Category management vs strategic sourcing – so much fuss for little difference?

From our research, it is clear that many organisations still see category management as simply another term for strategic sourcing. However, we believe that category management and strategic sourcing focus on different aspects and have distinct goals.

What is category management in procurement

Category management is the process of organising spend into groups of related products and services according to their characteristics, market dynamics, or business objectives. It is a strategic end-to-end process for buying goods and services that aligns business goals and customer requirements with supply market capability and maximises long-term value for the organisation.

It is a cross-functional activity that requires organisations to work collaboratively to understand internal stakeholder needs and examine category spend, the supply market, and suppliers to identify opportunities for savings and value improvement as well as aligning your procurement strategy with your business goals.

Category management helps build long-term relationships with suppliers and leverages their expertise and innovation. It is a way to manage categories for their whole life-cycle, and it sits above procurement activities, such as strategic sourcing, Supplier Relationship Management, or Contract Lifecycle Management. Category strategy outputs fit into four areas — sourcing, SRM, contracting, and internal operational change and implementation.

What is strategic sourcing

Strategic sourcing is a procurement process used to source goods and services from the available supply market at a specific point in time. It is aimed at selecting the right suppliers to achieve the lowest cost while meeting the specifications and required timelines. Its primary goal is to achieve price/cost reduction via aggregation and consolidation through negotiations. The process includes evaluating third-party requirements, analysing current spend, identifying potential suppliers, developing the route to market strategy including single/multi suppliers, lotting strategies, etc., and then running a supplier selection process or RFP and negotiating contracts. It is an effective way to deliver sustainable cost savings and promote healthy market competition between suppliers. It is often an output from a category strategy.

Category management vs. strategic sourcing – subtle differences, big implications

While many steps and processes are similar across Category Management and Strategic Sourcing, there are some subtle differences that with significant implications on how both are applied.

i. Strategic sourcing is focused on price reduction. Category management is focused on broader business value, such as risk, revenue, innovation, and cost, which may also include buying less (e.g., demand management) or buying smarter (e.g., specification management).

ii. Strategic sourcing is a procurement process focused on “sourcing events” for selecting suppliers that requires limited business input outside of specifying the requirements.

Category management on the other hand is an enduring cross-functional business process that requires intensive collaboration with a broad set of business stakeholders to develop deep insights on internal business requirements to create and implement wide ranging strategies to enable the organisation to behave as an intelligent customer in “what it buys”.

iii. Strategic sourcing provides a good understanding of the external market at a specific point in time and helps the organisation to be good at “how it buys”. Category management delivers deep external market expertise around the product structure, supply chains, the supplier landscape, and regulatory and risk factors.

iv. Category management delivers deep internal and external market expertise, cohering stakeholders, and providing governance to enable the organisation to behave as an intelligent customer in “what it buys”. Strategic sourcing alone provides a good understanding of the external market at a point in time and helps the organisation to be good at “how it buys”.

v. Strategic sourcing is usually focused on solving a specific demand and negotiating respective contracts with a timeframe of 1-3 years. Category management determines the go to market and approach for an entire category, which can span multiple events, and focuses on cohering stakeholders (demand), and providing governance to steer the organisation in a defined direction over a 3-5 year horizon.

Combining Category Management and Strategic Sourcing to execute strategies for increased value

In summary, category management and strategic sourcing should not exist in isolation. Category management provides the business intelligence and governance to maximise business value and, when combined with strategic sourcing, enables you to execute the procurement aspects effectively — so you are good at both what you buy and how you buy it.

Where organisations focus on one over the other, they often either end up with category strategies that struggle during implementation or with disconnected approaches for the same goods and services across regions, countries, or business units. Developing an Operating Model that clearly acknowledges and defines processes, roles and responsibilities, and handover points will ensure that organisations achieve the best of both methodologies and create increased customer value. This will become even more important with the advancement of digital tools and AI in both areas and the advancement of data-driven procurement.

If you want to discuss how your organisation is performing and how to design an operating model for seamless best-in-class processes, please speak to us about our maturity assessment.