How do you set up category management in procurement?
Short answer
To set up category management in procurement, build a category tree, give each category an owner and a team, agree who approves strategies, and measure the share of spend each category manages.
Key takeaways
- Setting up category management is an organisation decision before it is a sourcing decision. Four choices come first: the category tree, the owners, the approval rules and the measures.
- Build the category tree from the supply side, in two or three levels, and map each lowest level to codes or ledger accounts so that spend falls into one category only.
- You do not have to launch every category at once. One option is a first wave chosen on spend, supply risk, contract end dates and a business sponsor who supports the change.
- Each category needs a category manager, a small team of buyers and an analyst, and a senior sponsor from the business. In the US federal model, each agency also names a Senior Accountable Official for category management.
- Measure the share of spend under management, contract coverage, compliance and savings agreed with finance, not only savings claimed by procurement.
What does setting up category management in procurement involve?
Setting up category management in procurement means organising the procurement team around categories, groups of spend bought from the same supply market. The team agrees a category tree, gives each category an owner, decides who approves category strategies, and measures how much spend the categories manage. Then each category runs its own cycle.
Take a procurement team of twelve buyers who each serve one department. The buyer for marketing buys laptops, events and printing; the buyer for operations buys laptops, freight and spare parts. Nobody sees all the laptops. After the set-up, one IT category manager owns laptops, software and IT services for every department, and a logistics category manager owns all freight. The departments keep a contact in procurement, but decisions on a market are made once.
This page covers the set-up: structure, people, approvals and measures. What category management is, its cycle, the Kraljic matrix and what a category strategy contains are explained in what is category management. The techniques and software category managers use are in category management tools.
How do you build the category tree?
A category tree, also called a category taxonomy, is the list of categories and their sub-categories that every purchase is sorted into. Build it from the supply side: goods and services belong together when the same supply market sells them. Keep two or three levels, and link each lowest level to the codes your systems already use.
In 2015 the US federal government published such a tree for its common spend. That version of its Government-Wide Category Structure, on acquisition.gov, groups common purchases into ten categories, each split into sub-categories, with the spend for fiscal year 2014. Further categories cover defence spend. The table shows the ten common categories with a few of their sub-categories. It is a dated example of the shape of a tree, not a picture of federal spend today.
| Category | FY 2014 spend (US$ billion) | Sample sub-categories |
|---|---|---|
| Facilities & Construction | 75.7 | Construction related services; facility related services; facilities purchase and lease |
| Professional Services | 61.9 | Legal services; management advisory services; financial services |
| Information Technology | 49.9 | IT software; IT hardware; IT security; telecommunications |
| Medical | 36.0 | Drugs and pharmaceutical products; medical equipment, accessories and supplies; healthcare services |
| Transportation and Logistics Services | 26.8 | Package delivery and packaging; transportation of things; fuels |
| Industrial Products and Services | 10.5 | Machinery and components; hardware and tools; basic materials |
| Security and Protection | 5.5 | Security systems; security services |
| Human Capital | 4.1 | Vocational training; human resources services |
| Travel and Lodging | 2.7 | Passenger travel; lodging |
| Office Management | 1.9 | Office management products; office management services; furniture |
Source: Government-Wide Category Structure, acquisition.gov (2015, FY 2014 data). A company tree is smaller, but the shape is the same: a few categories by supply market, each split into sub-categories.
Below the sub-categories, map the tree to codes. Many organisations use UNSPSC, a classification with four levels of two digits each, segment, family, class and commodity, that gives an eight-digit code. Others use their own ledger accounts or material groups. What matters is that each code points to one category only. If the code for “IT consulting” sits under both IT and professional services, the same spend is counted twice and nobody owns it.
- Name categories the way suppliers sell, not the way departments budget: “facilities services”, not “head office costs”.
- Keep categories large enough to matter to a supply market and small enough for one person to know it.
- Put each sub-category under one category, and record the decision when a sub-category could sit in two places.
