In the last few years there’s been a lot of discussion about ‘category management.’ So, what is category management and do we need to worry about it?
Category Management Defined
Category Management is the deliberate grouping of products, that have similar physical attributes and/or manufacturing processes, into a single category.
This is done so the company can better analyze and understand the supply and demand of these products. Ultimately, this action leads to consolidation and leveraging of the supply. And this usually translates into significant cost reductions.
As an example, a company may have different Planner-Buyers purchasing many different machined parts from different suppliers. Furthermore, this could be the case across more than one division of the same corporation. The company would find it very beneficial to create a Category titled Machined Parts and work to organize and manage these parts both at the division and corporate levels.
Due to limited resources, the importance of a category to the company must be defined. This allows the supply chain group to focus on the most important Categories. Ranking of the Categories can be determined by dollar value and/or how critical the product(s) or service(s) are to generating revenue for the business.
A good example of a critical product is powdered Tungsten, an ingredient used when manufacturing a shape charge (shape charges are used in the perforation of an oil or gas well). There aren’t any substitutions for this ingredient so without Tungsten production stops and the company experiences ‘lost time.’ This could also mean ‘missed’ customer shipments.
An appraisal is a ‘status report,’ i.e., how well is a Category performing when supporting the objectives of the company. The report should include usage, projected demand, production issues, cost savings, non-conforming products, etc.
The Category Scorecard is composed of important elements from the Category Appraisal, and weighted to provide an overall score. Using the example above, the company should have a way to track and score deliveries, cost, usage, non-conformances, etc.
Category Strategies are developed to ensure that the category is properly organized and supporting the objectives of the company.
Let’s use the shape charge example above. Suppose the manufacturer has a customer service level goal of 98%. In this case one of the strategies should be to eliminate (as much as possible) production downtime.
Tactics, for a category, refer to specific actions the company will take to support its strategy for that category.
In the example above, an action to be taken to eliminate stockouts of powdered Tungsten is for the customer and supplier to exchange all necessary information ensuring the continuity of supply. This would include forecasts, current production schedules, inventory levels, consumption figures, etc.
Another tactic could be the creation of safety stocks, both for the supply of raw material and the demand of finished goods. This would attempt to account for any forecasting error(s), backlog changes, etc.
Review, Evaluation and Control
The final step is to review and evaluate the Category Management process to determine if the company is reaching its objectives. If the company is meeting its goals, further action may not be needed.
However, if the objectives are not being met, corrective action should be taken at the corresponding level in the category management process where issues have developed.
The Bottom Line.
The category management process is the careful and deliberate consolidation of products or services to allow for better control and management. This process, depending on the spend, can provide significant cost reductions. The Category Management Process has specific steps to ensure its success. When the Category Management Process is managed properly, it supports the company in reaching its objectives.