CATEGORY

STRATEGY
DEVELOPMENT
(PART 1)

RISGIYANTI, S.E.,M.Si
– Understand how supply and enterprise strategies must align to drive value
– Describe what a category strategy is
– Understand the category strategy development process
– Identify the types of category strategy outcomes
– Understand e-reverse auctions
– Understand supply management transformation initiatives
– World-class supply management requires that leaders align with business unit
stakeholders, understand their direct and indirect requirements for success,
develop a deep insight into the global supply market’s ability to meet these
requirements, and negotiate contracts and manage supplier relationships that
create a competitive advantage.
– In other cases, the sourcing process can yield a different result, (e.g., to develop
the technology internally). In cases such as the Dreamliner decision, if external
suppliers are not capable, then insourcing is a better alternative. Making
sourcing decisions is a dynamic and difficult task, given the complexity and
challenges that exist under current market conditions
– This chapter focuses on the contribution that supply management can make to
a firm’ competitive position and how this contribution should filter down to
category management teams
– A category refers to a specific family of products or services that are used in
delivering value to the end customer.
Aligning Supply Management
and enterprise Objectives

– What markets will the firm compete in, and on what basis?
– What are the long-term and short-term business goals the company seeks to
achieve?
– What are the budgetary and economic resource constraints, and how will these
be allocated to functional groups and business units?
Integrative Strategy
Development
Corporate Strategies

– These strategies are concerned with

1. the definition of businesses in which the corporation wishes to
participate and
2. the acquisition and allocation of resources to these business
units.
Business Unit Strategies

– These strategies are concerned with

1. the scope or boundaries of each business and the links with
corporate strategy and
2. the basis on which the business unit will achieve and maintain
a competitive advantage within an industry.
Supply Management
Strategies
– These strategies, which are part of a level of strategy
development called functional strategies, specify how
supply management will
1. support the desired competitive business-level strategy and
2. complement other functional strategies (such as marketing
and operations)
Category/Sourcing Strategies

– These strategies specify how a group tasked with

developing the strategy for the specific category being
purchased will achieve goals that in turn will support the
supply management-, business unit-, and ultimately
corporate-level strategies. The term “commodity” is
sometimes interchanged with the term “category” when
referring to these strategies.
Engaging Stakeholders
to Build Category
Strategy Objectives
– Category strategies, by definition, need to include stakeholders as part of the
team.
– In general, the more important the category, the more critical it is that internal
stakeholders be involved. Together, the category team will develop a category
strategy that provides the specific details and outlines the actions to follow in
managing the category.
To enable an effective category strategy,
the team must:

– Allocate resources initially, including assessment of current spend, data

collection, market research, training, and people.
– Validate the savings or contribution to other company objectives achieved by
supply management.
– Sustain the initiative through presentations to senior executives who support
the move toward an integrated supply management function with other
functional groups in the supply chain, including marketing, research and
development, and finance.
Examples of corporate-wide supply
management goals associated with various
supply management objectives

– Cost-Reduction Objective
– Be the low-cost producer within our industry. (Goal: Reduce material costs by
15 percent in one year.)
– Reduce the levels of inventory required to supply internal customers. (Goal: Reduce raw
material inventory to 20 days’ supply or less.)
– Technology/New-Product Development Objective
– Outsource non-core-competency activities. (Goal: Qualify two new suppliers for all major
services by the end of the fiscal year.)
– Develop new products and services. (Goal: Develop a formal supplier integration process
manual by the end of the fiscal year.)
– Supply Base Reduction Objective
– Reduce the number of suppliers used. (Goal: Reduce the total supply base by
30 percent over the next six months.) Reduce product complexity. (Goal:
Identify $300,000 in potential cost savings opportunities with two suppliers
by the end of the fiscal year.)
– Increase local content in Latin America (Goal: Identify five potential suppliers
in Brazil who can supply our local business in that region with $5 million of
business.)
– Supply Assurance Objective
– Assure uninterrupted supply from those suppliers best suited to
filling specificneeds. (Goal: Reduce cycle time on key parts to one
week or less within six months.)
– Quality Objective
– Increase quality of services and products. (Goal: Reduce average
defects by 200 parts per million on all material receipts within one
year.)
What Is a Category
Strategy?
– Category management is a process that carries out the following activities:
 Understand business unit requirements for the product or service.
 Conduct research on the characteristics of the supply market and the
capability to fulfill these requirements.
 Evaluate specific suppliers and establish capabilities that align with business
unit requirements.
 Develop a strategy that aligns supply capabilities and demand requirements.
 Determine optimal relationship characteristics and price/cost issues.
 Develop a business case for moving forward approved by senior managers.
 Develop a negotiation and contract strategy.
 Execute the negotiation and develop a contract.
 Establish a basis for ongoing management and continuous improvement of
supplier management for that category, and for transitioning this
responsibility to appropriate stakeholders.
– The job of a category manager is threefold:
1. to engage internal stakeholders and fully understand their requirements
for products and services,
2. to scan the marketplace to understand market trends, cost drivers, and
risks, and
3. to build a strategy that aligns stakeholder requirements with the realities
of the supply market.
Conducting Spend Analysis

– A spend analysis is an annual review of a firm’s entire set of purchases. This review
provides answers to the following questions:
 What did the business spend its money on over the past year? (This value is an
important component in calculating the cost of goods sold in the financial
statement. Purchased goods and materials are often more than 50 percent of the
total cost of goods sold.)
 Did the business receive the right amount of products and services, given what it
paid for them? (This is an important component involved in meeting the legal
requirements of the Sarbanes Oxley Act, which requires accountability and correct
reporting of financial statements to the Securities and Exchange Commission.)
– What suppliers are awarded the majority of our business volume, and did they
charge an accurate price across all the divisions in comparison to the requirements
in the POs, contracts, and statements of work? (This is an important component to
ensure contract compliance.)
– Which divisions of the business spent their money on products and services that
were correctly budgeted for? (This is an important component for planning annual
budgets for spending in the coming year.)
– Are there opportunities to combine volumes of spending from different businesses,
and standardize product requirements, reduce the number of suppliers providing
these products, or exploit market conditions to receive better pricing?
Spend Analysis
Spreadsheet
– The first step is to take this information and sort the data by category. In this case, a category is a “category”
of spending.
– From the category sort, find the total spend by category.
– Make a chart of the top 10 commodities by descending dollar spend. A Pareto chart is used to show the total
value of spend that occurs within each category.
– From the category sort, find the number of suppliers by category
– Make a chart of the top ten commodities by descending number of suppliers.
– From the category sort, find the average spend per supplier by category. Perform an ascending sort of
average spend per supplier.
– Applying the concept of Pareto analysis to the chart of top 10 commodities by
descending dollar spend
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