- Review the tree once a year, because markets merge and split, for example when software moves from licences to subscriptions.
Which categories should you manage first?
Manage first the few categories where a change is both worth it and possible within a year. A practical approach is a first wave of a handful of categories, with the rest added in later waves. Four questions help decide the order.
| Question | Why it matters | Where the answer comes from |
|---|---|---|
| How much do we spend, and with how many suppliers? | Large, scattered spend gives the most room for better terms | A spend analysis by category and supplier |
| How exposed are we if supply stops? | High-risk categories need a strategy even when spend is small | The Kraljic matrix: profit impact and supply risk |
| When do the main contracts end? | A contract ending in the next year forces a decision anyway | The contract register, end dates and notice periods |
| Will a business leader support the change? | Without a sponsor, people keep buying from the old suppliers | Meetings with the main budget holders |
For example, pick categories that score well on at least two questions, and include one with a willing sponsor so the first results come quickly.
For example, a hospital group might start with medical supplies, because spend is large and contracts end soon, and with facilities services, because the operations director wants one cleaning and maintenance contract for all sites. It might leave travel for the second wave, because spend is small and the market is simple. The spend data comes from a spend analysis; the matrix is explained in what is category management.
Count only the spend procurement can influence. The US memorandum on category management, M-19-13, uses the term addressable spend for the part of common spending that category management can work on. Taxes, grants or payments set by law are spend, but no category manager can change them.
Who does what in a category team?
A category team has one accountable owner, the category manager, supported by buyers who run sourcing and orders, an analyst who keeps the data, and stakeholders from the business who use the category. A senior sponsor gives the team its mandate.
| Role | Main job | Example in an IT category |
|---|---|---|
| Category sponsor | Supports the strategy at senior level and settles conflicts with budget holders | The chief information officer |
| Category manager | Owns the category strategy, targets, main suppliers and results across the organisation | The IT category manager |
| Buyer or sourcing specialist | Runs tenders, negotiations and orders within the strategy | A buyer who runs the laptop tender |
| Procurement analyst | Keeps spend data, prices paid and savings figures | An analyst who classifies IT invoices each month |
| Stakeholders | Say what they need and agree the specifications | IT operations, security, finance |
| Contract and supplier owners | Manage contracts and supplier performance after award | The service manager for the IT support contract |
In a small team one person may hold several roles, but the category manager and the sponsor must be named for every category.
Public bodies spell out the same roles. OMB memorandum M-19-13 makes a Senior Accountable Official in each US agency responsible for reducing unaligned spend. It names category managers, the owners of shared government-wide contracts and the agency officials who decide how to meet each need. It also asks each official to name one person to explain the agency’s spend data. UK central government’s commercial standard, GovS 008, says an organisation can divide its third-party spend into categories and may appoint category experts.
Category managers usually sit in procurement and work across business units. Whether the whole function is central, local or centre-led, with central rules and local buying, is a wider choice explained in procurement management.
How are category strategies approved?
Category strategies should be approved by the people who own the budget, not by procurement alone. One way to do this is a small category board, for each major category or one for all, with the sponsor, the main budget holders, finance and the category manager. In this example set-up, the board meets a few times a year to approve the strategy, follow the plan and decide on disputes.
- Approve the strategy. The category manager presents the strategy: scope, baseline, market view, approach and targets. The board approves it or asks for changes.
- Approve the plan. The plan sets the sourcing projects, dates and owners that deliver the strategy. In GovS 008 terms, the category plan “defines how the category strategy should be delivered”.
- Make the contracts the default. Management decides which new contracts are mandatory and how buying outside them is handled, for example by blocking orders with other suppliers in the catalogue.
- Review the results. The board reviews spend under management, savings and supplier issues, and approves the next refresh of the strategy.
Making contracts the default is the step that is easiest to skip. A category manager can sign a good contract and still see spend go back to the old suppliers if buying outside it has no consequence. That decision belongs to management; in the example set-up, the board is where it is taken. What a strategy document contains is set out in what is category management.
