Strategic sourcing vs Category management

1. Strategic Sourcing
Category Management
R V Srinivas Rao, MCIPS, SPSM, CISCM, CISCP, CIPC
Doha, Qatar
8-Apr-2017
R V Srinivas Rao

2. Strategic Sourcing
Category Management
AGENDA
Strategic Sourcing
§ What is Strategic Sourcing?
§ Difference between Strategic Sourcing vs Traditional Procurement
Category Management
§ What is Category Management?
§ Jonathan O Brien Model
§ Kraljic Matrix
§ Question and Answers
R V Srinivas Rao

3. Strategic Sourcing
Category Management
Raise profit by 30m?
How can it be achieved?
SALES
§ Revenue by Sales should be increased by 50m or more.
§ Needs aggressive marketing campaign and associated sales costs
with an expanded team.
PROCUREMENT
§ ???
Often a division of a company is a profit center because it has
control over its revenues, costs, and the resulting profit.
So the debatable question is whether Procurement should be
considered a cost center or profit center
R V Srinivas Rao

4. Strategic Sourcing
Category Management
R V Srinivas Rao

5. Strategic Sourcing
Category Management
What is Strategic Sourcing?
Strategic sourcing is an approach to Supply Chain Management / Value
Stream Management that formalises the way information is gathered
and used so that an organisation can leverage its consolidated
purchasing power to find the best possible values in the Market.
Strategic planning is an organization’s process of defining its strategy, or
direction, and making decisions on allocating its resources to pursue
this strategy.
R V Srinivas Rao

6. Strategic Sourcing
Category Management
STRATEGIC, TACTICAL,
OPERATIONAL
Reactive
Proactive
Collaborative
R V Srinivas Rao

7. Strategic Sourcing
Category Management
Difference between Strategic and
Traditional Procurement
Traditional procurement Strategic procurement
Typical mantra “get three quotes – award
the lowest priced supplier”. Frequent
tenders increasing administrative costs.
Aims to build longer-term relationships with suppliers that
offer quality, value, a willingness to collaborate and the
flexibility to meet changing supply requirements
Look to price as key factor strategic sourcing assess the total cost of doing business
with a supplier. In addition to price, they consider the costs
of quality control, delivery, purchasing administration and
inventory.
had been more operations oriented - in that
it was more needs based
combines the vendors and categories to have as few
suppliers as possible, with good performance
management. Managing suppliers and spend is different.
Require suppliers to meet quality standards Aim to achieve cost reductions through quality
improvement. They may select suppliers that offer
technologies or materials that enable them to improve their
own products or develop new products adding value to the
relationship and it helps a company increase its competitive
advantage.
R V Srinivas Rao

8. Strategic Sourcing
Category Management
R V Srinivas Rao

9. Strategic Sourcing
Category Management
What is Category Management?
The Official definition:
The practice of segmenting the main areas of organisational spend on bought-in
goods and services into discrete groups of products and services according to
the function of those goods or services and, most importantly, to mirror how
individual marketplaces are organised. Using the category segmentation,
organisations work cross-functionally on individual categories, examining the
entire category spend, how the organisation uses the products or services within
the category, the marketplace and individual suppliers.
Category Management is a strategic approach which organises procurement resources to
focus on specific areas of spends. This enables category managers to focus their time and
conduct in depth market analysis to fully leverage their procurement decisions on behalf of
the whole organisation - CIPS
R V Srinivas Rao

10. Strategic Sourcing
Category Management
How it all started
§ Category management first appeared in purchasing in the Late 1980s.
§ There does not appear to be a single pioneer of category management,
but rather the approach grew up across a relatively small number of
progressive companies working at forefront of strategic purchasing.
There are various forms of category management depending on the
product / service.
§ It was also in response to the need to counter the growing power of
suppliers born out of globalisation.
§ and to a growing realisation that organisations could gain advantage if
Procurement could play a more strategic role.
R V Srinivas Rao

11. Strategic Sourcing
Category Management
How different is Category Management
to Strategic Sourcing
Strategic Sourcing includes demand analysis, supply planning & market
engagement as key steps in the sourcing process.
Category Management also includes a ‘next step’ of benefits realisation
to complete the circle.
Category Management sees through the realisation of the business
case until full utility and business benefits are realised for the
organisation.
Ofcourse, a lot depends while finalising your Sourcing strategy or
Category Management
R V Srinivas Rao

12. Strategic Sourcing
Category Management
Two popular Category Management
Models
1. Jonathan O’ Brien Model
§ Five Steps
2. Kraljic Matrix
§ Four Steps
R V Srinivas Rao

