Category Management & Strategies
Sumit Wadhawan
Strategy Design for Sustainable Supply Chain |Data Decision Models | Process Excellence | Operations & Quality Management |
What is Category Management
Back in the days, when retail was booming which is the 70s and 80s era it was a way for the retailers to differentiate themselves from their competition and their profits by singularly focussing on product categories and not on individual products or brands or marketing billboards with attractive offers. I can also that category managers (CM) take ownership of assortment mix, costing (buying & selling) demand planning, product fulfillment, and sales offers. One can also add the additional roles of products phase out upon of its lifecycle and bring in a new version or a better deal of some other assortment. Well, this was usually a marketing lead along with the supplier’s sales performance decision. The ideas gained a lot of traction across retail management and a new chapter unfolded as Category management. Subsequently, the dependence of the shots calling of the suppliers was reduced and the power center of decision making moved from suppliers to the category management teams.
As time progressed, the category management teams became the pivot in buying and sourcing and new branches evolved out of the same, which primarily looked after the operational aspect of the side and was coined “Merchandising”. Though merchandising was relatively less accepted by several key industries but a larger job profile, it did or played the same function of the category management. ??
Coinage doesn’t impact the job functions across industries and supply chain function is common across industries with sole differentiation of products and markets. As per the industry, every supply chain role is industry-specific but I differ here as chain functions remain constant along with product life cycles and consumption.
Along, the same lines as the role drew importance with its function, in retail organizations, a new role emerged and that was of a private label which drew more importance the function of category management. Now he category management has gone specific and the role has evolved into Key account management in the new millennium and has become category sourcing (CS)
From cost-cutting to cost management and as I always say, the supply chain has evolved from logistics to warehousing to supply to the larger vision of value addition to the process, similarly, CM has come a long way from cost or time or delivery management to a strategic partner or key driver in the supply chain.
A products direct influence on Organisations market Leadership
Category Sourcing Focus
Strategic Lever
Strategic levers in Category Sourcing –
1. Create Significance & Importance
Category sourcing increases the company's power vis-à-vis its suppliers. It becomes easier to attract new suppliers and the tougher competition motivates them to be more responsive to the company's needs. There is no doubt that creating results is easier with power than without, which is one of the reasons why companies implement category sourcing. A company with power has greater access to equivalent options than a counterpart with less power, and it can be strengthened, for example, by the following:
? Bundle large volumes or assortments in comparison with other customers in the market. This will be beneficial for manufacturers to compete to become a supplier. Selection of the appropriate profile and size of supplier. The biggest suppliers should be among the best; at least they should be in.
Well, that does not necessarily mean they are the most suitable for the company, especially if the supplier ranks the company at its low ladder customer and gives it standard terms. A better approach might be to choose suppliers that are large enough to handle the task and can develop, but not so big that the company becomes an insignificant customer. Ideally, the company should be among the supplier's three most important customers.
? Create methods to start, challenge and phase out suppliers as straightforward as possible. It is never easy, but it is important to handhold a system that will not allow a low-performing supplier pool to develop. However, long-term influence can be even more important than power. By that, I mean how the company can be attractive to suppliers, not just linked to volumes or prices, but to benefits that arise from the collaboration. For example, the supplier might get access to markets that it cannot develop itself, or the relationship allows it to build skills that strengthen its competitiveness. The e.g. here is the e-commerce companies which give a wider audience to supplier’s products not only across cities but across the border now.
Of course, the supplier is expected to reciprocate in a similar way, for example by offering early or exclusive access to innovations and/or lower prices. Although all business relationships have a more or less obvious power relationship, the best relationships are built on strategic fit and complementary resources. When this is available, both parties get more out of the collaboration than the terms of the contract, and over time both trust and mutual dependence develop.
2. Utilize economies of scale
When increased volumes give a lower cost per piece, we see a scale effect. The size of the effect depends on the size of the fixed cost and how much of it can be diluted in larger volumes. By 'fixed costs' I mean those that are not directly dependent on the production volumes, for example, the cost of buildings, insurance, management, administration, etc. When a supplier does not fully utilize its machinery-e.g. when it only has one or two production shifts- fixed costs for machines can also be spread out across larger volumes. Volume increases can even affect variable costs positively, as the supplier can source materials in bulk, which gives lower prices and reduces logistics costs. My experience is that the cost advantage for any product manufacturing with high versus average volume is at least 15 percent, not including benefits obtainable through improved distribution to stores.
By far the fastest way to get results when implementing category sourcing is to exploit economies of scale and consolidate purchasing volumes to the best suppliers - which requires that the products/volumes are movable between suppliers.
