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Applying category management in procurement in manufacturing companies

Article in Upravlenets · December 2019

DOI: 10.29141/2218-5003-2019-10-6-5

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 International Journal of Advanced Science and Technology
Vol. 29, No. 8s, (2020), pp. 2099 - 2107

Category Management in manufacturing companies: new application of an

old retail practice
Irina V. Burlakova, Liudmila S. Ruzhanskaya
International Economy and Management Dept.
Ural Federal University named after the first President of Russia B.N. Yeltsin
19 Mira St., Ekaterinburg, 620002, Russia

Abstract

The topic of category management in manufacturing has been widely discussed in recent years, but not in
academic papers. The methodology of category management for manufacturing companies has not been
clearly defined yet. Traditional category management (CM) in retail involves effective management of the
margin of goods, which is achieved by concentrating control over purchase, pricing, promotion and
marketing in the hands of a category manager. It is obvious that the whole set of tools of traditional retail
category management is impossible to apply to the purchases of industrial companies due to a number of
specific restrictions: some of the goods purchased by the industrial enterprise are modified in the process
of production, and the others are acquired not for external, but for the needs of company internal
consumer. Therefore, it is necessary to make a number of clarifications in the methodology of category
management for industrial companies concerning the toolkit and implementation algorithm used. By
analyzing the theory of traditional CM and summarizing the experience of industrial companies we
outline the methodology of implementing CM in manufacturing companies that will become a basics for
further efficiency evaluation of this practice.

Keywords: Purchasing, procurement, supply management, category management, purchasing category

management.

1. INTRODUCTION

The major research directions for Purchasing and Supply management in recent years are known as green
procurement and sustainability. Category management in manufacturing is another topic that has been
widely discussed, but mostly between company management and business consultants. One will hardly
find many scientific articles systematizing literature on the subject or studying the practice itself.
Many consulting and analytical companies such as Nielsen Company (US), who used to study retail
category management practices, state than CM is equally applicable to manufacturing and assumes the
same fundamental steps:
 Category definition,
 Category role,
 Category assessment,
 Category scorecard,
 Category strategy,
 Category tactics,
 Category implementation
 Category review.(Nielsen, 2014)
In 2018 category management have been introduced to the procurement process in PCF, the most widely
used cross-industry process classification framework by American Productivity and Quality center
(APQC), which means its applicability to retail, wholesale and manufacturing business equally.
Compared with previous version (2017) the process “develop sourcing strategy” was replaced by

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Vol. 29, No. 8s, (2020), pp. 2099 - 2107

“perform category management”, and a new process “Develop sourcing and category management
strategies” was introduced.

Figure 1. PCF framework for process group 4.2. “procure materials and services”(PCF, 2018)

But in academic literature most of the articles on CM are devoted to grocery, retail and not industry, as
the approach itself originated in retail.
Efficient Consumer Response (ECR), first introduced in academic literature in 1993, is a concept aligning
particular practices and activities to deliver better value to the consumer. The initiatives of ECR include
Category management (CM), which assumes a shift from the traditional brand management approach to
the product category management approach, which can be accomplished by defining the basic business
unit as a product category as opposed to a specific brand or product line (Reyes, 2005).
Since category management is a set of tools originally developed for retail, there is no scientifically sound
basis for its introduction in industry:
 the set of CM tools applicable to the industrial enterprise is not defined;
 There are no published guidelines for implementation;
 There is no algorithm for introducing categorical management into the practice of industrial
enterprises.
Thus, the purpose of this study is to define the methodology of applying category management tools for
manufacturing companies.

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Category management in retail and its methodology.

