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PUBLISHING Purchasing & Supply

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 -
CIPS STUDY MATTERS

ADVANCED DIPLOMA IN
PROCUREMENT AND SUPPLY

COURSE BOOK

Category management
in procurement and supply
Category Management in Procurement and Supply
-

Contents

Page

Preface v

The Unit Content vii

How to Use Your Study Pack xi

1 Definitions 1

Purchasing, procurement and sourcing; strategy; strategic procurement and strategic sourcing;
category management; from transactional purchasing to strategic sourcing

2 Categorising Expenditures 15

Cost analysis; Pareto analysis; Kraljic's analysis; Bartolini's scorecard

© Profex Publishing Limited, 2012 3 Strategic Acquisition Processes 27

The CIPS purchasing and supply model; the OGC procurement process model; an introduction to
strategic sourcing models; the AT Kearney 7-step model; category management models
Printed and distributed by:

The Chartered Institute of Purchasing & Supply, Easton House, Easton on the Hill, Stamford, Lincolnshire PE9 3NZ 4 Skills for Category Management 51
Tel: +44 (0) 1780 756 777
What does a category manager do?; technical skills; behavioural skills
Fax: +44 (0) 1780 751 610
Email: [email protected]
Website: www.cips.org
5 Understanding the Data 69

Gaining initial insights into a category; demand patterns for category groups; current contracts,
suppliers and terms; reviewing existing relationships and performance; market trends
First edition December 2012
6 Preparing for the Process 81

Requirements for the preparation of sourcing plans; total cost models for category management;
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, portfolio tools in category management; stakeholder needs analysis; cross-functional teams;
in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the legislative requirements and standards
written permission of Profex Publishing Limited.
7 Supply Market Factors 95
While every effort has been made to ensure that references to websites are correct at time of going to press, the
world wide web is a constantly changing environment and neither CIPS nor Profex Publishing Limited can Industry dynamics, competitiveness and pricing behaviour; financial data on potential suppliers;
accept responsibility for any changes to addresses. using requests for information to assess market factors; internal and external influences on category
management; corporate social responsibility and sustainability; supply chain and value chain analysis;
We acknowledge product, service and company names referred to in this publication, many of which are trade
analysing supplier perceptions
names, service marks, trademarks or registered trademarks.

CIPS, The Chartered Institute of Purchasing & Supply, and its logo, are all trademarks of the Chartered Institute of
Purchasing & Supply.
Category Management in Procurement and Supply
,.....

Page

8 Pre-Planning Preparation 117

Preface
Make or buy decisions; switching costs; sourcing options; delivering planned change; risk planning
and mitigation
Welcome to your new Study Pack, consisting of two elements.

9 Planning the Process 129

• A Course Book (the current volume). This provides detailed coverage of all topics specified in the unit
Involving stakeholders in the sourcing decision; creating evaluation criteria; finalising specifications content.
and contractual agreements; the use of confidentiality agreements • A small-format volume of Revision Notes. Use your Revision Notes in the weeks leading up to your exam .

For a full explanation of how to use your new Study Pack, turn now to page xi. And good luck in your exams!
10 Routes to the Supply Market 141
A note on style
Competition and negotiation; invitations and requests; supplier selection; reverse auctions; joint
proposition improvement Throughout your Study Packs you will find that we use the masculine form of personal pronouns. This convention
is adopted purely for the sake of stylistic convenience- we just don't like saying 'he/she' all the time. Please don't
11 Implementing the Process 151 think this reflects any kind of bias or prejudice.

Governance structures; deciding on a sourcing transaction approach; relationship management in December 2012
supply chains

12 Working with Stakeholders 161

Stakeholder buy-in; stakeholder communications; presenting strategic sourcing plans to

stakeholders

13 Mobilisation, Start-up and Transition 169

Performance improvement; planning for the effective start-up of category plans; mobilising
start-up and transition; transition arrangements

14 Managing Contracts and Suppliers 181

Responsibilities for contract management; operational performance; obtaining feedback from

stakeholders; benchmarking performance; creating performance improvements

15 Performance Measurement 193

Capturing data; creating performance measures; dashboards; reviewing improvements

16 Risk, Volatility and Exits 203

Dealing with supply chain risk; adjusting for volatility; creating exit arrangements

Subject Index 217

v
Category Management ln Procurement and Supply

The Unit Content

The unit content is reproduced below, together with reference to the chapter in this Course Book where each
topic is covered.

Unit purpose and aims

On completion of this unit, candidates will be able to develop plans to improve competitiveness by the application
of systematic approaches to the management of both direct and indirect organisational responsibilities.

This unit focuses on differing approaches or methodologies for strategic sourcing and category management,
demonstrating the role of the procurement and supply chain specialist in leading these approaches.

Learning outcomes, assessment criteria and indicative content

Chapter

1.0 Understand approaches that can be adopted to develop strategic sourcing

and category management for a mix of procurement expenditures

II Critically compare strategic sourcing, category management and conventional sourcing processes

• The stages of a conventional sourcing process 1

• Defining strategic sourcing and category management 1
• Transactional and strategic sourcing activities 1
• Differentiating account management and category management 1

Assess the mix of expenditures that strategic sourcing and category management processes
can be applied to

• Expenditures that are related to direct costs 2

• Expenditures that are related to indirect costs 2
• Applying Pareto analysis to expenditures and key suppliers 2

II Critically compare the main models for the adoption of strategic procurement, strategic sourcing
and category management

• Models of strategic procurement such as the CIPS purchasing and supply model 3
• Models of strategic sourcing such as AT Kearney's 7 step model 3
• Models of category management such as CIPS category management model 3
• Analysis of similarities and differences between models for strategic procurement, strategic
sourcing and category management 1

Ill Analyse the main technical and behavioural skills for the implementation of approaches to strategic
sourcing and category management

• Technical skills such as financial management and cost analysis, supply chain analysis,
supply base research, sourcing processes, risk management, legal aspects and negotiation 4
• Behavioural skills such as communication, influencing, working with teams, cross-functional
working and acting as a change agent 4
 Category Management in Procurement and Supply

Chapter Chapter

Be able to create a plan for a strategic sourcing or category management Critically compare routes to market for the implementation of a strategic sourcing or category
2.0
management process
process
• The use of competition or direct negotiation to source suppliers 10
Evaluate data for the development of a strategic sourcing or category management process
Ill • Historical and forecast data on categories of spend 5
•
•
Devising invitations to tender, quotation and requests for proposals
The use of reverse auctions
10
10
• Demand patterns for category groups 5 • The use of joint proposition improvement 10
• Current contracts with suppliers and terms that are being applied 5
Develop decision criteria that can be applied for the implementation of a strategic sourcing or
• Reviews of existing relationships and performance 5
category management process
• Market trends 5
• Define relationship management and governance structures 11
Interpret the requirements for initiating and preparing the introduction of a strategic sourcing
• Confirm segmentation approach and relationship profiles 11
or category management process
• Confirm transaction process 11
• Producing category hierarchies for both direct and indirect expenditures 6 • Using staged gate reviews 11
• Applying portfolio tools to map the categories of expenditures 6
Develop an implementation plan for a strategic sourcing or category management process that
• Creating total cost models for category management 6
could be presented to stakeholders
• Conducting stakeholder needs analysis 6
• Forming cross-functional teams and preparing responsible, accountable, consultative and • Gaining stakeholder buy-in to sourcing and category strategy 12
informing roles within the team 6 • Creating presentations on strategy plans 12
• Reviewing the implications of existing legislative requirements and standards 6
4.0 Understand the main aspects of performance improvement for strategic sourcing or
Assess supply market factors in the development of a strategic sourcing or category management
category management processes
process