When the company is sourcing product-by-product at level 2 - the lowest unit cost-it is common to create a large supplier base that will eventually be mature for consolidation. When ABC Corp implemented category sourcing, there were 2,500 suppliers and sales of € X billion. Today, sales are jumped 5x times and fewer than 1000 suppliers deliver it.
3. Develop the supplier base
Creating strategies and managing the supplier base is among a team's most complex tasks. It becomes especially difficult - and most important - when volumes are large and involve many suppliers, when logistics are complicated, and when the company is sourcing products directly from contract manufacturers. If the products are sourced through agents or from brand suppliers, they handle a large part of the complexity, course, at a cost.
A good supplier structure is like a platform where complementary suppliers deliver results, motivated by good cooperation, strategic fit, and healthy competition. A bad structure is easily recognizable but it can be very difficult to correct. Among the most painful situations is when the company allows low-performing supplier monopolies to develop, a problem that may take several years to correct, but the list of possible defects is depressively long.
It is unusual for teams to change the entire supplier base at once, but the strategy serves as logic and framework for tactical decisions, such as volume allocation, start-up, and phase-out of individual suppliers. A good strategy should facilitate and balance several sometimes-contradictory perspectives:
? Risk management, such as currency, quality or supply risks; balancing economies of scale with the flexibility of multiple sourcing; The degree of own production, single sourcing, and multiple sourcing; the selection of purchasing country(s); determining the ideal mix of supplier types: agents, product suppliers, contract manufacturers or mass producers.
领英推荐
One of the challenges with the supplier structure is that teams sometimes perceive the task to be so long-term and difficult that they avoid addressing it. This opens the door to skilled suppliers who systematically develop products and solve tactical problems in a way that increases the company's dependence on them. It often happens gradually and almost invisibly, and the company may need to develop guidelines and checkpoints that push its teams to develop a healthy supplier structure.
4. Improve the specifications
When the company organizes sourcing in categories, the teams get a better overview than each business unit had, and they can ask questions that few have asked. Why do products from different business units have different solutions and material qualities? Why do some products have patented components while others use industry standards? How can products with the same functionality have different requirements, prices, and suppliers? The work is not limited to the design or selection of products, but also includes the business units' specifications on the supply process as a whole. This may include order and payment routines, requirements for lead times, minimum order quantities, etc. The most interesting questions are those that have the potential to influence the category as a whole and not just individual products. The team reviews the specifications and seeks opportunities to (a) apply best practices or new solutions, (b) remove bottlenecks that hamper production or prevent healthy competition between suppliers, or (c) reduce or eliminate the need for the product. The latter may seem strange, but it is one of the variants when purchasing goods and services that are used internally.
There are no technical barriers to optimizing specifications when the company is sourcing product-by-product on level 2 - lowest unit cost- but, in reality, the products are usually too numerous and the impact of each product on the company's results is too small to motivate any significant effort. In category sourcing, optimizing the specification can become one of the key levers and it is common for the teams to identify several ideas where some are implemented directly and others saved for future product revisions.
5. Rationalize the supply chain
The supply chain comprises the activities that create costs from raw materials to end customers, how they are used, and finally destroyed and recycled. Depending on the company's organization, the development responsibility is allocated to different units, but the purchasing organization should be involved at least until the products are used by the customer. Rationalizing the supply chain can appear to be scary, overwhelming, and complicated for a buyer/sourcing manager who is used to working at a more tactical level, but the principles are not so difficult. Map the flow of essential activities with an estimate of cost and quality per activity, and seek opportunities for improvements, including engaging suppliers and other resources in creative dialogue. Surprisingly, many relatively easy improvements can be found when a company starts category sourcing. The supplier mostly focuses on its own concerns and may have insufficient understanding of customers and the entire supply chain, and the purchasing organization has corresponding blind spots. However, when a competition team studies the supply chain and has investigative dialogues, new opportunities arise.
6. Implement supplier relationship management (SRM)
When the company consolidates its supplier base and phases out perhaps 50-75 percent of its suppliers, it will achieve significantly improved results, but the trade-off is an increased reliance on how the remaining suppliers perform. For example, an overview points to the fact that ABC Corp has approximately 200 suppliers with an average annual turnover of $ 80 million and that they collectively deliver 80 percent of ABC Corp's total sales What happens if two of these suppliers do not perform, or stop developing new skills? Most companies will not have the same volumes and will not have driven consolidation as much as ABC Corp, but this still illustrates the importance of developing supplier relationships from a transactional focus to a methodical approach that continuously creates customer benefits and cost reductions. The supplier had streamlined its production and the focus now turned to the packing line. Almost half of the production staff were in the packing line, and a significant portion of the quality and capacity problems had their root causes there. The supplier had already used ABC Corp's framework agreement for packaging materials and now it turned to ABC Corp again. A joint project was started in which ABC Corp could contribute with:
-?????????deep proficiency and experience with automated packing lines;
-?????????benchmarking and lessons learned from other suppliers and industries;
-?????????adaptation of the packaging construction to enable automation, with retained or improved management in the rest of the supply chain;
-?????????contacts and negotiated prices for machinery and robots; adjustment of batch sizes and minimum order quantities; financing under reasonable conditions.