13. Strategic Sourcing
Category Management
Jonathan O’ Brien Model
1. Initiation
2. Insight
3. Innovation
4. Implementation
5. Improvement
R V Srinivas Rao

14. Strategic Sourcing
Category Management
1. INITIATION – Project Kick-off, Scoping, opportunity analysis, securing
executive sponsor, recruiting team members
2. INSIGHT – Data gathering, (internal, supplier, market), Price and cost
analysis, under external environment (PESTLE, STEEPLE etc.)
3. INNOVATION – Creating and Finalizing sourcing strategy
4. IMPLEMENTATION – Detailed plan, Project and Change Management,
RFQ / RFP / Tender, Supplier shortlist, negotiations, contracting.
5. IMPROVEMENT – Capture learnings, Supplier relation management,
Driving continuous improvement.
Jonathan O’ Brien Model
R V Srinivas Rao

15. Strategic Sourcing
Category Management
What is Kraljic Matrix
The Kraljic Portfolio Purchasing Model was created by Peter Kraljic and
it first appeared in the Harvard Business Review in 1983.
This model involves four steps
1. Purchase Classification
2. Market Analysis
3. Strategic Positioning
4. Action Planning
R V Srinivas Rao

16. Strategic Sourcing
Category Management
1. Purchase Classification
SUPPLY RISK
Leverage
High profit impact
Low supply risk
Strategic
High profit impact
High supply risk
Non Critical
Low profit impact
Low supply risk
Bottleneck
Low profit impact
High supply risk
FINANCIAL
RISK
LOW HIGH
HIGH
R V Srinivas Rao

17. Strategic Sourcing
Category Management
Areas to target
MATERIALITY
Supplier
Management
Supplier
Collaboration
Supplier
Rationalization
Supplier
Development
SOPHISTICATION
LEVEL
TACTICAL STRATEGIC
UNSOPHISTICATED
SOPHISTICATED
R V Srinivas Rao

18. Strategic Sourcing
Category Management
2. Market Analysis
It is ideally recommended to conduct Market anlaysis using Porter’s Five forces model.
It is a simple but powerful tool for understanding where power lies in a business situation.
This is useful, because it helps you understand both the strength of your current
competitive position, and the strength of a position you're considering moving into.
1. Supplier Power
2. Buyer Power
3. Competitive Rivalry
4. Threat of Substitution
5. Threat of New Entry
R V Srinivas Rao

19. Strategic Sourcing
Category Management
3. Strategic Positioning
Classify the products or materials you identified as "strategic" in Step 1
according to the supplier and buyer power analysis you did in Step 2.
To do this, simply enter each item in the purchasing portfolio matrix,
shown in this figure
R V Srinivas Rao

20. Strategic Sourcing
Category Management
3. Strategic Positioning
Purchasing Portfolio Matrix
EXPLOIT EXPLOIT BALANCE
EXPLOIT BALANCE DIVERSIFY
BALANCE DIVERSIFY DIVERSIFY
SUPPLIER MARKET STRENGTH
STRENGTH
AS
A
BUYER
LOW HIGH
HIGH
R V Srinivas Rao

21. Strategic Sourcing
Category Management
4. Action Plans
The three purchasing strategies indicated are as follows:
1. Exploit – Make the most of your high buying power to secure good prices and long-term
contracts from a number of suppliers, so that you can reduce the supply risk involved in these
important items. You may also be able to make "spot purchases" of individual batches of the item,
if a particular supplier offers you a good deal. The only real caution is not to take any aggressive
approach too far, just in case circumstances change.
2. Balance – Take a middle path between the exploitation approach and the diversification approach
described below.
3. Diversify – Reduce the supply risks by seeking alternative suppliers or alternative products.
Buying power can be increased by consolidating to a single / two / three suppliers. And, in other
situations, you could bring the production of the item in-house.
R V Srinivas Rao

22. Strategic Sourcing
Category Management
Conclusions
§ Procurement should be part of corporate strategy. As such, it's important that buyers
know how to evaluate risk and maximize profits by having the right approach to
procurement.
§ Always target quick wins / low hanging fruits to win the confidence of
Management for better staffing and deployment of strategy.
§ End-users should not be treated as Customers. They are stakeholders. Infact
Procurement spends the User department’s funds. Process has to be collaborative.
§ If Category Management is applied effectively throughout an entire organisation, the
results can be significantly greater than traditional transactional based purchasing
process.
§ Always remember – Please be UPDATED or you may be OUTDATED.
R V Srinivas Rao

23. Strategic Sourcing
Category Management
R V Srinivas Rao