• Analysing industry dynamics, competitiveness and pricing behaviour 7 Explain arrangements for the mobilisation, start-up and transition to achieve performance
• Analysing financial data on potential suppliers 7 improvement through the execution of strategic sourcing or category management processes
• Using requests for information (RFis) to assess market factors 7 • Engaging users for initiating contract arrangements 13
• Reviewing STEEPLE, SWOT and market share/growth factors that influence categories 7 • Planning for the effective start-up of category plans 13
• Conducting impact assessments of CSR/ sustainability factors 7 • Contract transition arrangements 13
• Conducting supply chain and value chain analysis 7
Propose arrangements for contract management and supplier relationship management to
• Analysing supplier perceptions 7
achieve performance improvement through the execution of strategic sourcing or category

Ell Create a sourcing plan including its priorities in the development of a strategic sourcing or
category management process
management processes

• Responsibilities for contract management 14

• Assessing switching costs and make versus buy criteria 8 • Operational performance and strategic levels of contract and supplier management 14
• Assessing sourcing options such as the length of agreement and the numbers of suppliers • Obtaining feedback from stakeholders 14
under single, dual or multiple sourcing options 8 • Benchmarking performance 14
• Assessing the procurement process to deliver planned changes 8 • Creating performance improvement 14
• Developing risk mitigation plans 8
Develop performance measures that can be applied to achieve performance improvement
3.0 Be able to develop an implementation plan for strategic sourcing or category through the execution of strategic sourcing or category management processes
management process • Templates for gauging feedback on performance 15
• Creating performance measures to assess success of the category process 15

II Analyse the use of plans for the implementation of strategic sourcing or category management process

• Involving stakeholders in the sourcing decision 9

• Reviewing improvements to the category management and strategic sourcing process 15

•
•
Creating evaluation criteria
Finalising specifications and contractual agreements
9
9
Ill Identify exit arrangements that can be applied in the execution of strategic sourcing or category
management processes

• The use of disaster recovery plans 16

• The use of confidentiality agreements 9
• Dealing with risks and supply chain volatility 16
• Creating exit arrangements 16

viii
 category Management in Procurement and Supply

How to Use Your Study Pack

Organising your study

'Organising' is the key word: unless you are a very exceptional student, you will find a haphazard approach is
insufficient, particularly if you are having to combine study with the demands of a full-time job.

A good starting point is to timetable your studies, in broad terms, between now and the date of the examination.
How many subjects are you attempting? How many chapters are there in the Course Book for each subject? Now
do the sums: how many days/weeks do you have for each chapter to be studied?

Remember:

• Not every week can be regarded as a study week- you may be going on holiday, for example, or there may
be weeks when the demands of your job are particularly heavy. If these can be foreseen, you should allow
for them in your timetabling.
• You also need a period leading up to the exam in which you will revise and practise what you have learned.

Once you have done the calculations, make a week-by-week timetable for yourself for each paper, allowing for
study and revision of the entire unit content between now and the date of the exams.

Getting started
Aim to find a quiet and undisturbed location for your study, and plan as far as possible to use the same period
each day. Getting into a routine helps avoid wasting time. Make sure you have all the materials you need before
you begin- keep interruptions to a minimum.

Using the Course Book

You should refer to the Course Book to the extent that you need it.

• If you are a newcomer to the subject, you will probably need to read through the Course Book quite
thoroughly. This will be the case for most students.
• If some areas are already familiar to you -either through earlier studies or through your practical work
experience- you may choose to skip sections of the Course Book.

The content of the Course Book

This Course Book has been designed to give detailed coverage of every topic in the unit content. As you will see
from pages vii-ix, each topic mentioned in the unit content is dealt with in a chapter of the Course Book. For the
most part the order of the Course Book follows the order of the unit content closely, though departures from this
principle have occasionally been made in the interest of a logical learning order.

Each chapter begins with a reference to the assessment criteria and indicative content to be covered in the
chapter. Each chapter is divided into sections, listed in the introduction to the chapter, and for the most part being
actual captions from the unit content.

All of this enables you to monitor your progress through the unit content very easily and provides reassurance
that you are tackling every subject that is examinable.

X
- Category Management in Procurement and Supply
r

Each chapter contains the following features.

CHAPTER 1
• Introduction, setting out the main topics to be covered
• Clear coverage of each topic in a concise and approachable format
•
•
A chapter summary
Self-test questions
Definitions
The study phase
For each chapter you should begin by glancing at the main headings (listed at the start of the chapter). Then read Assessment criteria and indicative content
fairly rapidly through the body of the text to absorb the main points. If it's there in the text, you can be sure it's
there for a reason, so try not to skip unless the topic is one you are familiar with already. Critically compare strategic sourcing, category management and conventional sourcing processes

• The stages of a conventional sourcing process

Then return to the beginning of the chapter to start a more careful reading. You may want to take brief notes as
• Defining strategic sourcing and category management
you go along, but bear in mind that you already have your Revision Notes- there is no point in duplicating what
• Transactional and strategic sourcing activities
you can find there.
• Differentiating account management and category management
Test your recall and understanding of the material by attempting the self-test questions. These are accompanied
by cross-references to paragraphs where you can check your answers and refresh your memory. II Critically compare the main models for the adoption of strategic procurement, strategic sourcing and
category management

• Analysis of similarities and differences between models for strategic procurement, strategic sourcing
The revision phase and category management

Your approach to revision should be methodical and you should aim to tackle each main area of the unit content
in turn. Read carefully through your Revision Notes. Check back to your Course Book ifthere are areas where you Section headings
cannot recall the subject matter clearly. Then do some question practice. The CIPS website contains many past 1 Purchasing, procurement and sourcing
exam questions. You should aim to identify those that are suitable for the unit you are studying. 2 Strategy
3 Strategic procurement and strategic sourcing
Additional reading 4 Category management
5 From transactional purchasing to strategic sourcing
Your Study Pack provides you with the key information needed for each module but CIPS strongly advocates
reading as widely as possible to augment and reinforce your understanding. CIPS produces an official reading list Introduction
of books, which can be downloaded from the bookshop area of the CIPS website.
There has been a succession of concepts of and names for the activity of obtaining inputs for the
To help you, we have identified one essential textbook for each subject. We recommend that you read this for organisation, of which strategic sourcing and category management are the latest. The strategic nature
additional information. of obtaining the organisation's inputs is a relatively new thought, the implications of which are not fully
developed as yet.
The essential textbook for this unit is Category Management in Purchasing by Jonathan O'Brien.
This unit is about strategic sourcing and especially about category management. These are still recent
ideas, so you must expect new thoughts and practices to emerge constantly.

The objectives of this Course Book are as follows.

• To demonstrate the development of the concept of 'obtaining the organisation's inputs'

• To describe how different stages in the development of the concept are understood
• To highlight strategic sourcing and category management as the latest stages in that development
• To indicate the variety of thought on these two concepts
• To provide some definitions to enhance clarity and understanding
• From this base, to explore aspects of the category management process
• To provide a bridge between the tactical and operational viewpoint you will have had at lower levels
of the CIPS programme and the strategic viewpoint you will be expected to adopt at higher levels

In this chapter we begin with the definitions, following CIPS where we can.

xii
 Definitions ) CHAPTER 1
Category Management in Procurement and Supply

I
Figure 1.1 A simple purchasing cycle
1 Purchasing, procurement and sourcing
1.1 Purchasing is the transactional process of buying products and services that includes raising and placing
purchase orders and paying invoices. There is no forwards or sideways thinking in purchasing: a need is
presented to the purchaser whose job it then is to fulfil the need.
Specification
• Purchasers are not involved until an actual, real need (and possibly also the solution) is presented to experience
them by the user. They remain involved only until the need has been fulfilled and paid for.
• Purchasers have little contact with or involvement in user functions' planning and scheduling, and play
a service role to them, perhaps as a sub-function of finance.
• Purchasers have very little influence. They are mainly involved in selecting the supplier and agreeing
terms with them, though even here they may be bound by pre-existing agreements.
• Purchasers' freedom to make decisions is very limited, and tends to be focused on individual
transactions. Purchasers do not make decisions that refer to the organisation's overall goals or longer-
term strategies.

