Procurement category management from a supplier ledger

Group by function, without a buying team

Procurement category management groups what you buy so that similar spend is managed together. On its page comparing category management with strategic sourcing, the Chartered Institute of Procurement & Supply (CIPS) says you segment the main areas of spend into groups of products and services according to their function, then look at the whole category spend, the marketplace, and the individual suppliers.

Function means what the purchase does. Finished goods, packaging, freight, a third-party logistics provider (3PL), and software are functions. A payee name does not tell you the function. CIPS includes services in that sort, so a 3PL contract and a software subscription belong with the goods you buy, grouped by what they do.

The formal definition assumes a team. CIPS defines category management, as it applies to procurement and supply management, as "organising the resources of the procurement team in such a way as to focus externally onto the supply markets of an organisation." A founder with an accounts export is outside that definition. What you can still use is the grouping. How many categories get a written strategy is a separate limit.

Retail category management uses the same words for a different job. There, a category is products that meet a similar consumer need, or that are interrelated or substitutable. That Wikipedia page also notes that category management has no single agreed definition. The retail meaning is an assortment decision, and the procurement meaning is a buying decision.

Retag the payee export

A year of supplier payments arrives sorted by who was paid. A category review has to be sorted by function. Rank the export as it stands and the largest name comes out on top, even when that name covers two markets.

On a short staff list, stop at the function: packaging, not a separate strategy for each print type. That stop is this guide's staffing limit, and this section does not take it from CIPS.

Split a supplier that covers two functions. A factory that also invoices for cartons is one payee and two categories. Wikipedia's page on the Kraljic matrix says that, in its original form, the matrix is used for mapping purchasing categories, not suppliers. Conflating a supplier with a purchasing category can produce a strategy that does not match the actual supply risk or the commercial opportunity. The market for a tooled product and the market for printed cartons are not the same market, even when one company sends both bills.

The bank feed will still show one name, and that is fine: the category list is a second sheet, not a new accounting system.

Profit impact and supply risk

The chart people usually reach for is the Kraljic matrix. Peter Kraljic, a director at McKinsey & Company, introduced it in 1983 in Harvard Business Review, in the article "Purchasing Must Become Supply Management".

Mindtools describes the model as a way to help purchasers maximise supply security and reduce costs, by making the most of their purchasing power. Profit impact and supply risk are the two factors Mindtools uses.

Wikipedia's page on the Kraljic matrix names substituting expenditure for profit impact as a common misapplication of the vertical axis. This guide does not plot annual spend on that axis. A cheap component can still stop a launch if you cannot ship without it. The spend figure will not show that.

Mindtools says: "Supply risk is high when the item is a scarce raw material, when its availability could be affected by government instability or natural disasters, when delivery logistics are difficult and could easily be disrupted, or when there are few suppliers."

If one factory holds the tooling, you have few suppliers in practice, whatever a directory says. A notice period, or a 3PL exit that would take months, is a different problem. Mindtools does not list switching time, so marking a slow exit as high supply risk is an assumption in this guide. The 3PL in the ledger below clears the spend line, so its written strategy does not depend on that assumption.

Art of Procurement, writing as practitioners rather than as a study, says the matrix has lost some of its appeal as business has become more global, digital and sustainability-focused. Wikipedia adds that a classification which was accurate at the time of analysis may become unreliable as conditions change. Doing the sort once and filing it will not keep up with that.

How much work a category earns

CIPS says category management requires investment in time and commitment, along with the right training and skills. The effort rule in this guide is an assumption. Write a strategy for a category if it is at least 15 per cent of annual supplier spend, or if supply risk is high enough that a failure would stop orders even though the spend is smaller. Every other category gets a standing arrangement: one owner, a renewal date, and a reason to reopen the file.

CIPS says each category will have its own timetable, but at least annually the entire process should be reviewed. The same page asks you to consider what the situation may look like in five years. AcademyGlobal, a training provider, describes category management as containing sourcing events and continuing through supplier management, demand management and market monitoring between them. That watch between contracts belongs to the strategy categories. A standing arrangement does not need a market note every quarter.

On a small brand, finance and operations may be one person. The strategy file still needs both questions: what the category does to cash, and whether orders can still ship.

An invented £1,200,000 ledger

The figures and the supply notes in this section are invented to illustrate the rule. They are not a client result. The cash notes record where the cash goes, and what would make leaving that supplier slow or costly.

The total is £1,200,000 of supplier and service payments over one year. Media spend is left out. If advertising is your largest payment, give it a separate note. It is outside these five lines.

| Function | Annual spend | Share | Supply note | Treatment | | --- | --- | --- | --- | --- | | Finished goods | £540,000 | 45% | One factory holds the tooling | Written strategy | | 3PL | £240,000 | 20% | Moving the stock is a long exit | Written strategy | | Packaging | £168,000 | 14% | Several printers can run the dieline | Standing arrangement | | Freight | £132,000 | 11% | One carrier on the export lane | Written strategy | | Software and small services | £120,000 | 10% | Contracts can end inside a quarter | Standing arrangement |

15 per cent of £1,200,000 is £180,000. Finished goods and the 3PL clear that line, so both get a written strategy on spend. Packaging misses it by £12,000, and the supply note says the dieline can move, so packaging stays a standing arrangement. The finished-goods line is a category, not the factory's legal name. If that factory also billed £40,000 of the packaging, those cartons stay in the packaging row.

Freight is under the line at 11 per cent. It still gets a written strategy, because this invented lane has one carrier that rolls bookings in peak season. Mindtools counts delivery logistics that are difficult and could easily be disrupted as high supply risk, and few suppliers is the other factor that fits a single carrier. The supply-risk part of the effort rule is what puts freight on the strategy list.

On finished goods, a lower unit price that comes with a larger minimum order can leave months of stock already paid for. The strategy file should record payment terms, the minimum, and which components have no second source. How much to commit is a supply-planning decision, separate from the label: Demand planning vs supply planning.

On the 3PL line, the fee is the smaller cash question. Stock in that building, the notice period, and the work of reconnecting orders are what slow the exit. Whether to stay, bring fulfilment in house, or split the volume is a different decision: 3PL, owned fulfilment or hybrid.

Mindtools states a purpose for the matrix, supply security and lower cost. That sentence does not report a measured saving. Do not put a savings percentage on a strategy file.

The five-year prompt, in this invented case, is a second source for the tooled component, and a check on whether one warehouse still matches the countries you expect to ship.

Run the same pass on your export

1. Export twelve months of supplier payments. Use one basis for the whole year, and write that basis on the sheet. If some lines include VAT and some do not, the shares will shift.
2. Retag each payee by function. If one supplier covers two functions, split the spend or flag the line. Do not let the supplier name become the category.
3. Sum the year by function and mark each share of the total.
4. Score supply risk with the Mindtools factors quoted above. One factory holding the tooling counts as few suppliers. Record a slow exit separately, as that section describes.
5. Apply your spend line. Write a one-page strategy for every category over that line, and for any category under it that you have marked high risk.
6. Give the rest a standing arrangement: an owner, a renewal date, and the change that would reopen it. A printer market that shrinks to one supplier is a reopen. A software tool that becomes the only copy of customer data is a reopen.
7. Date a full repeat for twelve months later. Between contracts, keep a short note on the strategy categories covering supplier performance, demand, and anything in the market that would change the score.