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Category management: What it is and how to use it

Category management: What it is and how to use it

Understanding a business requires a balance of broadness and precision.

When you look too deep into granular details, you miss out on the bigger picture. But go out too far and you miss out on critical insights that drive effective decision making.

When it comes to procurement, operations of all sizes are constantly trying to get a grasp on the trends that affect their costs and processes. 

To strike the balance of broadness and precision, they use category management. If you start using it, you may be able to drive more profits and build the framework for long-term success.

What is category management?

Category management is a strategic approach to procurement that involves bucketing products and services into categories rather than individual items.

By grouping procured items into buckets, you cut down on the amount of data and information you need to process to understand trends. Rather than digging into the costs of each item, you can see what categories are driving changes in your spending levels to enable the quick, adaptive decision-making that saves money.

These categories are defined based on how they are involved in the business’s strategy. For example, you may have a category for costs of marketing, IT, human resources, and travel.

Categories are defined by businesses based on what they’re procuring and what purpose those goods or services serve. However, a common starting point is using the categories of the United Nations Standard Products and Services Code (UNSPSC).

Category management benefits

Businesses opt for category management for different reasons. These are some of the benefits that drive the decision and why you may want to consider implementing the practice.

Improved efficiency

Looking at data to try and learn something is like being given a map without directions. But there’s a big difference between being given a map of the world versus a map of your city.

Category management sizes down that map to minimize the time between beginning the search and finding your answers. You get the gist at a glance and then know exactly where to dig deeper to find what you’re looking for.

This is worlds away from looking at individual transactions and vendors that put you so deep in data that it feels like you need to pull yourself out to see the bigger picture.

Cost savings

As you start to understand your procurement through categories, you start to understand where you’re overspending.

Category management helps streamline spend analysis. Browsing through a category helps you identify redundancies and unnecessary costs that can immediately be cut and save you money.

Thinking about categories from the perspective of what purpose they serve, you get more critical about what serves that purpose and whether it’s worth the investment. Over time, you’ll cut down on your expenses by category by identifying ineffective spending that can be rerouted to better efforts.

Better supplier relations

Understanding the trends in categories means understanding market dynamics and impacts on supply chains on a deeper level. You’ll start to get a clearer picture of what’s impacting your suppliers and what it ultimately means for what you procure from them.

Over time, you’ll learn how to better identify opportunities and pivot away from challenges to better collaborate with suppliers and build stronger relationships.

You’ll also start to understand which suppliers to put more effort into maintaining the relationship.

The vendors who view you as a long-term customer will take steps to protect you from the downwind effects of market dynamics are invaluable. When you dig into a category and see some vendors have more volatile costs, you’ll get the gist of who’s looking at you as a payment versus a long-term customer.

Deeper understanding of markets

The market trends that affect your procurement process are also driving customer demand and wants.

By aligning the categories of your procurement with the categories of what you offer, you position yourself to serve customer preferences in a way that’s cost-effective and scalable. You’ll easily identify opportunities to serve the right goods or services at the right time.

A step-by-step guide to implementing category management

Once you’ve decided to use category management in your operations, follow these steps to get set up and hit the ground running.

Step 1: Define the categories

Take a holistic approach to defining categories. Understand each component and how they’re interconnected to come up with effective buckets that provide meaning to your organization.

Each category should have a clearly defined role that helps you understand what purchases go where. Think about the purpose it serves, what it enables, and the people (both internal and external) that are affected by it.

For greater insight, consider using subcategories. This allows you to look at categories in as broad or as strict of a definition as you need.

Step 2: Understand category performance

Look at past performance and trends within the category. Once you’ve got the lay of the land, you can start setting future goals and expectations for that category.

This is like an internal benchmarking process. You’re starting to set a standard for that category that will help you gauge the impact of a change, for better or for worse.

Step 3: Draft category KPIs

Stepping off from understanding historical category performance is determining where you want to take it.

Look for areas of improvement and set measurable goals. These will be your key performance indicators (KPIs) that help you understand whether you’re getting closer or further away from your goals.

Step 4: Conduct market research

Market research is an essential component of contextualizing your category stats against the greater whole. The process of learning the market of each category facilitates identifying opportunities for savings and optimization.

Each opportunity you identify is typically going to impact the rest of the category. Over time, you’ll establish category-based strategies and research tactics that keep you up-to-date on market trends so you can take advantage when it’s favorable and pull back when it’s not.

Step 5: Establish category tactics

Throughout the process of looking at your historical performance, drafting KPIs, and conducting market research, you’ll have a set of goals and a wide array of options to accomplish them.