Reactive sourcing

1.2 Straightforward, administrative purchasing is sometimes described as reactive sourcing. It is sourcing that
Receipt and
responds to events and needs as they happen and is therefore unplanned. There is no dedicated, proactive
strategy for the sourcing. It may take place within a policy, contracts and procedures framework, but it will
not be one that has been developed or decided with the participation of the sourcing function.
Contracting
The stages of a 'conventional' sourcing process

1.3 CIPS talks in terms of a 'conventional' sourcing process in the sense 'not strategic'. This is at odds with
the spirit of the unit, which plainly is built on the idea that strategic sourcing and category management Procurement
should be 'conventional'. A better choice of words would probably be 'traditional' or 'reactive'.
1.8 Procurement is a wider concept than purchasing. There is the strict, simple semantic difference that not
1.4 Reactive sourcing (ie purchasing), is 'conventional' in the sense that it is long-established, widespread, and everything that is procured is purchased (eg it can be leased or traded instead), but more importantly
still commonly practised. It is not second-rate or amateurish; it can be highly professional and can be the it is proactive where purchasing is reactive, and so necessarily entails more possibilities, processes and
most appropriate response in some sourcing situations. responsibilities.

1.5 It is, however, something that we want to get away from quickly in this unit, so we will simply review the 1.9 Procurement includes all those activities and processes that refer to and implement the organisation's
purchasing cycle as a convenient process that brings together the stages expected from a 'conventional' strategies toward the obtaining of its inputs, as well as the actual acquisition. Strategic procurement
sourcing process and then move on. expands on this to include a role in developing these strategies. We look at strategic procurement later.

1.6 There are many versions of a purchasing cycle, each one identifying different stages in the overall process. 1.10 Non-strategic procurement is concerned with the following activities.
The concept offers little strategic insight, being more of a checklist of milestones. It does at least, however,
• Managing the organisation's spend
underline that there is a connected process involved in bringing inputs to the organisation, and that this
• Furthering the organisation's strategies
process can be improved upon with experience.
• Maximising value added or released
1.7 The purchasing cycle arranges the stages involved in the act of purchasing into the sequence in which they • Minimising total cost of ownership
are expected to occur. CIPS have in the past used a nine-stage cycle, as shown in Figure 1.1, to which we • The end-to-end acquisition process, from positioning procurement activity so that it is consistent with
have added a tenth stage- the knowledge and experience captured by the purchaser for his organisation. strategy (eg compliant with the organisation's CSR position) and ready to service known needs (eg has
There is no gain in explaining the stages now as they should be sufficiently familiar to allow us to press researched appropriate supply markets), through to the review and evaluation of procurement activity
on with the unit, and they will be dealt with at various points later on as part of the more sophisticated and the disposal of procured items at the ends of their working lives
approaches we will be considering.
Tactical sourcing

1.11 Procurement is sometimes referred to as tactical sourcing. It is sourcing that takes place within the tactical
decision frame, ie with immediate rather than deferred effects. There is still a reactive element but it exists
within and is consistent with a strategic sourcing framework. Resources and processes are allocated to
enable it to be managed within the sourcing strategy.

2
 Category Management in Procurement and Supply Definitions ) CHAPTER 1

I
Sourcing 2.4 There are four contrasting approaches to strategy making.
• Deliberate- set a goal and take planned steps to reach it.
1.12 Sourcing can be viewed as an activity within procurement, or an activity which precedes procurement.
• Emergent- inch along, 'correcting' our course according to what we learn and to events.
Essentially, non-strategic sourcing is a part of strategic procurement (see particularly the CIPS purchasing
• Competitive positioning- do whatever will improve our position in our markets (including redefining
and supply model in Chapter 3), or strategic sourcing precedes non-strategic procurement. We follow the
'our' markets).
latter view here, and will look at strategic sourcing shortly.
• Resource, competence and capability- do what we are good at, or could get better at.
1.13 If procurement is an end-to-end process, then sourcing is an 'end-to-middle' process. It starts with 2.5 Mintzberg suggests that actual, 'realised' strategies are combinations of planned and unforeseen
identified needed inputs and concludes roughly at the point where the organisation knows which input is elements. They start with an idealised plan, which changes along the way.
coming from where.
• Intended strategy- the result of a purposeful strategic planning process sourced in corporate
1.14 Sourcing means eg 'identifying and evaluating potential suppliers, engaging with selected suppliers objectives
and selecting the best value supplier(s). The outcome of the sourcing process is usually a contract or • Deliberate strategy- where an intended plan has been put into action
arrangement that defines what is to be procured, on what terms and from which suppliers.' (CIPS Glossary) • Unrealised strategy- not all intended strategies are implemented
• Emergent strategy- sometimes strategies are improvised or created because of unforeseen
1.15 In crude terms, sourcing is the 'what' and 'why' of the organisation's inputs decisions, and procurement is circumstances during a strategic management process
the 'how'. Both activities have an interest in the 'from where'. Figure 1.2 presents a fairly typical distinction • Realised strategy- the final, realised strategy results from a balance of deliberate and emergent
between the two. strategies; no actual strategy will be wholly one or the other

2.6 These processes apply as much to sourcing strategy as to any other type of strategy. Whereas non-strategic
Figure 1.2 Procurement takes aver where sourcing leaves off (Sol/ish and Semanik)
procurement is largely programmable once the initial need is known, sourcing is much more open-ended,
with freedom of choice and scope for decision-making that can radically affect the nature of the outcome.
~ Request for ~ Supplier Contract
Acquisition ~ Table 1.1 highlights the contrast.
~
Supplier
Requirements ..,
~
Pre-
qualification info/quote selection formation management

Table 1.1 The contrast between tactical purchasing and strategic sourcing
SOURCING PROCUREMENT

1.16 Distinguishing sourcing and procurement in this way gives sourcing an intrinsically strategic character. It
detaches sourcing from the mechanics of acquisition, and moves it into a forwards-looking decision frame.