Category management, as an approach to the management of purchased products range, originated in
Procter'Gamble in the 1990s (Holweg, 2009). Traditionally, categorical management has evolved as a
method of managing purchase in retail and wholesale trade.
According to ECR, CM can be defined as a distributor/supplier process of managing categories as
strategic business units producing enhanced business results by focusing on delivering consumer value
(Holweg, 2009).
One of the most comprehensive definitions of category management was given by S. Sysoeva and E.
Buzukova:
“Category management (product management) – is an approach to the management of product range,
which assumes the following rules:
1. The division of the entire product range into product categories not necessarily in accordance with
generally accepted groups and types of goods, but based primarily on the psychology and perception of
the consumer.
2. Responsibility of one employee of a trading company for the entire cycle of the category - from
purchase to sale.
3. Considering each product category as a mini-enterprise within a company with its own budget, pricing,
procurement policy, etc.
4. Approach to the assortment of a retail store as a single set of all categories, according to the buyer’
sperception” (Sysoeva, 2016).
The wide opportunities of applying CM outside of retail were mentioned by various authors: "Category
management is applicable for retailers and wholesale companies. It allows to identify their role, strategy,
tactics and thus to determine the points of growth. Category management allows you to assess the
effectiveness of sales of an unlimited number of items, identify the causes of low sales, plan and
implement measures to improve the performance of each individual category. This, in turn, will increase
the efficiency of sales and profitability of the company." (Ilyenkova 2018). The methodology of CM can
be structured as follows:
The first step of implementing category management is to divide the range into categories and allocate
subcategories in accordance with consumer perception. Then, based on the share in turnover and revenue
of the company, the roles of categories (basic, convenient, etc.) are determined. For each category it is
necessary to analyze its composition, internal structure, supplier market and strategies. Based on the
category development strategy, a plan of activities related to marketing, layout, pricing, etc. is being
developed. Before the project starts, it is necessary to clearly define the goals and formulate the indicators
to achieve.

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Vol. 29, No. 8s, (2020), pp. 2099 - 2107

Category management

Defining categories and subcategories

Defining roles

Category analysis and defining strategies

Defining tactics

Setting objectives

Project implementation (using 4P marketing concept)

Assortment Merchandising Marketing activities Pricing

management

Theanalysisofstatisti
Competitor price
Market analysis Supplier analysis csonpreviouscampai
analysis
gns

Consumer analysis Consumer analysis Consumer analysis Consumer analysis

Supplier Supplier Supplier Supplier

cooperation cooperation cooperation cooperation

Result analysis

Implementation

Figure 2. Eight stages of the category management method. Source: Ilyenkova, 2018, p. 129

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CM at the project stage includes the following:

 Managing the product range, managing suppliers;
 Marketing activities aimed at increasing sales and customer loyalty;
 Pricing. A pricing policy is developed for each category separately to maximize the profits of the
company;
 Layout (merchandising) is a retail tool that allows to increase sales by effective location of goods
on the shelves.
When the project is finished the results are to be analyzed according to the specified indicators and
conclusions are to be made. These findings should form the basis of the next phase of work with
categories and be taken into account when setting goals and objectives. We will take these tools and
stages of CM project as a basis when analyzing the implementation CM in manufacturing plants.
Category management is based on the theory of marketing. Philippe Kotler defines values as the
relationship between the benefits that a consumer receives from the acquisition and use of a product and
the cost of purchasing and using it. When we talk about CM in manufacturing companies, the consumer is
not the end consumer, but the internal customer, the employee/division of an enterprise. Therefore, the
target function of CM is shifting from the customer's satisfaction to cost optimization. In developing a
category approach for a production organization, it is necessary to shift from the marketing concept
because the consumer is inside the enterprise itself. The theoretical basis for the development of a new
category approach will be the following:
 TCO concept (total cost of ownership)
 strategic planning
 project management
The lack of literature on the methodology and practice of applying category management by
manufacturing companies was one of the factors that prompted the authors to write this article.

