Removing the ambiguity: Strategic sourcing and category management | by Andrew Hillman

Andrew Hillman AltStrategic sourcing and category management – two quite distinct approaches – are often mistakenly used interchangeably by many organisations. Fundamentally, it should be quite easy to distinguish between the two by their labels alone: specifically, strategic sourcing is a sourcing methodology, and category management is a management approach. However, let’s unpack the two practices to gain a better understanding of how each is applied and at what level…

Strategic sourcing
Strategic sourcing (SS) is a methodology with associated techniques and tools applied to optimally source goods and services to meet business requirements. It includes commodity sourcing, as well as some general / tactical sourcing activities and cross-functional sourcing support activities. Commodity sourcing is the use of strategic sourcing processes and techniques to optimally source a category and its constituent commodities / sub-categories.

Fundamentally, SS is a process; some organisations adopt a seven-step process and others an eight or nine-step process, depending on what they have decided is most suitable for their needs. Broadly speaking, these are largely similar in form and content. The SS process is typically preceded by an “opportunity analysis” which provides initial insights into opportunities where value can be extracted from the supply chain.

SS activities are episodic initiatives or projects, which are narrow in scope for a specific commodity and/or service, or a group of very similar commodities and/or services for which there is a common supply market.

There are generally three stages to any SS process:

Stage 1: Project initiation, which includes processes such as identifying the need, pre-project planning, forming a cross-functional team and defining the project.
Stage 2: Strategy, including processes like collecting internal and external data, performing a strategic analysis, formulating strategies, and developing implementation plans
Stage 3: Implementation and management, which incorporates implementation planning, supplier selection (RFI/RFP/RFT) and then measuring, monitoring and reporting on the value created.7 Step Strategic Sourcing Process
Category management
In contrast, category management (CM) is a life-cycle framework and set of practices used to optimally manage supply categories to meet specific business objectives. The CM framework sits above traditional sourcing methodologies, and guides the content and sequencing of such lower-level methodologies like strategic sourcing and supplier relationship management (SRM) to satisfy the category objectives and the key objectives of the business.

Category management involves building a clear understanding of the organisation’s key value objectives for the category (themselves based on business objectives), and then developing a set of executable strategies. Procurement’s role is to come to the table with ideas as to what value is possible to capture, even if procurement might itself not be measured on all those benefits.

The key elements of CM cover:
• End-to-end management of the supply chain
• Acute market awareness
• Sound (if not expert) technical knowledge
• Collaborative supplier relationship management
• Excellent stakeholder relationships

5i CatMan ImageEffective category management is an end-to-end process that focuses on the identification of needs, analysis of internal and external environments, planning, research, through to contract management (including vendor management). A typical CM approach, often deployed by Bespoke on client projects, is the “5i stage” of CM:

Stage 1: Initiate – establish the governance model
Stage 2: Insight – conducting research and analysis
Stage 3: Innovate – generating ideas with stakeholders and suppliers
Stage 4: Implement – planning and management
Stage 5: Improve – monitor, control and continuous improvement

Conclusions
The self-explanatory illustration below clearly defines the differences between strategic souring and category management.

SSvsCM
With these key differences and methods in mind, SS is an episodic process which is mostly a price-centric methodology. It is highly effective for garnering initial savings if implemented well (i.e. a rational and streamlined cross-functional process creating a solid, price-effective contract), but it is still a sourcing methodology and geared toward creating contracts. Often, strategic sourcing encompasses some tactical procurement activities and even tail-end spend management.


Category management, on the other hand, is a life-cycle approach to a broad category of spend and scope. It evaluates not only the full cycle of a contract or group of contracts and the supplier life cycle, but also looks holistically at the life-cycle of the value chains which consume the products and services in the spend categories. It is the ‘MBA’ of strategic procurement, and is a highly strategic approach to extracting value from the entire value chain of the category in scope.

Andrew Hillman is the CEO of Bespoke Group - www.bespoke.co.za

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Posted on November 14, 2018