This wealth of opportunity can be paralyzing. Prioritization is key to ensure everyone is unified on which opportunities will be pursued immediately and which can wait.

Draft up a set of tactics and then place them into a priority matrix. You’ll get a clearer picture of the level of effort and amount of impact each tactic has to give you a sense of direction.

Step 6: Make an implementation plan

The implementation plan is the north star of the who, what, and how of any changes you’ll make. It clearly outlines the steps the business as a whole will take to complete any project.

You should have an implementation plan for the switch to using categories as a whole. This will define who the stakeholders are, who’s responsible for each part of the process, and the scope of the project.

It’s also worthwhile to dedicate time to define what continued work within categories looks like. Similarly, you should define who will be responsible, what the work entails, and the frequency on which it’s delivered.

Step 7: Review and iterate

Changing up your processes to enable category management helps businesses get more efficient and maximize their profits. But making the change once and moving on leaves further improvements on the table.

Keep touching base with stakeholders following the rollout to see what their experience has been like and if additional changes could help them achieve a new level of performance.

There may be new challenges and opportunities that arise over time and you should be prepared to jump on them to maximize the effectiveness of this change.

Common challenges when adopting category management

There are some potential pitfalls to watch out for when implementing category management. Look out for these challenges and use our actionable tips to avoid them.

Reshaping your business’s processes

Implementing categories requires reshaping multiple processes of procurement. For businesses with a legacy framework of organization or reliance on their current technology, this turns into a larger undertaking. 

It’s essential to keep focused on the end goal. With what category management offers your operations, the effort in the short term can save you both time and money down the line.

If you want to bring on new tech to help with the transition, look for something that seamlessly integrates with other essential components of your finance tech stack. For example, BILL Spend & Expense’s integrations include leading accounting systems like NetSuite, Sage, QuickBooks, and Xero.

Getting team buy-in

Everyone needs to buy into a change in process for it to have any impact. Everyone from multiple departments needs to be committed to the change for it to work.

Getting buy-in requires being focused on the end game. Every team needs to understand the positive impact the change is going to have on them and their workflows.

Start by having conversations with those who would be affected by the change. Take time to understand any hesitations and what they would want as an ideal outcome.

By taking feedback early in the process, you have time to address any concerns or needs and incorporate them into your decision-making. Your teams will feel empowered and heard which will make them more receptive to any changes.

Working with complicated, fractured datasets

Procurement involves many stakeholders and their work is often done separately from one another. When transaction volume is high, your data is going to be unwieldy and fractured in multiple different places.

In some ways, this is a benefit of category management: all of this information becomes centralized and easy to navigate.

However, getting to the point that it’s organized can be a challenge.

To successfully make the change, you’ll need to invest in data management. This may mean dedicating time to wrangle the data together and create a new process that keeps the data unified. Or maybe there’s a tech solution that handles doing all this work for you.

Best practices for implementing category management

When working through the implementation of category management in your procurement process, follow these best practices to do it with maximum effect.

Collaboration is the key

For category management to be effective, everyone needs to be invested in the process and willing to work together. It’s a cross-channel function and everyone needs to be committed to the common goal.

Communication will be an integral part of this. Make sure you have centralized channels where there can be conversations and questions that keep everyone on the same page.

Invest in your data infrastructure

At the center of category management is data. The quality of data that goes into it will determine the level of insight you get out of it.

Touch base with the different users and people involved in the process to understand their workflows and how they interconnect. You may find ways that data is getting fragmented or passed through inefficient channels.

Think of the process as like building roads: the more something is traveled, the more you should invest in streamlining the process. A highway doesn’t make sense for a short point-to-point trip but is essential when it’s the most traveled route.

Turn to technology when needed

The stress and uncertainty of making a change can be mitigated with technology that streamlines the process. There are options available that help provide similar levels of insight while minimizing the lift to get it working.

Before you commit to an overhaul, take a look at which tech solutions are out there and their approximate cost. Even if you don’t take the plunge right away, they’re a great option to keep in your back pocket if needed.

Getting category management insights without the lift

By adding a new tool to your accounting tech stack, you can get all of the insights categories provide without radically changing your established workflows.

Enter BILL Spend & Expense, an expense management platform that automates categorization, provides in-depth reporting, and opens up a whole new world of real-time analysis. Trusted by both businesses and accounting services like Nimbl, the customizable platform lets you set the rules to provide the level of insight you need.

Get started with a demo to see for yourself how we can reshape your procurement process.

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