2 Strategy
2.1 Strategies and tactics are quite different, but frequently confused.
• Tactics are narrow in nature- they are unplanned decisions that affect the immediate, short-term
timeframe, the immediate organisational context and the immediate issue, and are detailed and
specific.
• Strategies are broad in nature- they are planned decisions that impact in the longer-term timeframe.
They affect the organisation as a whole (or at least a significant proportion of it), they can address a
collection of issues and issues that though not urgent yet, soon will be. They are framed in terms of
budgets, policies, hopes and intentions.
3 Strategic procurement and strategic sourcing
2.2 This unit is about bringing a strategic perspective to bear on sourcing and, to a lesser extent, procurement
issues Strategic procurement
2.3 A useful strategy will advance the organisation in respect of one or more of Mintz berg's '5 Ps'. 3.1 As we have noted, strategic procurement is a procurement process that aligns with and helps develop the
• Plan- a methodical, justified, resourced sequence of steps towards explicit, measurable targets. organisation's vision, strategic goals and competitive strategy. Strategic procurement activities typically
• Ploy- a move in a competitive situation that will gain an advantage over a competitor. focus on the following issues.
• Pattern- consistency, coherence and identity in the organisation's actions. • The supplier base
• Position- the fit between the organisation and its environment, matching strengths and weaknesses • Negotiations and agreements
with opportunities and threats in relation to competitors, partners, suppliers and customers. • Communication
• Perspective- a (unique) worldview and interpretation of events and conditions. • long-term relationships
• The effects of globalisation

4
 Category Management ln Procurement and Supply
Definitions I CHAPTER 1

I
• Continuous improvement • Inventories
• Competitors • Customer lead times and commitments
• Corporate social responsibility • New product development plans
• Supply chain governance and transparency • A financial plan

3.2 Strategic procurement's five key tools are as follows

Supplier management
• Aggregation- reduces price per purchase and overall costs by reducing the number of transactions.
• Categorisation- classification of organisational requirements to promote expertise, market knowledge 3.8 Demand is serviced with supply which is provided by suppliers. Collectively, the organisation's supplier
and innovation. base has capability, cost and capacity properties that can be managed, developed and improved so that
• Outsourcing- achieves value from third-party expertise and from reallocating resources internally to demand is more effectively, efficiently and economically met.
core concerns.
3.9 The procurement function's use of the supplier base can be developed through a supplier management
• Relationship management- facilitates information and knowledge exchange with suppliers and key
approach. Individual suppliers within the base can be developed on an individual basis through a supplier
stakeholders.
relationship management approach. This term describes the collection of attitudes, tools and processes
• Standardisation- a standard set of policies and procedures for individual users and cross-functional
that the procurement function uses to proactively improve the service provided by a given supplier.
teams.

3.10 Some form of supplier segmentation is typically useful. Here are some possible categories of suppliers.
Strategic sourcing
• Transactional suppliers with which the organisation has little or no ongoing relationship. Every supply
3.3 So we conclude that strategic sourcing is sourcing that takes place in the strategic decision frame, but what is on a one-off basis with no expectation of a repeat, even if the supplier has a long history with the
does this mean? The Supply Management Guide ta Strategic Sourcing suggests that strategic sourcing organisation. Switching is easy.
comprises four main elements. Performance-managed suppliers where the focus is on tactical outcomes (delivery, quality etc of the
•
• Demand management immediate supply) rather than on building a long-term relationship.
• Supplier management • Relationship-managed suppliers that are seen as having some strategic value, so are nurtured.
• Total cost of ownership • Strategic suppliers that are business critical. They cannot be replaced, they account for a large
• Sustainability proportion of spend, or they provide highly volatile (prone to risk) supplies.

3.4 These activities certainly indicate the scope of its concerns and perspective. Reading them as a coherent Total cost of ownership
whole, we can see that: 'Strategic sourcing is an organisational procurement and supply management
process used to locate, develop, qualify, and employ suppliers that add maximum value to the buyer's 3.11 Total cost of ownership (TCO) is an end-to-end figure that begins with the first steps in supply market
products or services. The major objective of strategic sourcing is to engage suppliers that align with the research and extends to disposal costs. It includes reputational impacts, insurance against any legal issues
strategic business and operational goals of the organization.' (Sollish and Semanik) arising from waste, resource usage, currency exchange rate movements, and handling during production. It
is a process of attributing overhead and operational costs to specific organisational inputs. Understanding
3.5 Strategic sourcing is concerned with the long term. It focuses on those sourcing actions that will realise total cost is becoming increasingly important to procurement as organisations adopt value-maximising
results over a relatively long time horizon. This will tend to exclude the day-to-day features of the rather than price-minimising approaches.
acquisition process, eg quotations, routine buying, logistics movements, quality assessment, performance
analysis, and payments. It will tend to concentrate on high supply risk strategic items, bottleneck items, Sustainability
long-term procurement policies, reciprocal and intra-organisational trading, partnership sourcing, capital
item procurement, and ethical and sustainability issues. 3.12 The term sustainability is used in both a narrow and a broad sense. Narrow sustainability, for
procurement, is about acquiring the organisation's inputs in such a way that its long-term performance
Demand management is at the very least not compromised, and is ideally enhanced. This means weeding out the organisation's
supply and operations vulnerabilities, and building on and developing its advantages. In the broad
3.6 Demand management is about matching supply with demand so that no waste occurs in the supply chain. sense, sustainability means being a 'good' and responsible participant in the organisation's operating
If demand can also be rationalised or reduced, then so much the better, though this is not a primary aim. environment, whether this is observing ethical and environmental standards or improving the value
Demand is set by the organisation's operational needs, and it is not the supply chain's role to say what experienced by customers.
these should be, but rather to understand them and develop solutions that will more effectively fulfil
them. Sourcing strategies
3.7 Most of the organisation's demand will probably come through its sales and operations planning process. 3.13 Strategic sourcing is not the same thing as a sourcing strategy. Strategic sourcing is a frame of reference
This is essentially its downstream supply plan, or how the organisation intends to service the pull exerted for sourcing decisions and activities, whereas a sourcing strategy is a structured, consistent approach
on it by its customers. This generally includes the following elements. to a specific, recurring sourcing problem more in line with the tactical plans we mentioned earlier. With
• A sales plan sourcing strategy we are choosing which golf club to take out of the bag; with strategic sourcing we are
• A production or delivery plan deciding whether we would be better off playing chess or going to the cinema instead.

