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Category management vs Strategic sourcing – The differences

by | February 22, 2019

Purchasing the best goods or services available, at the best price-quality ratio, with the optimal delivery time, from suppliers that comply with your company’s values, while also optimising the procurement process and achieving savings, can be quite a hassle whether you are a small company or a huge enterprise.

There are many theories around the best purchasing methods, based on your company’s goals, the industry you operate in, the size of your company, the goods you purchase and of course the type of goods or services your company produces. There is no universal “right way”, however there are a few best practices, depending on a couple of factors.

One of these purchasing practices is sourcing. Sourcing has been talked about a lot, as the concept was popularized by major consultancies in the 80s and 90s. There are many popular practices when talking about sourcing, ranging from simple programmes of e-auctions to complex category management. However, at its core, a sourcing process is used to select the best product or service for a certain category of expenditure. When selecting a vendor through a sourcing process, the buyer works in collaboration with other internal customers and budget holders. Beyond the purchasing of goods and services, sourcing is usually one of the most effective ways to deliver savings.

There are 2 concepts we want to cover in today’s article. Both considered best practice sourcing strategies, much debated throughout the years and sometimes even considered to be one and the same: that is – strategic sourcing and category management. Let’s start with a definition of the 2.

What is Strategic Sourcing?

Strategic sourcing is a procurement process during which a company is continually reviewing current needs against purchasing opportunities. Strategic sourcing can help businesses shape future forecasting and define pricing to help position them more competitively.

There is much to be discussed about strategic sourcing best practices, especially when talking about mature procurement functions versus growing procurement functions. To learn more about this have a look at our Strategic Sourcing – best practices blog.

What is Category Management?

Category management is a structured and strategic approach to the procurement of goods and services by a business organisation. This approach organises procurement resources to focus on specific areas of spend. In category management goods are broken down into discrete groups of similar or related products known as categories, each product category being managed as a strategic business unit.

How are the 2 different?

There have been many debates around the difference between strategic sourcing and category management. Some say they are different terms of the same process, while others say there is a dramatic difference between the 2 strategies, as there are different issues and challenges associated to them. However, most procurement experts agree that category management is broader than strategic sourcing and is considered to be the next level of maturity beyond strategic sourcing.

Strategic sourcing typically seeks to reduce purchasing costs through a set of periodic processes, by aggregating demand and rationalising the supply base in selected commodities. The process starts with a spend/opportunity analysis to identify the target commodities and ends with a preferred supplier contract.

Strategic sourcing is a price centric methodology, focused on achieving savings and relies heavily on contract creation.

Category management is a way of driving value and includes strategic sourcing, but is much broader than that. It uses strategic sourcing techniques and processes to source each category and its sub-categories.

It implies the development and implementation of best practice techniques when it comes to creating an integrated strategy for each category, that is aligned to the needs of the organisation. The practices involved in category management work towards optimally meeting the business’ objectives.

The framework sits above and guides the sequencing of methodologies like strategic sourcing and supplier relationship management to satisfy category and business objectives.

Category management is a way of improving your strategic sourcing activities, moving the process beyond cost saving and contract management to working towards achieving the business objectives. Although the benefits are obvious and procurement experts position category management as a driver for value and growth, many companies still struggle to make the transition from strategic sourcing to effective category management. Used on the long term, however, category management can help improve the strategic sourcing process.

Where do you stand on your journey to sourcing excellence? Get in touch with our sourcing experts and let us guide you on your quest to sourcing excellence.