Packaging is one of the best examples of how collaboration between customer and supplier can create results that are not possible for anyone to achieve individually. In addition, the packaging is a significant part of supply chain cost and customer benefits. Another area that can benefit from joint projects is logistics, which affects everything from There are two main purposes with SRM where the first is to reduce risks and improve the operational performance. The second is to maximize complementary capabilities and grow the business, for example by developing new technologies, products, or platforms. The latter work is reserved for the best suppliers, while operational improvements are implemented on a broad base.
7. Optimize the activity chain
Optimizing the activity chain is not a separate lever but a method of streamlining the supply chain and/or developing the supplier base. But it is so important to ABC Corp that I want to clarify it: inactivity analyses the complete products are viewed as a series of distinct activities that can either be merged into one supplier or divided between several. A car dashboard can, for example, be divided into cabinets, fittings, doors, handles, and drawers, manufactured by specialized suppliers and assembled close to the sales markets, or by the manufacturers themselves This specializes is the main reason why any company's suppliers need to pick up multiple packages when purchasing a new product For many years, the automotive industry has chosen a different direction, and bundles a large part of the development and manufacturing of entire systems, such as transmissions or cooling systems, to original equipment manufacturer (OEM) suppliers. The different choices depend, among other things, on the fact that supplier and cost structures look very different for different categories of products as compared with cars. A car costs between $500 million and $1 billion to develop and consists of 10,000 components, all of which must be in place at the same time. This compares with ABC Corp, which has a total of 9,500 products - which never need to be in the same place at the same time - and an average cost of developing a product of less than €200,000.
8. Standardize
The primary purpose of standardization is to simplify the supply chain, shorten development times and create opportunities for improved quality at lower costs. In the development of own products, standardization is an ongoing process, as new products tend to have differences in details that do not create customer value but complicate the supply chain. Some of these details are created by suppliers who want to achieve a situation where the customer becomes dependent on their solution, but even the best standardizations need to be challenged, developed, and improved to make use of new technology and materials.
Platforms are a way to standardize complex and expensive system products. The basic idea is that as much of the cost of the product as possible is standardized and that it is customized by adding and combining smaller but unique details. Here, too, the automotive industry is at the forefront, but both information technology (IT) and physical platforms are important in many industries. In-home furnishing, we often see simpler platforms, such as XYZ Corp's, a clothing manufacturer ( jackets & outerwear ) where a few cut parts can be combined with a number of different designs to create hundreds of possible combinations. The development of standards and platforms is significantly complicated if the purchasing organization sees itself as an isolated function only with responsibility for the sourcing of ready-made products. Strategic sourcing means being an integral part of the company's business development that actively initiates and drives improvements throughout the supply chain, often with the starting point in opportunities in the purchasing market.
9. Develop better products
ABC Corp has its roots in industrial design, ie an approach that optimizes both customer demand and production, which is mainly used for mass production. ?A Pareto is a classic method of how product cost and cost of changes increasingly are committed as the products are completed. For example, approximately 80 percent of the product costs are committed when the prototype is chosen. In practice, it means that the sourcing teams need to exert influence on product development early to achieve any substantial impact. At ABC Corp, the purchasing function is involved in the concept stage and selected suppliers as early as possible, often when the prototypes are made. Since ABC Corp has exceptionally long product lifecycles, substantial efforts are made to reduce the cost of change, so that products that are already on sale can be improved over time.
The main task of the project buyer is to provide guidance on how decisions on technology, design materials will affect the cost, performance, and supply of the product, and to lead the work with selected suppliers. Make something new! At ABC Corp, the results in nine out of ten categories sourcing projects are realized by applying creative variants and combinations of the previous nine strategic levers. They are well-described and proven in several industries, and the only thing unique to ABC Corp is that there are few retailers, and none in home furnishing, who work as deeply with them as ABC Corp does. However, it would be arrogant to believe it is a complete list, or that rule solutions are so simple that you can only tick them off. Furthermore, every tenth solution looks very different.
Lastly, what I have shared is not industry or category based but is the norm which when apple across the function yields to a bigger volume, encompasses profit maximization, deeper SRM, above all post covid era organizations goals.
?