Beyond category management for strategic procurement

Most companies have implemented or are implementing strategic procurement initiatives such as category / commodity management. (In this article we refer to the category management process, but this is interchangeable with commodity management in most instances.) 

Depending on the maturity of the organisation, the complexity of the spend, capability and capacity of the central group procurement team, results have varied from exceeding all expectations to high levels of frustration and limited results.

Where there are issues over organisational maturity, internal stakeholder buy-in, limited capability and/or capacity of the central group procurement team, the organisation’s senior management need to address these internal roadblocks to support the strategic procurement team and unlock the value that is being missed by the organisation.

When category management has been successfully implemented, with quick-wins and strategic-procurement strategies fully executed, procurement will have reached the final stage 5 of category management, known as the “Improvement Stage”, which focuses on supplier relationship, supplier management, and continuous improvement processes.

Keep the focus

At this point it is easy for category managers to lose direction as the process is not a structured and well-defined process like the initial stages of category management. Furthermore, the organisation’s internal stakeholders often do not understand this stage as they tend to align strategic procurement function to more traditional procurement processes.

The respective procurement strategies developed during the category management process should also clearly identify the key performance indicators that need to be used in the contract service-level agreements and supplier-evaluation processes. These supplier-performance measurements should drive the correct supplier behaviour.

The above activities are important and should be viewed as the minimum requirement to maintain the strategic procurement strategies on track. 

This process of continually finding improvements is not a specific activity with a set of procedures. Continuous improvement can relate to value, quality, performance, price, process, innovation, opportunity costs or any other value lever as perceived by the organisation. 

The need for support

Many of the continuous-improvement philosophies were originated by quality practitioners in the 1980s. From this have come some very structured programmes from Japan such as the Toyota “Lean” manufacturing. A version of this is a supplier-development programme (also originally developed by Toyota), successfully implemented as Nissan South Africa, is now used internationally by many organisations. These structured improvement processes require a high level of commitment and investment. They are generally implemented as a company-wide philosophy. They also require internal or external specialists who have been trained to implement these structured continuous-improvement processes. If you can get the support of your organisation’s management to implement one of these processes and apply it to your strategic partners in the supply chain, it is worth the effort and will assist in yielding value in your strategic categories beyond the traditional procurement savings. 

However, in the absence of one of these initiatives, most category managers need to proactively identify and implement continuous improvements by themselves, which requires a large amount of intuition by the category manager. The category manager at this stage should be an expert of his or her category and this should assist in knowing where real opportunities can be found. 

Three approaches to take

There are three basic approaches that can be applied: attracting innovation, discovering new breakthroughs, and finding new sources of value in your business processes. 

Innovation requires that the correct environment is established. As a category manager, you can build relationships in your supply chain with the objective of developing innovation. Such innovation must be done jointly with internal stakeholders, such as marketing, and with strategic suppliers that supply custom-designed products and service to your organisation. An easy way to identify where this type of approach could work is to identify strategic suppliers who are supplying you with Original Equipment Manufacturers products. 

Another way to create an environment for innovation is to invest in joint product development with a strategic supplier. This type of arrangement should only be considered if a long-term relationship has been established. These arrangements should be backed-up with a formal contractual agreement for managing the risk and reward in the joint-development relationship. 

Discovering new breakthroughs sounds easier than it is. There are often many potential possibilities being pitched by the market. The category manager must be able to evaluate if these proposed breakthroughs are scalable and/or ready to move from theory / design into practise / industrialisation. While being the lead in a new technology can give your organisation a significant market advantage, the risks are also significant. The best approach is to limit the breakthrough ideas to the few that you as category manger believe you can motivate and implement. Analysis methodologies can also be applied to rank levels of feasibility. The best way to manage the risk is to form cross-functional evaluation teams with all relevant stakeholders to complete joint evaluation of possible breakthrough ideas, build consensus, and then pilot before going to full implementation.

The last area where additional value can be found is in the internal and external processes of the supply chain that are relevant to your category. Business-process improvement can include approaches such as process reengineering, brown paper / process mapping, and theory of constraints to remove bottle-neck processes. These approaches normally require internal or external specialists to assist in the implementing. They are also normally best implemented and lead from within one of the operational departments of the organisation, and not procurement. 

However, the category manager can initiate such programmes and offer to act as lead facilitator in areas where the process improvement can have a positive impact on their commodity deck. While the improvement stage of category management is outside the comfort zone of most procurement professionals and procurement departments, this is the stage that differentiates your organisation’s category management from the rest of the industry when implemented.

Contributed by: Dion de Gruchy, Associate Director: SCM Advisory at Bespoke Group Africa

Article originally appeared in:   BESPOKE.png