6
 r-·-
Category Management ln Procurement and Supply Definitions ! CHAPTER 1

3.14 The CIPS Glossary mentions a number of sourcing strategies, some of which we will look at more closely 4.8 Strategic sourcing does not readily transfer outside the supply chain; category management has ideas that
later in the unit.
•
•
•
Crowd sourcing- sourcing from a community of (social media empowered) potential suppliers
Dual sourcing- sourcing from two suppliers simultaneously
Ethical sourcing- sourcing from suppliers who observe minimum social, ethical and environmental
can be transferred to (for example) the marketing and other functions. For Mitchell, strategic sourcing
is a series of structured projects with specified intended strategic outcomes, typically starting with a
procurement-led analysis to identify target categories and opportunities, and ending with a preferred-
supplier contract.
I
standards • Profile the category.
• Global sourcing- sourcing regardless of a supplier's geographical location • Develop the sourcing strategy.
• lnsourcing- bringing sourcing solutions in-house from external suppliers • Identify suppliers.
• Low-cost country sourcing- sourcing from suppliers located in low factor cost countries • Evaluate suppliers.
• Multi-sourcing- sourcing from many suppliers • Negotiate and award the contract.
• Outsourcing- taking sourcing solutions out-of-house from internal suppliers • Transition to the supplier and implement the contract.
• Single sourcing- choosing to source from just one supplier • Monitor supplier performance.
• Sole sourcing- having to source from just one supplier as there are technical, design or patent
4.9 Compare this with the AT Kearney model (Chapter 3).
reasons that preclude using any other source
4.10 Category management, in contrast, examines not only the full length of the contract and supplier
4 Category management lifecycles, but also the lifecycles of the value delivery chains that consume the inputs acquired in each
spend category. It aims to identify value that the organisation as a whole can capture, and not just the
4.1 Category management is both an approach to procurement and a way of organising the procurement
value that can be realised within the supply chain.
function. The organisation's inputs are divided into categories of meaningfully similar items (different
points of similarity will be more or less significant for different organisations), which then form the bases Account management and category management
for a collection of end-to-end procurement processes.
4.11 An account is an established supply relationship between a supplier and a customer. Key accounts
4.2 It is a top-level framework and process that co-ordinates, guides and sequences other methods such as
represent sufficiently significant amounts of activity to warrant being treated differently from other
strategic sourcing and supplier relationship management to satisfy category and organisational objectives.
accounts. Strategic accounts are ones without which the organisation cannot operate successfully in the
longer term. This may be because of the volume or the criticality of the supply that they represent.
4.3 Category management is the process of managing a collection of categories; category sourcing is the
application of strategic sourcing to a particular category. 4.12 CIPS requires you to differentiate between category management and account management. There are
two senses in which account management can be used.
4.4 The existence of different categories enables closer tailoring of procurement processes to the different
needs of different types of organisational input, and allows category procurement personnel to develop • In the simplest terms, a procurement category manager is responsible for specific categories of
substantial expertise in the needs and detail of their category. Some category managers are not dedicated spend. All the suppliers they deal with will come from those categories. By contrast, a procurement
procurement staff, but functional practitioners who also undertake procurement planning for a specialist account manager is responsible for specific suppliers, and not necessarily all ofthe suppliers active
category with which they are very familiar. within the categories that those accounts belong to. This unit is clearly about the former approach.
• Moving forwards, procurement category managers take a value-driven, strategic, market-segmenting
4.5 This all makes procurement fully outwards-facing as it is organised according to the nature of the supply approach to acquiring their organisation's inputs. Customer account managers take a value-driven,
matkets the organisation uses and not the internal customers the function serves. strategic, market-segmenting approach to providing their organisation's outputs. One deals with their
organisation's demand; the other deals with its supply. They are in a sense mirror images of each
4.6 An organisation will tend to design the categories it uses so that they represent similar workloads and
other, and can learn a lot from each other's tools and practices.
difficulty. This means being sensitive to the value of spend in each category, the diversity of each category,
and the nature of the supply market(s) involved. The organisation's spend has to be large and diverse in 4.13 The basic reflex for a procurement category manager will be to reduce the number of suppliers that they
order to get the most out of the category management approach (ie the spend has to be capable of being deal with, and to minimise activity within the category. In other words, they reduce the need for the input
broken down into substantial and distinctive categories). relative to the output of the organisation, to help make the organisation more efficient.

The relationship between category management and strategic sourcing 4.14 In contrast, a customer account manager is trying to grow the activity with the customer accounts for
which they are responsible, and to introduce new accounts to their organisation. They want to increase
4.7 Pierre Mitchell makes the sweeping distinction that category management is broader than strategic output and make the organisation more effective. In a joined-up organisation and supply chain, the
sourcing. This position depends on how you view the two activities. We suggest the following distinction. procurement category managers and customer account managers will work together to increase end-to-
end value creation.
• Category management is an organisational philosophy (in much the same manner as total quality) that
permeates and organises its activities and attitudes. 4.15 Despite these differences, there are also similarities: Table 1.2.
• Strategic sourcing is a focused, technical, tool-driven supply chain activity occurring within the
strategic decision frame.
. Category Management in Procurement and Supply
Definitions ! CHAPTER 1

already be tied up with more forward-thinking organisations. Supply is more likely to be off-the-shelf

I
Table 1.2 Customer account management and procurement category management (Busch)
than tailored to the organisation's precise needs.

5.3 This 'traditional' approach to acquisition is shown in Figure 1.3. You can see that most of the activity and
most of the value added occurs within a narrow section of the sourcing process. Very little happens before
the supplier selection stage, and in fact the largest part of the effort comes in enforcing the contract
through tasks such as expediting, quality control and payments.

Figure 1.3 The traditional, transactional approach to purchasing

'----->
Value_.--------...-,
added.... ~===~====r-oe;;-:---:
Level of effort ' - - - - _ ! _ - - - - + - - - - ! __ _ __!__ _ _ -+----+----_;____ _!

Initiate Identify Specify Plan Approach Negotiate Manage Review

project needs and requirements approach market and and award contract and
analyse to market select contract relationship
the market and supplier
evaluation

PROCESS STAGE
Source: New Zealand Governmetlt Procurement Reform Programme

5.4 This is very much an arm's length arrangement which is only slightly modified with two common variants.

• Approved suppliers- an approved supplier is a pre-qualified option in the supply market and is
known to meet certain preconditions for supply. Any resulting business is still carried out on a
transactional basis, though it may be more frequent.
• Preferred suppliers- an approved supplier with some form of relevant differentiation from other
5 From transactional purchasing to strategic sourcing suppliers, eg experience, performance, history with the organisation, third-party certification such
as ISO accreditation. Organisations may set up systems to facilitate purchases with their preferred
5.1 The strategic activity of acquiring the organisation's inputs presents us, as we have seen, with a mass
suppliers because they expect to deal with preferred suppliers where possible, but there is no limit on
of inconsistently applied terminology and opinions. There is no neat guide to it. This is perfectly
the number of suppliers they identify in this way, and no significant greater commitment to them. The
understandable: the field is recent, developing quickly, and being developed by many practitioners all
purchase is still transactional.
around the world.
5.5 The effect of moving away from transactional purchasing is seen in Figure 1.4. The first difference is that
5.2 We can characterise the evolution of category management and strategic sourcing quite simply, however. comparatively little happens after the supplier has been chosen. In a strategic process all that should be
It has been the process by which this activity has become steadily less like transactional purchasing, which left to do at that point is straightforward administration and monitoring. Comparatively little value is added
is: in the supply market itself: the procurement function knows exactly what the organisation wants and has
already acted to help develop value, so all that is really left is to go and find the necessary inputs on the
• Reactive- responding to an unheralded, immediate need
• Short-term -looking for the best spot price rather than long-term value best terms possible.
• Adversarial- the purchase is viewed as a one-off so there is no benefit from creating value for the
supplier
• Uncoordinated- each individual purchase is made the best it can be on its own terms, even if that
detracts from other purchases to the extent that total value gained by the organisation is smaller
• Vulnerable- it has to take supply market conditions as it finds them
• Likely to return a poorer-quality result- suppliers with better-quality offers are the ones most likely to
Category Management in Procurement and Supply Definitions I CHAPTER 1

Figure 1.4 The strategic approach to sourcing

Value added
'----+
I
------. 1-----1
Level of effort

Initiate Identify Specify Plan Approach Negotiate Manage Review

project needs and requirements approach market and and award contract and
analyse to market select contract relationship
the market and supplier
evaluation

PROCESS STAGE
Source: New Zealand Government Procurement Reform Programme

Self-test questions
5.6 A third significant difference is indicated by the activity in the review stage and the huge amount of value
that it adds. In a transactional arrangement, the organisation learns little, and whatever the supplier learns Numbers in brackets refer to the paragraphs above where your answers can be checked.
may be lost forever, because they have no expectation of being used again. In a strategic process, it is in
both the organisation's and the supplier's interests to gain every lesson they can from each act of supply. 1 What is meant by the term 'reactive sourcing'? (1.2)
This information can be used by them both to make the next supply more effective and efficient.
2 List the stages in a typical purchasing cycle. (Figure 1.1)
5.7 This transition from transactional to strategic sourcing is often mapped onto 'relationship strength'
models (see Figure 1.5). The two are associated but not the same thing. They are more parallel processes 3 Describe Mintzberg's SPs. (2.3)
that support each other and grow together as the organisation's thinking moves from the tactical to the
4 List differences between tactical purchasing and strategic sourcing. (Table 1.1)
strategic frame. An organisation that is thinking strategically about its sourcing may still want to keep its
distance from its suppliers. An organisation that is close to its suppliers may still need to be somewhat
5 List five key tools of strategic procurement. (3.2)
reactive. Both stances imply some co-ordinated planning for the future.
6 List elements included in total cost of ownership. (3.11)
Figure 1.5 The features of increasing relationship strength between two organisations (Thamis and Desai)
7 Distinguish between category management and strategic sourcing. (4.7)
'Sharing bath
profits and risk' Integration 8 Distinguish between category management and account management. (4.12)
1
I 'Risk sharing and I
: shared milestones' : Alliance 9 Describe characteristics of traditional 'transactional' purchasing. (5.2)
'Reduced price
Partnering
.-------!
fee for service' 10 Distinguish between approved suppliers and preferred suppliers. (5.4)
'Fee for service'
Preferred

