Category Management: A Procurement Story About Finding Value That Transactional Buying Misses
Category management is an approach to procurement in which spending is grouped into categories of similar goods or services, and each category is managed strategically -- with a category plan, a market analysis, and a sourcing strategy -- rather than as a series of individual transactions. It was developed in retail and FMCG environments and has been adopted widely across public-sector and corporate procurement in the past decade.
In 2022, with inflation driving up costs in most spending categories and supply chain volatility affecting delivery reliability, category management provides a structured way to understand where cost and risk are concentrated and to develop sourcing strategies that address both. The following scenario illustrates the difference it can make.
The Scenario: A Regional Health Authority
A regional health authority in Ontario manages procurement through a decentralised model: each facility has its own purchasing function, and procurement decisions are made locally. In early 2022, with medical supply costs rising 12 to 18 percent across most categories and several facilities reporting supply shortages for specific items, the authority's CFO commissioned a category management review of the authority's top 10 spending categories.
What the Review Found
The authority was purchasing the same item from seven different suppliers across its facilities, at prices ranging from $4.20 to $6.85 per unit -- a 63-percent price spread for an identical product. No single facility had visibility into the prices other facilities were paying.
Three of the authority's top 10 spending categories had no active supply contracts. Purchases were being made on a spot basis, at whatever price the supplier quoted at the time. In an inflationary environment, spot purchasing exposes the organisation to the full rate of price increase.
Two major contracts were within 90 days of expiry, with no renewal process initiated. In 2022's supply market, renewing a contract without lead time or competition effectively grants the incumbent supplier a unilateral price increase.
The authority had no supplier consolidation strategy. In some categories, the number of active suppliers had grown through individual facility decisions to the point where no single supplier had enough volume to offer preferential pricing or priority service.
What Category Management Changed
The review produced a category plan for each of the top 10 categories. The first-year outcomes included: a 14-percent reduction in unit cost in the highest-spend category through supplier consolidation and a competitive RFP, resolution of the two expiring contracts with negotiated multi-year terms, and a single authority-wide supplier panel for the spot-purchasing categories, with standing pricing agreements. The total identified savings in the first year were $2.3 million on a base of $18.7 million -- a 12.3-percent reduction, in a year when unmanaged costs were rising 15 percent.
XNM supports public-sector organisations in implementing category management and strategic sourcing. Reach out to XNM's procurement, sourcing & contract management team to discuss category management for your organisation.