“Typical category management and contract management activity leaves 46% of the value identified on the table”
Opportunities for transforming value through category and supplier management are not always realised. This matters when 3.2% of savings can be lost
Where should planning for category strategy implementation start?
When we discuss the implementation of a category strategy, the first steps typically start with activities such as carrying out supplier selection processes, negotiating with incumbent suppliers and making internal changes that drive out more value such as specification or demand modifications.
The second implementation step focuses on transitioning between contract terms and implementing agreed changes with an incumbent supplier, or transitioning to a new supplier.
At the heart of all of these activities should be the business requirements that were originally agreed by the cross-functional category team and documented in the category strategy. These provide a central thread that links through from the needs and wants identified by that category team to the contract that is operated in the business on an ongoing basis.
What percentage of identified category management value leaks away?
Respondents to global research undertaken by Vantage Partners in 2012 identified that on average only 54% of value identified in their category strategy gets realised in operating supplier relationships. 46% of the value identified leaks away during the subsequent sourcing, negotiation, contracting and contract management activities.
The range between top performers and lowest performers is significant. The top companies, with very structured category strategy creation and implementation approaches, realised 94%+ of targeted value, versus only 6% of targeted value realised by the bottom companies.
Value leaks away across all steps in the process from the point at which the business requirements and value lever opportunities are initially quantified and documented in the category strategy. As these are translated into subsequent documents such as the RFP and contract, value is eroded. Intent, meanings and clarity is lost as the requirements are handed from person-to-person and document-to-document until the practices on the ground, used when managing the live contracts, no longer fully resemble the original requirements and opportunities identified.
Where should planning for implementation start?
The 2019-20 Future Purchasing Global Category Management report identified that on average 7.0% savings were delivered from category management – with 6.4% for Followers and 9.0% for Leaders.
Vantage research implies that 46% of this value is unrealised. This means that for every EUR 100m of supplier spend, with the average 7.0% savings available, 3.2% of those savings (EUR 3.2m) leaks away
The difference between leaders and followers in procurement is over 2:1 on every metric.
Many large organisations in the private and public sectors are well aware of the considerable opportunities that remain for transforming their capability to develop and implement category strategies.
The challenge is creating and securing the business case for that transformation and then driving through well-executed category and supplier work streams capable of delivering it. This is the focus of Future Purchasing’s work.
About Mark Webb
22 years procurement experience in line management
and consulting roles.
Previous employment: Price Waterhouse, Mobil Oil and QP Group
Education: BSc in Management Science and MSc in Business by Research, Aston University