How do you measure category management?
Measure category management by how much spend it actually manages and what that spend delivers. The main measure is spend under management: the share of addressable spend bought through a category strategy and a contract. Add contract coverage, compliance, savings agreed with finance and supplier results.
| Measure | What it shows | How to calculate it |
|---|---|---|
| Spend under management (%) | How much of the spend the categories actually control | Spend bought through an approved strategy and contract ÷ addressable spend |
| Contract coverage (%) | How much spend has a contract behind it | Spend with suppliers under a valid contract ÷ total category spend |
| Compliance (%) | Whether people buy through the contracts | Spend on the chosen contracts ÷ spend that the contracts could cover |
| Savings agreed with finance (currency) | The price effect, counted the same way by both teams | Old price minus new price, times the volume bought, by a method finance approves |
| Number of suppliers per category | Whether spend is still scattered | Count of suppliers paid in the category over twelve months |
| Strategies approved and on time (number) | Whether the set-up is running | Categories with a current approved strategy and plan |
Report spend under management and compliance first; savings without compliance usually stay on paper.
The US federal government measures progress this way. M-19-13 sorts spend into four tiers, from Tier 0, unaligned spend bought in a decentralised way, to Tier 3, spend through government-wide Best In Class contracts, and asks agencies to move spend out of Tier 0. A company can use the same idea with two levels: spend under an approved category strategy, and the rest. Wider procurement measures are covered in procurement KPIs.
What does the first year look like?
A first year of category management can move from data to a first wave of strategies and the first contracts. The plan below is an example order of work, not a standard or a fixed timetable; a large organisation takes longer.
- Months 1 to 3: data and tree. Clean and classify twelve months of spend, agree the category tree, and map codes and ledger accounts to it.
- Months 2 to 4: people and rules. Name a sponsor and a category manager for each first-wave category, set up the boards and agree the measures with finance.
- Months 3 to 6: first strategies. Analyse each first-wave category, meet stakeholders and suppliers, and get the strategies approved.
- Months 6 to 12: first projects. Run the sourcing projects in the plans, award contracts, move demand onto them and track compliance. The strategic sourcing process describes each project step by step.
- Month 12: review. Report spend under management and results to management, refresh the first strategies and choose the second wave.
Two risks are worth watching. The first is redesigning the tree again and again while no category is managed; settle it in weeks, not months, and fix it at the yearly review. The second is naming category managers without authority over spend; the sponsor and the board are there to solve that.
Questions
How many categories should a procurement team have?
There is no standard number. It depends on what the organisation buys and how many category managers it has. The 2015 version of the US government’s common structure has ten categories, each with sub-categories. A mid-sized company may have fewer top categories, with each category manager owning one or a few of them.
What is the difference between a category manager and a buyer?
A category manager owns a whole supply market for the organisation: the strategy, targets, main suppliers and results over several years. A buyer runs specific tenders, negotiations and orders, often within a category strategy. In small teams one person does both, but the two jobs ask different questions: how to buy this market, and how to buy this need.
Can a small procurement team run category management?
Yes, with fewer layers. Two or three people can each own a few categories, use a simple category tree and, for example, meet the main budget holders once a quarter. Start with the two or three categories where spend is largest or contracts end soonest, and add others when those run.
Does category management replace strategic sourcing?
No. Strategic sourcing is the project that selects suppliers and awards a contract. Category management is the permanent frame that decides when to run those projects and manages the category between them. Setting up category management gives sourcing projects an owner and a plan; it does not remove them.
Which software does category management need?
At the start, a spend analysis, a contract register and a shared place for strategies are enough. Larger teams add sourcing tools for tenders and auctions, and category management tools for market data, strategy templates and savings tracking. Choose the tools after the tree and the roles are agreed, not before.
New guides on the strategic sourcing line
One short email when a guide on this line is added or revised. Nothing else.
Coming soon: sign-up opens with the first email.