What is category management in procurement?
Short answer
Category management is the continuous practice of managing everything an organisation buys in one market, such as IT, freight or facilities, as a single portfolio with its own strategy, owner and targets.
Key takeaways
- Category management groups purchases by supply market, not by department, and gives each group, a category, one accountable owner and a multi-year strategy.
- Strategic sourcing is a project that ends with a contract; category management is the ongoing cycle that decides when to run that project, and what happens between projects.
- The cycle runs from spend and market analysis to a category strategy, sourcing, contract and supplier management, then review, and starts again.
- Segmentation by profit impact and supply risk, the Kraljic matrix, decides how much effort and which approach each category gets.
- The US federal government defines category management as buying common goods and services as an enterprise, and measures progress as spend under management.
What is category management?
Category management is a procurement practice that organises spending into categories, groups of goods or services bought from the same supply market, and manages each one continuously as a portfolio. A category manager owns the strategy, the contracts, the suppliers and the targets for that category across the whole organisation.
A category is defined from the supplier’s side of the table. Laptops, software licences and IT support belong together because the same markets and often the same suppliers serve them, even if three different departments order them. Office cleaning, security and maintenance form a facilities category for the same reason. The point of the grouping is leverage and knowledge: one person who understands the market and sees all the demand negotiates better than ten buyers who each see a slice.
Public bodies use the same idea. The US Office of Management and Budget, in memorandum M-19-13 of March 2019, defines category management as “the business practice of buying common goods and services as an enterprise to eliminate redundancies, increase efficiency, and deliver more value and savings” from the government’s acquisition programmes. Read “enterprise” as “the whole organisation”: the definition works for a company as well as for a government.
How is category management different from strategic sourcing?
Strategic sourcing and category management use the same raw material, spend data and market knowledge, but over different time spans. Strategic sourcing is a structured project that ends with a supplier selected and a contract awarded. Category management is the permanent frame around those projects: it decides which categories to source and when, and it keeps managing the category after the contract is signed.
| Aspect | Strategic sourcing | Category management |
|---|---|---|
| Time span | A project, typically months | Continuous, with a strategy refreshed every year or two |
| Output | A supplier choice and a contract | A category strategy, a pipeline of sourcing projects, managed contracts and suppliers |
| Owner | A sourcing lead or project team | A category manager accountable for the category across the organisation |
| Scope after award | Ends at signature, hands over to contract management | Includes supplier performance, demand management and the next renewal |
| Typical question | Who should supply this need, on which terms? | How should we buy everything in this market over the next three years? |
Strategic sourcing is the main tool category management uses; category management decides when and how to use it.
In practice, organisations that say they “do strategic sourcing” often run it category by category, and organisations that “do category management” spend most of their category plans on sourcing events. The two terms overlap in job titles and in software, which is why searches for sourcing and category management usually land on the same pages.
How does the category management cycle work?
End-to-end category management is a cycle rather than a straight line. Each turn starts with data and ends with a review that feeds the next strategy. Names vary between methods and consultancies, but the work in each phase is broadly the same.
- Define the category: list the goods and services it includes, the classification codes or ledger accounts that map to it, and the internal stakeholders who consume it.
- Analyse spend and demand: total spend, suppliers, contracts, prices paid and who buys what, from a spend analysis refreshed for the category.
- Analyse the supply market: number and strength of suppliers, cost drivers, price trends, risks and new entrants, often through requests for information and supplier meetings.
- Write the category strategy: objectives, the chosen approach (consolidate, tender, partner, secure supply), targets, risks and a sourcing plan with dates.
- Source and contract: run the sourcing projects the plan calls for, such as an RFP, an RFQ or a reverse auction, and award the contracts.
- Implement and manage: move demand onto the new contracts, track compliance, supplier performance and savings delivered, and manage demand where volumes can fall.
- Review and refresh: compare results with targets, record what changed in the market, and start the next cycle with an updated strategy.
The cycle explains why category management needs an owner. Each phase hands work to the next, and without one person accountable for the whole loop the contract is signed, the team moves on, and spend drifts back to whatever suppliers people used before.
How do you segment categories?
Not every category deserves the same effort. The most widely used segmentation is the portfolio matrix that Peter Kraljic, then at McKinsey, published in the Harvard Business Review in September 1983. It places each category on two axes: its profit impact (how much it weighs on cost and results) and its supply risk (how hard it is to source and how exposed the organisation would be if supply failed).
| Quadrant | Profit impact | Supply risk | Usual category approach | Example |
|---|---|---|---|---|
| Leverage | High | Low | Use buying power: competitive tenders, target pricing, consolidation of suppliers | Freight, office IT hardware |
| Strategic (critical) | High | High | Long-term partnership, shared performance goals, joint cost reduction | A core production component from few qualified suppliers |
| Bottleneck | Low | High | Secure supply: buffer stock, longer contracts, qualify alternative sources | A specialised spare part from one manufacturer |
| Non-critical (routine) | Low | Low | Reduce process cost: catalogues, purchasing cards, standardisation, e-procurement | Stationery, routine MRO consumables |
Leverage categories reward tenders, strategic ones reward partnership, bottleneck ones reward security of supply, and routine ones reward less process.