Category management practice in manufacturing companies

In 2009 Jonathan O'Brien, manager of the international procurement management consulting agency,
published a book named "Category Management in Procurement". This was the first book about the
application of category management to non-retailers. O'Brien uses the terms “marketing category
management” and "purchasing category management" The first refers to the traditional approach to the
management of product groups, depending on how the buyer sees and uses them. The author introduces
the concept of category management in purchasing: it is the practice of dividing the main areas of
expenditure for purchased goods and services into separate groups according to their functions and the
characteristics of the respective markets. (O'Brien, 2019).
Using the division of purchased goods into categories, employees work in cross-functional teams on each
category: study the cost of purchases, study the use of products category in the organization - Study the
markets and individual suppliers
The purpose of their work is to develop category strategies that can create added value for the
organization. (O'Brien, 2019). It is clear that we are not talking about the use of traditional category
management tools: pricing, marketing, merchandising.

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The use of terms "marketing category management" and "purchasing category management " seems
incorrect because, according to most authors, the classic "category management" in retail includes
marketing management activity, and this approach is most often implemented by managers of retail
procurement departments. Thus, category management can use marketing tools, and at the same time be
carried out by the employees responsible for procurement.

Hereafter we will explain the necessity to distinguish the notions of retail and wholesale CM (marketing
CM by O’Brian) and category approach to managing product range of manufacturing companies
(purchasing CM by O’Brian).

Raw materials Semiproduct Consumer goods Wholesaler Retailer

manufacturer manufacturer manufacturer

Figure 3. A classic supply chain centered on the consumer goods manufacturer.

Retail outlet is the final point of a supply chain, where the goods are sold to the consumer. A category
manager controls the profit from sales (determines purchase price, sale price, marketing activities to
stimulate sales, and decides on the assortment). It assumes total control over the profitability and
efficiency of a product category.
The tools of CM are mostly applicable to wholesale companies, as the goods are not modified or
transformed. The same manager may be responsible both for purchase and for sales of a product category
to retail stores or manufacturing plants. In this case the toolkit of CM that can be used will be narrower,
as in the B2B market there is no direct interaction with the end consumer. There is no contact with buyer
in retail store, which means that merchandising is not applicable.
Here a company will focus on pricing, margin, purchasing prices.
Regarding C Min manufacturing we will only study companies, manufacturing goods, because service
production is a very different phere and should be regarded separately.
Manufacturing companies in a supply chain can be classified as follows:
• Mining companies (raw materials);
• Processing plants (processing natural resources or producing semi-finished products from
several types of raw materials);
• Manufacturer of consumer goods (producers of the final product).
Goods purchased by a manufacturing plant can be divided into two main classes: direct and indirect
procurement. Direct procurement group includes products that are used directly in production and are
constituent parts of a finished product. Indirect procurement is related to products that are used to provide
production and non-production processes, but are not included in final product. The structure a
production company's range of purchased goods will depend on its place in the supply chain. Therefore,
the closer to the center of the supply chain, the greater the share of direct materials.

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Table 1 A production company purchase structure.

Firm type Purchase structure
Mining companies Mostly Indirect
Processing plants Direct+indirect
Manufacturer of consumer goods Direct + indirect. Direct exceed in terms of
purchasing budget.

Direct materials are purchased for manufacturing. Indirect materials are purchased not for manufacturing,
but also not for sale, but to satisfy inner demand of the company departments. Thus marketing, pricing,
merchandising is not applicable in both cases.
Category management is a value-oriented approach. However, the value as its founders understood lean
production (O'Brien, J. 2019. P.64-68 Womack, J., Jones, D. 2003. PP. 29-37), should be considered from
the point of view of perception of the end consumer, not to confuse with internal customer. The end
consumer is the buyer of the finished product of the company, not its employee, who ordered materials
for repair and maintenance. This makes it possible to standardize, optimize, manage purchased goods,
analyze total costs, i.e. developing category strategies and tactics.
Table 2 Potential to use category management tool sin enterprises occupying different position sina
supply chain.

