have the same or a comparable need and could thus participate in the new prices? And does the awarding of the contract fit in with the specifications of internal logistics regarding packaging size and delivery frequency?
The complexity of a successful category strategies
In today’s highly networked structures within companies and in supplier networks, many factors have to be considered for successful procurement in addition to the unit price of an article or service. Many of these requirements do not change daily but form strong guard rails. And if these are adhered to by procurement, the awarding of contracts is not always made to the most favorable one. Such an allocation irritates the person responsible for costs, which must then be explained by procurement. A further expense.
Category strategy (material group strategy), a written strategy that defines goals and measures for the optimization of a category. The desired supplier structure, the processes and supply chains, the product, packaging and logistics specifications are recorded in this strategy. But also, the optimal procurement markets and the target values for prices (costs) and the key figures that make the procurement success assessable. The basis is always the specifications from the procurement strategy in a classic top-down process.
1. achieve transparency about the category
A category describes a logical summary of articles or services. It is used as an ordering element for assignment to a hazard class, for reporting, or for the responsibility of a purchasing group. There can be categories with 3 articles (for example, lubricants) or with over 100,000 articles (for example, C parts). The same applies to the number of suppliers for the category – only one supplier or over 12 months over 1,000. The purchase value can be less than 1% of the company’s turnover or 30%.
Due to the heterogeneous nature of categories, a good information base is necessary for developing a successful Category strategy. Number of articles, suppliers, sales development and price developments are the basis. Countries of origin, number of orders and invoices, price differences at article level with different suppliers and terms of payment are just some of the other useful analyses.
Advantage for procurement: Each inquiry can be quickly put into the overall context.
Advantage for the company: Each category can be compared in the overall context
2. absorb expert knowledge and develop strategy
Writing a report, setting out a strategy or preparing a position paper is not in the DNA of every procurement. Especially not when the tasks pile up on your desk and internal customers are waiting for your deliveries. The advantage of a structured, uniform Category strategy for the purchaser quickly makes up for this effort. Just think of a tidy cupboard: One-time effort for tidying up, with each use direct time advantage without searching. The same applies to a Category strategy: You take the time to create it once, and after that only updates and additions are necessary. And as procurement you always have your general conditions at hand. Structure, scope and content depend on the procurement strategy and should be derived according to the principle of added value for each organization.
Another very important aspect is the consolidation of information in one place. Information about markets, suppliers and articles can usually be found in different places, in and on different data carriers. And on top of that, there is the expert knowledge of the procurement people in their minds. One of the main reasons why problems arise when changes are made, for example, a new supplier, is the lack of expert knowledge. In established supplier relationships, not all rules are documented, and this leads to problems when changing suppliers.
Advantage for procurement: Defined framework conditions in a category
Advantage for the company: Expert knowledge conserved, clear guidelines for procurement
3. increasing success with category strategies
Category strategies form the basis for targeted measures to optimize costs, processes and structures. Standardization and bundling across several locations require a uniform strategy and cooperation between the purchasing teams.
Cost and efficiency targets are based on the defined strategies for the category. If the goal was defined to significantly reduce the number of suppliers in order to achieve bundling effects in prices and logistics, such a goal must first be set. The cost reduction levers are thus set and determined via the category strategy as implementation of the procurement strategy. And this is done individually for each category. Cost reduction is always dependent on the initial situation.
Advantages of Category strategies for procurement and the company:
- The necessary data transparency already shows optimization areas
- Internal and external benchmarking is made possible
- Expert knowledge is preserved and is available to others
- Purchasing teams (national and international) are easier to manage
- Requests from managers and internal users regarding the Category strategy can be explained at a glance
- Initiatives and measures can be better prioritized and implemented with intensity
- developments on the time axis (e.g. price developments) and the measures are transparent in case of queries
- One language is spoken in procurement (levers, regions, markets, initiatives, measures, success, …)
Managing Director, ADCONIA GmbH