Transactional

ATIRIBUTES

1
l
FEATURES

INCREASING CLOSENESS OF RELATIONSHIP

I
I
I
Ij
CHAPTER 2

Categorising Expenditures

Assessment criteria and indicative content

Assess the mix of expenditures that strategic sourcing and category management processes can be applied
to

• Expenditures that are related to direct costs

• Expenditures that are related to indirect costs
• Applying Pareto analysis to expenditures and key suppliers

Section headings
1 Cost analysis
2 Pareto analysis
3 Kraljic's analysis
4 Bartolini's scorecard

Introduction
This chapter looks at the key precondition to category management: whether there genuinely are
categories in the organisation's spend that can result in meaningful and useful differentiation. We only
begin the process in this chapter, starting at the simplest basis, cost classification, and ending at a generic
investigatory tool, Bartolini's scorecard.

The specific process, methods, and categories should suit the individual organisation conducting the
spend analysis. That said, most organisations will benefit from starting by dividing their total spend into
categories that relate to their supplier markets, then dividing these categories by business unit or location.
Subsequent useful questions include the following.

• Who specifies the product?

• Why is it needed?
• How is it authorised?
• How is it ordered?
• Who supplies it?
• How is it received?
• How is it paid for?
• Where is it stored?
• When is it used?
• How is it disposed of?
No organisation should expect to get its category definitions completely 'correct' to begin with. A rounded
understanding of what is and is not a useful category will come from experience, so do not be surprised if
you revisit this step time and again.
 Category Management in Procurement and Supply
Categorising Expenditures 1 CHAPTER 2

1 Cost analysis Materials costs

1.1 Categorisation processes typically start with costs. Costs can be categorised according to how they relate 1.6 The whole life costing and total cost of ownership concepts account for the many ancillary costs involved
to the organisation's level of activity within a specified period of time. The length of the time period and its in (for example) buying a machine. They look beyond the purchase price. Should the same rounded
position in the calendar may influence which category a given cost falls into.
•

•
Variable costs- costs which depend directly on the level of activity. Whenever the activity level
changes, the costs do, too.
Fixed costs- costs which are not affected by changes in the level of activity. They must be paid even if
activity is zero. 1.7
approach be adopted with materials? Total materials costs potentially include the costs of purchasing,
transporting, receiving, unpacking, inspecting, insuring, storing and issuing materials, as well as general
administration.

There would be little benefit in trying to relate a portion of a supermarket's refrigerator unit cost to each
I
• of the many items of food that pass through it during its lifetime, but does that change if we consider a
Semi-variable costs- costs which have both fixed and variable elements .
• specialist refrigerator unit in a clinic that is used to store one batch of one vaccine only?
Step costs- fixed costs that increase in steps, ie they are fixed for a band of levels of activity.
1.2 Costs can also be categorised according to how strongly they can be attributed to specified purposes. 1.8 In principle, all of the costs incurred in inputting materials into the organisation's production processes
• should be included in its materials costs. There is a cost-benefit judgment to be made, however. If the
Direct costs- directly linked to a specific unit or aspect of the organisation, such as a person, product,
service, department or location. costs of meticulous cost allocation outweigh the benefits, then it is better to roll them into overheads, or
• allocate them to specific orders, requisitions or cost centres.
Indirect costs or overheads- spread over a number of identifiable units or aspects. They are costs
that cannot be identified directly with specific products or services
Materials costs classification
1.3 O'Brien provides examples of direct and indirect cost categories, as seen in Table 2.1. All costing
approaches are useful if they uncover categories that will help organise and improve our sourcing efforts. 1.9 Materials are usually requisitioned and issued, so there should be little problem in identifying the direct
materials costs for any given activity or process. As we have suggested, however, there may be little
Table 2.1 Some common direct and indirect cost categories (O'Brien) return or even a cost in being fastidious in eg breaking down a consignment of timber to the level of each
individual plank. In these circumstances it will be better to treat materials as indirect costs spread over a
range of products and activities, each of which takes a share.

1.10 Materials costs will probably be variable costs, regardless of whether they are direct or indirect. They
will be consumed at a rate proportional to activity. Materials can only be a fixed cost if they are used
irrespective of whether or not production takes place. This is unlikely.

Waste and scrap

1.11 Organisations are inefficient. They have accidents, and they change their product and service offerings
from time to time. Therefore they sometimes buy materials that they end up not using. Unused materials
have no value, and are considered to be waste. Waste materials that are sold off, typically at a loss so as to
remove the organisation's disposal or storage obligations, are considered to be scrap.

1.12 Waste materials costs are indirect costs; they cannot appear as a direct cost because the materials never
reached production. Any cash recovered by selling waste materials as scrap is used to off-set the overall
cost of wastage.
Product and period costs
Labour costs
1.4 Some costs relate to the delivery of the organisation's products and services, whereas others are part of
the expense of running the organisation. 1.13 People can be paid in a variety of different ways. This can make cost analysis complicated and opens up
options for categorising the costs where otherwise there would appear to be none.
• Product costs- costs identified with the organisation's products and services .
• Period costs- costs treated as expenses incurred during the period and not related to product or • On time spent- employees are paid for the hours they have worked at an hourly rate. If they work no
service delivery. hours, they receive no pay.
• Piecework- employees receive a fixed amount for every task completed, regardless of the time taken.
1.S Product costs include the direct and indirect costs of production. Working on commission involves receiving a fixed percentage of every sale made.
• Prime cost of production- the total of direct materials, direct labour and other direct costs. • Salary paid at the end of a specified time period- employees are expected to work a notional
• Production overhead cost- the total of indirect materials, indirect labour and other indirect costs of number of hours and to complete the tasks assigned to them. These tasks are generally necessary to
production. the overall duties and responsibilities of the post rather than a specific activity or project. Salary is
typically paid at the end of each week or month.