The quadrants and approaches follow Kraljic’s matrix as CIPS summarises it. The examples are illustrative only: where a category falls depends on the organisation, its volumes and its market, so freight can be a leverage category for one company and a bottleneck for another. MRO category management, for maintenance, repair and operations supplies, is a good illustration of why segmentation matters. Most MRO items are routine and are best handled through catalogues and a small number of distributors, but a few critical spares sit in the bottleneck quadrant, and a single category strategy has to treat both differently.
What does a category strategy contain?
A category strategy is the document that turns the analysis into decisions. It is usually short enough for stakeholders to read and approve, with the detail in appendices. A practical one answers seven questions.
- Scope: which goods and services, classification codes and business units the category covers.
- Baseline: current annual spend, number of suppliers, contract coverage and prices paid, with the date of the data.
- Market view: the main suppliers, their bargaining power, cost drivers and risks that will shape the next two to three years.
- Stakeholder needs: what the users of the category require, in service levels, specifications and timing.
- Approach: the chosen route per sub-category, for example consolidate suppliers, run a competitive tender, renegotiate, or develop a partnership.
- Plan and targets: sourcing projects with dates, expected savings or cost avoidance, and non-price targets such as risk, sustainability or small-business use.
- Governance: who owns the category, who approves decisions and how progress is reported.
Category management analysis is the evidence behind each line: spend cubes, price benchmarks, supplier market maps and stakeholder interviews. The strategy should state where the evidence is thin, because a target built on incomplete spend data is a guess presented as a plan.
How does category management work in government?
Government category management applies the same idea to common goods and services bought by many agencies. OMB memorandum M-19-13 noted that the federal government spent over $325 billion in fiscal year 2018 on common goods and services such as software, mobile devices and professional services, and asked agencies to take five actions.
- Set annual plans to reduce unaligned spend and increase the use of Best In Class (BIC) contract solutions, consistent with small-business and other socio-economic duties.
- Develop vendor management strategies to improve communication with contractors, especially those supporting mission-critical work.
- Apply demand management to remove inefficient purchasing and consumption.
- Share data, including prices paid, across government to inform buying decisions.
- Train and develop the workforce in category management.
Progress is measured as spend under management, using a tiered maturity model. M-19-13 summarises the tiers as follows and reports that, at the end of fiscal year 2018, 56% of addressable common spending was still unaligned, Tier 0.
| Tier | How the spend is managed |
|---|---|
| Tier 0 | Unaligned: bought in a decentralised way, without category management principles |
| Tier 1 | Managed agency-wide, with mandatory-use policies, data analysis and tracked metrics |
| Tier 2 | Managed government-wide through multi-agency solutions that are not Best In Class (BIC) |
| Tier 3 | Managed government-wide through designated Best In Class (BIC) solutions |
Spend under management is a useful private-sector metric too: the share of category spend that runs through a deliberate strategy and contract.
M-19-13 replaced an earlier OMB memorandum on strategic sourcing, M-13-02 of December 2012, which shows how the government vocabulary moved from sourcing projects to the continuous category model.
What are the benefits and limits of category management?
The benefits of category management in procurement come from seeing the whole of a market’s demand at once. Consolidated volumes support better prices and terms; one owner builds market knowledge that individual buyers never accumulate; contract renewals are planned instead of rushed; and non-price goals such as supply security or sustainability get a home in the strategy.
The limits are organisational. Category managers need authority over spend that budget holders control, and that authority has to come from leadership. The model also depends on spend data: if purchases cannot be assigned to categories reliably, the baseline, the targets and the savings claims are all weak. Finally, the categories themselves need maintenance, because markets merge and split, and a taxonomy designed years ago can hide a new supply risk.
What else does this part of the guide cover?
This page is the entry point to category management on the sourcing line. It answers what category management is and how it runs; more specific questions have, or will have, their own guides.
- Spend data and the spend cube: what is spend analysis?
- The sourcing project inside a category plan: the strategic sourcing process, step by step (guide in preparation).
- Software for category managers: what category management tools do and how to compare them (guide in preparation).
- Where category management sits in the wider practice: what is strategic sourcing?
Questions
What is a category in procurement?
A category is a group of goods or services that are bought from the same supply market, such as IT hardware, freight, facilities services or professional services. Categories are defined by how suppliers sell, not by which department buys, so that one owner can manage all the demand for that market.
What does a category manager do?
A category manager owns the strategy for one or more categories across the organisation: analysing spend and the supply market, writing and agreeing the category strategy, running or overseeing sourcing projects, managing key suppliers and contracts, and reporting results against targets. The role combines market knowledge with negotiation and stakeholder management.
What is a category management framework?
A category management framework is the method an organisation uses to run the category cycle: the phases, the documents produced at each phase, such as the category profile and strategy, the approval gates and the roles. Most frameworks follow the same loop of analysis, strategy, sourcing, implementation and review.
Is category management only for large organisations?
No. Large organisations gain most because their spend is spread across many buyers, but a mid-sized company can apply the same logic to its five or six largest categories. The minimum requirement is spend data that can be grouped by category and one named owner for each category.
How long does a category strategy last?
Category strategies often cover two to three years, aligned with the main contract terms in the category, and are reviewed every year. A sudden market change, such as a supplier exit or a price shock, is a reason to revise the strategy before the planned review.
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