In an environment where may organisations are suffering from “demand shock” with revenues and profits under significant pressure and at the mercy of forces which are beyond their abilitity to control, thoughts naturally turn to the management of cost transformation
Profitability through Better Category Management
This is true even for companies who remain busy at the current time but whom are seeing their Selling, General, and Administrative (SG&A) costs outstrip increases in revenue as a result of amplified costs to serve.
A number of recent C suite surveys, including BCG’s May 2020 CFO Pulse Survey [BCG(1)], have shown that many companies have responded by slashing capex, reinforcing existing financial performance controls including client credit management, suspending dividend payments and so on.
All very understandable, but this also begs the question:
‘Are external cost reduction and value management levers also being pursued with the same degree of rigour?’
If the answer to this question is ‘no’, companies should seek to implement an effective category management programme focused on the systemic identification and delivery of value creating (i.e. cost out, risk down and / or revenue up) opportunities across their third party spend base.
All well and good?
Maybe not – whilst category management is a well-trodden area with purchasing professionals and consultancies, few organisations do it really well. However, a close review of successful programmes highlights some key enablers that are central to benefits realisation.
Can your organisation identify with these enablers?
Never under-estimate how hard it is to drive collaboration internally – even across different parts of the same business – and ensure availability of the right type and quantity of resources. Any broad-based category management programme must therefore be supported by:
- An Executive Group or Board that approves and sets overall programme goals, approves the overall category sourcing programme plan and targets, provides organisational focus, and also acts as / creates a catalyst for creating engagement (e.g. sets and allocates aggregate savings targets in a ‘top down’ manner across different parts of the business) whilst ensuring the programme, initially at least, covers ALL third party addressable spend.
- Category Sponsors whom chair Category Sourcing Boards, have ‘skin in the game’, the authority to make decisions and address any barriers to delivery, along with a ‘no stone unturned’ attitude (versus ‘we always do it this way’) allowing for fresh opportunity assessment.
To be credible, all category plans must be developed ‘’bottom up’’ – category management is thus a business not a procurement process. It requires the right quality and degree of cross-functional participation from the business, including Finance and Procurement, for each agreed category area and associated sourcing initiative. Use of mechanisms such as joint target setting can be helpful to focus minds, embed category management disciplines, and prompt full consideration of all means to drive value from both a technical and commercial perspective.
As a minimum this should focus on:
- Creation of a credible overall business case (‘the case for action’) and Programme plan. The plan typically comprises a number of activity ‘waves’ based on an assessment of factors such as benefit to the business, speed / ease of implementation, and the ability to build in and also address current business priorities / key projects.
- Generating programme momentum via delivery of a number of quick wins.
- Effective management and reporting of overall progress, including benefits, in line with defined programme governance.
- Ongoing alignment to
(i) any other third-party sourcing activity that might be underway, being clear what is in and out of programme scope and
(ii) complimentary internal programmes of work such as zero-based budgeting (ZBB) initiatives.
This will vary from organisation to organisation dependent on business dynamics, category dynamics, relative business performance and organisational culture. It also provides a basis for gearing programme activity levels to the amount of change the organisation can deal with. In broad terms:
- In the first 12 months the programme should create a pipeline of rapidly implementable opportunities that deliver in year benefits. This creates a fast-paced attitude to driving change and builds confidence in category management.
- Activity beyond the first 12 months provides an opportunity to deliver changes that take more time to identify, agree, design and implement and which should result in step-change improvements driven by increased levels of internal collaboration, e.g. new product development involvement and external supplier innovation capture.
That said it is also viable to target a number of such opportunities for delivery at the beginning of the programme in parallel with those that deliver in year benefits to maintain savings velocity.
This should address savings definition, savings sign off protocols, details of how savings are dealt with (e.g. are they taken out of budget), and ensure recognition is given to all parties involved and not just Procurement, along with accountability for benefits realisation post contract award. Typically, Finance should play a significant role here and attest benefits delivery to both the Executive and Category Sourcing Boards.
Without this the danger is that the revised cost base will simply ‘balloon’ once the dust has settled. To prevent this:
- Accountability for ongoing contract / performance management of each sourcing solution must be clearly assigned at an early stage of the sourcing activity.
- The personnel whom will manage each solution must be part of the category management activity set, including strategy development and delivery.
- Opportunities for value improvement post contract award must be captured and tracked to ensure these are actioned going forward.
Not only does this aid initiative prioritisation, it also enables the organisation to act as an ‘intelligent buyer’ and avoid self-imposed limitations about the ‘art of the possible’ through appropriate consideration of sourcing initiatives including any synergies that span sub categories of associated spend. Equally, good insight allows effective consideration of rationale solutions – for example pursuing a global aggregation strategy will not work if the supply market is regional in nature.
This requires some effort, specifically:
- Identification and integration of key business processes, such as the annual budgeting cycle, alongside the Category Management process. Aligning objectives at this stage, including the activities to be progressed, increases the likelihood of success.
- Putting in place an agreed Category Management process and tool kit, complimented by training of key business personnel to create good levels of awareness and understanding linked to their role.
- Measurement of programme effectiveness aligned to business goals and objectives potentially also including:
(i) how much spend is being addressed (spend penetration)
(ii) how fast and often spend is being sourced (spend velocity).
This should address any ‘’why bother’’ and prioritisation challenges.
Conclusion
Organisations that adopt these enablers can expect to achieve transformative benefits arising from an enhanced brand, increased reputational and service resilience, and improved business profitability based on the delivery of better sourcing outcomes. Fundamental to these improved outcomes is the full and systemic consideration of all available value levers, which is an intrinsic part of better category management, ranging from basic tactical ‘price down’ driven volume consolidation plays, through to ‘cost-out’ value re-engineering initiatives, and ultimately more collaborative supplier-led revenue enhancing opportunities.
Mark Sukiennik
Managing Partner at Intelligent Sourcing Solutions Limited
This white paper has been guest written by Mark Sukiennik. Mark is Managing Partner at Intelligent Sourcing Solutions Limited. He has worked in procurement for over 30 years and has previously operated in a variety of procurement and consultancy leadership roles.