16
Category Management in Procurement and Supply
Categorising Expenditures I CHAPTER 2

1.14 These methods can be augmented with extra payments (incentives, productivity rewards or bonuses) few and trivial many' where 20 per cent of instances in a given situation give 80 per cent of the results.
depending on output levels or achieving targets. This sort of performance-related pay is based on the idea Juran called this the 80: 20 rule or Pareto principle.
that linking pay to performance will encourage people to work harder. The quality of an employee's work
may be more important than the quantity of tasks they complete. Merit pay is based on a judgement of 2.3 The Pareto principle applies in a wide variety of situations. For example, it may be found that 20 per cent

I
the quality of the work. It is used when it is difficult to decide how many tasks a person should be capable of suppliers will account for 80 per cent of spend, for 80 per cent of time and effort, for 80 per cent of
of completing. the volume supplied, for 80 per cent of the value added. Suppliers falling in the 20 per cent, on whatever
criteria an organisation considers important, are usually considered to be key suppliers.
1.15 Some labour payments are not made in the form of money. Benefits in kind include company cars, medical
insurance, clothing allowances, staff discounts, entertainment-based rewards, housing allowances, and 2.4 The Pareto principle forms the basis for ABC analysis. Figure 2.1 Shows how 20 per cent of spend items
relocation assistance. (Category A) account for 80 per cent of value; a further 10 per cent of spend items (Category B) account
for another 10 per cent of value; and the remaining 70 per cent of spend items (Category C) account for
1.16 The organisation will incur employment costs depending on the manner in which it has engaged a given the remaining 10 per cent of value.
individual. An external consultant, an agency worker, and an employee can all do the same job, but the
employer's obligations to them and the payments they must make in using their services will be different Figure 2.1 The ABC (Pareto) onolysis
in each case.
100
Labour costs classification Purchase spend
by value, % 90

1.17 Labour costs will be direct costs if the organisation can relate them directly and exclusively to the single
80 • High value
product, process, activity and so on in question. If the labour costs are spread over a range of jobs, (Category A) items
activities and so on, each job must take a share of them, so the costs are indirect. Medium value
(Category B) items
1.18 Indirect costs should include idle time, ie non-productive time when salaried employees are not able to 60 ~ _; low value
work or have nothing to do. If idle time is not accounted for, the costs of productive time will be inflated, (Category C) items

giving misleading results.

40
1.19 By the same argument, indirect labour costs should also include holiday pay (contracted idle time),
bonuses (discretionary costs) and overtime (a bonus payment that is more cost-effective than employing
additional workers). This all makes the apportionment of indirect labour costs for overheads more difficult.
20
1.20 It can be difficult to decide whether labour costs are fixed or variable. A salary is a fixed cost, but the costs
of the tasks for which the employee is responsible may be variable since each one, even if it is the same
basic task, may take a different amount of effort. For example, a safety inspector may have a fixed salary
20 40 80 100
each year, but one machine may require four hours and a different one three days to test and inspect. The
direct labour cost of a machine attributable to the inspector will be variable. Purchase spend by number of
distinct stock items, or number of suppliers, %

Cost analysis depends on the situation

1.21 The same cost can be categorised in a variety of ways according to the needs of the individual performing 2.5 It follows that we should give Category A items more attention and with that decision we have the
the analysis. The cost may be analysed for planning, decision making or control. It may be viewed beginnings of a categorisation and prioritisation system.
differently depending on the nature and norms of the organisation's industry, or its position in the value
2.6 This is a one-dimensional cost analysis, however, and can produce misleading results. Say, for example, a
chain between raw materials and end-user. Although making distinctions between direct, indirect and
overhead spend may be a necessary first step in creating categories, it will not in itself be sufficient. factory spends £1 million buying water and £1 thousand buying tantalum. Water is clearly easier to obtain
than tantalum, but on a straightforward Pareto analysis it is the water that is the Category A item and
tantalum that is placed in Category C.
2 Pareto analysis
2.7 We can address this by looking at total costs, and so factoring in sourcing risk and its cost implications. The
2.1 Individual costs can be categorised according to the part of the organisation's activities to which they
aggregated information that would result is not especially helpful, however. It is more useful instead to
relate and the way in which those costs are incurred: whether they are direct or indirect, fixed, variable or
take our Pareto results (the A, B, C, however many categories we feel is useful) as one dimension of a two-
semi-variable, and so on.
dimensional analysis and balance them against some other meaningful factor. A familiar two-dimensional
2.2 Pareto analysis provides an alternative way of categorising costs. In 1906 Vilfredo Pareto observed that 80 analysis is that of Peter Kraljic.
per cent of the wealth in Italy was concentrated on 20 per cent of the population. Over the subsequent
30 years, researchers in other fields obtained similar results until Joseph Juran devised his rule of 'the vital
Category Management in Procurement and Supply Categorising Expenditures I CHAPTER 2

3.9 Critical items often consume a disproportionate amount of time relative to their value; their supply
3 Kraljic's analysis
markets may be complex, or suppliers difficult to find or deal with. The organisation will want to simplify
3.1 Kraljic's matrix is a simple spend segmentation tool that identifies four broad classes of organisational the procurement of these items or, if possible, design out its need for these items in favour of ones from
the other quadrants in the matrix.

I
input which it is useful to approach in different ways. Kraljic essentially places the criticality of an item
to the organisation on one axis of a four box matrix, and the difficulty of operating in that item's supply
3.10 If an organisation finds itself stuck with having to source items from this category, it may want to improve
market on the other.
its position by entering into buying consortiums with other organisations with the same problem.
3.2 You may see the matrix referred to as a 'portfolio analysis' or a 'positioning matrix'. It has proved so useful
and successful that a variety of close and less close variants have been developed. O'Brien's version is Leverage items
given in Figure 2.2, and we will see how he applies it in Chapter 6. Massin's version follows on later in this
3.11 leverage items are sometimes described as 'commodity' items. There are many suppliers offering much
chapter.
the same product or service, and the organisation uses a lot of it. The organisation therefore has the
Figure 2.2 One version of Kraijic's portfolio analysis matrix (O'Brien) opportunity to 'leverage' its purchasing power and the competitive nature of the market to gain itself a
good deal.
High
Critical Strategic 3.12 The organisation will want to enhance its purchasing power by rational ising its spend so that it is not
DEGREE OF buying significant quantities of several similar products, or the same product from several sites, but
MARKET DIFFICULTY Acquisition Leverage one huge quantity of one product that can be co-ordinated centrally and used in a variety of situations.
Low
Information management, specification and standardisation will be important issues, where procurement
Low High
DEGREE OF PROFIT IMPACT needs to work closely with requisitioning departments.

3.13 The organisation's purchasing power grows the more it consolidates its purchases. However suppliers
3.3 The following discussions of the four Kraljic classes should suggest to you the factors and input types may become complacent if they believe that the organisation, once it has chosen its supply partner(s),
driving the development of strategic sourcing and category management. is disinclined to switch. A supplier offering a commodity has many potential buyers. For this reason, the
organisation may choose to deal with several suppliers and exercise care in determining the duration of
Strategic items supply contracts.

3.4 Strategic items are also known as 'critical' items, which can be confusing given O'Brien's separate use of 3.14 Wendy L Tate describes white-sheeting- a combination of price benchmarking and cost analysis. The
'critical' on his version of the Kraljic matrix. These are items to which the organisation is highly vulnerable organisation starts with a blank page (a white sheet) and builds a breakdown of all the cost elements of an
(they are risky and have a large profit impact), so the organisation needs to exert as much control over item, using industry knowledge, price indices, and other benchmarking techniques to develop a 'should
them as it can cost' price for the item. This then acts as a baseline in negotiations with suppliers.