Firm type Retail Wholesale Manufacturer of Mining

consumer company
goods/processing
plant
Defining categories
Category analysis,
strategy, tactics
Project realization :
Managing categories

Marketing

Pricing

Merchandising

Our paper “Applying category management in procurement in manufacturing companies” (Burlakova,

2019) describes the practices of implementing CM in four Russian manufacturing companies, based on
open source information (articles industry and logistics magazines).
The managers outline 2 most common practices of CM implementation:
• development and application of the "category strategy". "Category strategy refers to a
document that includes supplier market analysis, cost analysis, analysis of overall costs, and
strategic decisions on how to purchase materials and the principles of supplier selection.
• creation of a category team - a cross-functional project team that solves the problem of supply
chain management for a specific product category.

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Another recent study “Purchasing Category Management: Providing Integration between Purchasing and
Other Business Functions” (Heikkilä, J, 2019), based on interviews with managers of manufacturing
companies using category approach, outlines the following common practices:
• Defining purchasing categories.
• Using cross-functional purchasing category teams.
The generalization of CM application experience in Russian and European manufacturing firms allowed
to formulate the main steps of applying the category approach:
1. Defining purchasing categories;
2. Creating cross-functional category teams;
3. Determining purchasing strategies for category;
4. Formalization of strategies in a form of a document.
It is fair to say that defining purchasing categories was mentioned by P. Kralich in 1983, when he
proposed to divide the range into several categories on the basis of risk and the possible economic
benefits (Kraljic, P, 1983)Kralichmatrix is often called by business consultants a CM tool for applying
CM production companies.
However, Phase 2,3,4 had not previously been clearly defined, and in practice the production facilities
often missed these important points.
It should also be noted that many of the tools that are attributed to category management (e.g. cost
analysis, overall cost analysis, inventory management calculations, supplier management) have long been
known as "Supply Chain Management" (Chopra S., Meindl P., 2006).
In the near future, the specifics of CM implementation for procurement management in manufacturing
plants will be refined, and that will allow to measure the key efficiency indicators of its application, that is
still a field of opportunities for further research.
References
[1] Category management – common language between retailers and manufacturers, Nielsen (2014).
Online: https://www.nielsen.com/wp-content/uploads/sites/3/2019/04/category-management-
2014en.pdf
[2] Cross Industry Process Classification Framework (PCF), version №7.2.1 generated on
17.09.2018. Online: https://www.apqc.org/resource-library/resource-listing/apqc-process-
classification-framework-pcf-cross-industry-pdf-8
[3] Reyes, P.M. and Bhutta, K.(2005) ‘Efficient consumer response: literature review’, Int. J.
IntegratedSupply Management, Vol. 1, No. 4, pp.346–386.
[4] Holweg C., Schnedlitz P., Teller C. (2009) The drivers of consumer value in the ECR Category
Management model, The International Review of Retail Distribution and Consumer Research.
Online:
https://www.academia.edu/18138219/The_drivers_of_consumer_value_in_the_ECR_Category_
Management_model
[5] Sysoeva S., Buzukova E. (2016). Category management: retail assortment management.
St.Petersburg: Peter.400 s.
[6] Ilyenkova K. M. (2018), Introduction of category management in traditional retail, Herald of
Moscow University, No 3, pp. 124-145.
[7] O'Brien, J. (2019) Category Management in Purchasing. Kogan Page. Kindle Edition. 497 p.
[8] omack, J. and Jones, D. (2003) Lean Thinking. L: Free Press, 2003.

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[9] Burlakova I.V., Karkh D.A., Ruzhanskaya L.S. (2019). Applying category management in
procurement in manufacturing companies. Upravlenets – The Manager, vol. 10, no. 6, pp. 54–66.
[10]Heikkilä, J; Kaipia R, Ojala M (2018) Purchasing Category Management: Providing Integration
between Purchasing and Other Business Functions, International Journal of Procurement
Management (IJPM), Vol. 11, No. 5, pp.533 – 550
[11]Chopra, S. and Meindl, P. (2001), Supply Chain Management, Pearson Prentice Hall, Upper
Saddle River, New Jersey.
[12]Kraljic P (1983). Purchasing must become Supply management. Harvard Business Review, pp
109-117

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