September 24, 2011

The Significance of Procurement Category Management

In today’s competitive environment, every second of time matters and is worth its weight in gold. This fact is readily observed as there has been a lot of research in the development and introduction of various methods aimed at saving time in the industry.
One of the most important metrics that represent the extent of time utilization or loss in regards to suppliers is supplier lead time, i.e. the time between placing of order and receiving the goods. It usually includes purchase order processing time, in transit time, receiving, inspection, and any inventory processing/repackaging time.
Besides, according to a survey conducted by Accenture during the recent economic recession, most procurement officers admitted that the recession had an impact on the supplier relationships and augmented supplier risk. The main reason was that the suppliers were looking for increase in their prices.
Procurement category management involves strategic development, assessment and monitoring of procurement and supplier performance in specific supplier categories. So, the basic steps for implementation are:
1.      Categorize each supplier based on the needs served by the goods supplied by the supplier. So, in other words, the suppliers supplying similar or substitutable items are placed in one category. For example, in case of a retail business, toothpastes and hair oils can be two different categories.
2.      It is also advisable to assign a person, as category manager or owner, to each category, based on the knowledge and application of the goods being procured from it.
Apart from shorter supplier lead time, the following benefits can be derived from this methodology:
1.      Since each of the categories requires similar procurement strategies and supplier relationship programs, it is far easier to manage the categories than to manage the uncategorized suppliers.
2.      It facilitates better relationships with the suppliers, which in turn improves supplier performance.
3.      It also helps in managing the spend by providing better purchasing power.
4.      It reduces supplier risk, develops a better supplier portfolio and provides better control over procurements.
In terms of supplier lead time and turnaround time, very significant differences have been observed between the organizations that are employing procurement category management and those that aren’t. According to “APQC Open Standards Benchmarking” in procurement, the supplier lead time in the former case is found to be around one-fourth of that in the latter case. Similarly, the purchase order processing time is found to be around nine times lesser for the organizations implementing procurement category management.
Procurement is undoubtedly one of the most lucrative areas to look into for cost optimization, and category management represents a well-defined and proven technique to go about it.
The writer of this article, Akshay Agarwal is a PGP student of Indian Institute of Management, Raipur and has done his B.Tech from Indian Institute of Technology, Guwahati.

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