3.5 The organisation will need to recognise its vulnerability and concentrate on co-operating, collaborating Acquisition items
and integrating with its supplier, ie introducing elements of co-destiny to the relationship. Supplier
relationships will develop features consistent with the longer term, more strategic outlook, eg continuous 3.15 Acquisition items are more usually known as 'routine', 'generic', 'standard' or 'non-critical' items. The
improvement, early supplier involvement, innovation, mutual total cost reduction, and sustainability. organisation needs to be efficient in sourcing these. The items involved are comparatively unimportant.
Their markets are highly competitive, with many suppliers and low switching barriers. The organisation
3.6 The suppliers in the strategic class tend to be at the top end of the Pareto analysis, ie part of the 20 per needs to pay the most competitive price while maintaining delivery and quality standards. Supplier
cent of suppliers that account for 80 per cent of the organisation's costs. The organisation spends a large relationships will tend to be arm's-length and transactional.
proportion of its time and effort in developing these suppliers.
Massin's analysis
3.7 The greater depth of the resulting relationship necessitates dealing with few suppliers in each category,
perhaps to the extent of single-sourcing the category. Switching barriers are high in such close 3.16 There are many variations on the Kraljic matrix. We will briefly look at Jean-Phillipe Massin's as he is
relationships, perhaps to the point where the organisation finds itself in a sole-sourcing situation. specifically mentioned in CIPS resources. Massin essentially maps sourcing groups or categories on to a
Kraljic matrix that has been modified with some of Michael Porter's ideas, as shown in Figure 2.3. The
Critical items CSSB matrix uses two multi-factor axes to map sourcing groups (SGs).

3.8 Critical items are most often known as 'bottleneck' items, but we are keeping to O'Brien's version of the
Kraljic matrix here. These items are difficult to obtain and can seriously affect the organisation's ability to
deliver its products or services, but are not intrinsically expensive. The organisation's focus will therefore
be on securing continuity of supply; any price premium is essentially ensuring that operations keep going.
Total cost is important, including the cost of failure to supply the organisation's customers.

?1
 Categorising Expenditures I CHAPTER 2
category Management in Procurement and Supply

Figure 2.3 Massin's CSSB matrix CHARACTERISTIC STRATEGIC

High
Commodity Strategic

I
sourcing groups sourcing groups
SOURCING GROUP'S
BUSINESS IMPACT Standard Bottleneck
sourcing groups sourcing groups
Low
Low High
SOURCING GROUP'S
SUPPLY MARKET COMPLEXITY

3.17 The vertical axis maps the SG's business impact.

• Consequences offailure
• Costs
• Customer value
• Product differentiation
• Technology advantages
3.18 The horizontal axis maps the complexity of the supply market, as proposed by Porter's five forces model.

• Barriers to entry
• Buyer power
• Opportunities for substitution
• Rivalry among competitors
• Supplier power
3.19 This yields four broad sourcing classes that can be treated in broadly similar ways. They can be
characterised in greater detail, as shown in Table 2.2.

Table 2.2 Characteristics of Mass in's category groups

3.20 There is nothing remarkable in what Massin does with his sourcing groups once he has them. In fact he
CHARACTERISTIC STRATEGIC describes a sourcing process very similar to the AT Kearney 7-step model (Chapter 3), but his category
analysis is methodical and worth noting.

3.21 He defines sourcing groups with six criteria.

• They come from a similar supplier source.

• They have similar production processes.
• They have a similar use or purpose.
• They have similar material content.
• They have similar specifications.
• They employ similar technology.

3.22 Massin suggests that it is useful to organise similar sourcing groups together in a sourcing tree (Figure
2.4). This is a hierarchy that goes from narrow, highly-defined sourcing groups through several levels of
increasingly broad specification before arriving at a 'first-level' category. First-level categories might be, for
example, products and services or direct and indirect spend items. The idea is that different tools, levels of
detail, decision frames and so on will be appropriate at different levels.

Continued ...
category Management in Procurement and Supply
r
Categorising Expenditures 1 CHAPTER 2

Figure 2.4 A section of a sourcing tree based an the 'Services' first-level category (Massin) • Sourcing history
• Stakeholder engagement
CATEGORY • Number of stakeholders
• Access to spend information.

SUB-CATEGORY
Professional
services
FAMILY

Risk management
SOURCING GROUP
4.4 Market factors- this group of factors is based on Porter's five forces, and examines supply market
competition. It looks at:

•
•
Level of competition (number of potential suppliers)
Entry barriers
I
• Substitute availability
• Buyer's relative bargaining power.

4.5 Supplier factors- the factors in this group describe the capabilities and attributes of the suppliers in the
specific category. It looks at:

• Highly-specialised or unique capabilities

• Supplier profit margins
• Value-added service components
• Level of technical excellence
Market research/data • Financial stability.

4.6 Procurement factors- the factors in this group focus on the procurement process and how the use of a
Advertising/PR
given category impacts the organisation and its outcomes. It looks at:

• Supply assurance risk

• Outcomes, operations or production impact
• Category spend volume
• Estimated savings potential.

4.7 Category-specific factors- the factors in this group look at the unique attributes of the category that will
determine suitability for category approaches. It looks at:
• Strategic impact
• Category complexity
• Lead time.

4 Bartolini's scorecard
4.1 Andrew Bartolini conceptualises strategic and category sourcing as the building of sourcing 'pipelines', and
the process of rethinking and reengineering the approaches to various categories as 'sourcing waves'. With
that out of the way, it is worth mentioning his category sourcing scorecard as a methodical approach to
category definition.

4.2 Bartolini's scorecard scores different categories across a set of sourcing considerations. It provides a
framework by which those factors can be quantified and compared. The end result is a sourcing score for
each category that can be used to prioritise categories for sourcing and to allocate resources.

4.3 Internal and organisational factors- this group of considerations is aimed at filtering out any spends that
will be difficult to fit into a category approach. It looks at:

• Contract status
Category Management in Procurement and Supply

CHAPTER 3

Strategic Acquisition Processes

Assessment criteria and indicative content

Critically compare the main models for the adoption of strategic procurement, strategic sourcing and
category management

• Models of strategic procurement such as the CIPS purchasing and supply model
• Models of strategic sourcing such as AT Kearney's 7 step model
• Models of category management such as CIPS category management model

Section headings
1 The CIPS purchasing and supply model
2 The OGC procurement process model
Self-test questions 3 An introduction to strategic sourcing models
4 The AT Kearney 7-step model
Numbers in brackets refer to the paragraphs above where your answers con be checked.
5 Category management models
1 Distinguish between product costs and period costs. (1.4)
Introduction
2 The cost of waste materials and scrap is a direct cost. True or false? (1.11)
This chapter looks at some sourcing models that you will be expected to be aware of. The temptation with
3 Sketch the Pareto curve. (Figure 2.1) a model, especially a comprehensive, authoritative model, is to follow it in a blinkered fashion believing
that it offers the surest, even a guaranteed, path to best practice.
4 How may the one-dimensional Pareto analysis prove to be misleading? (2.6)
In reality, models are not that powerful. A model is a subjective simplification that is set up in such a
5 Sketch Kraljic's matrix. (Figure 2.2) way as to allow us to investigate the behaviour of a limited number of specific aspects of the real world.
Models have to leave things out, just as a painting leaves things out when it shows us a representation of
6 How does Massin adapt the Kraljic analysis? (3.16)
the world. The hope is that by simplifying, we gain a more powerful tool for understanding the world and
predicting its behaviour.
7 List internal and organisational factors affecting supply categorisation, according to the analysis of
Bartolini. (4.3)
The few models described in this chapter will not cover every aspect of every sourcing situation or process,
List supplier factors affecting supply categorisation, according to the analysis of Bartolini. but they will cover most aspects of most situations and processes in mostly the best order. You should use
8
them for what they are: starting points towards developing optimised, individualised models that fit your
organisation and its needs.
 Strategic Acquisition Processes ! CHAPTER 3
Category Management in Procurement ar:d Supply

The CIPS model

1 The CIPS purchasing and supply model
1.6 The CIPS purchasing and supply model (Figure 3.1) is an end-to-end procurement process model that is
Introduction
both plugged into the organisation's strategic concerns and provides operational best practice methods in
1.1 CIPS suggests that strategic procurement comprises four activities: planning, formalisation, making procurements.
implementation and evaluation.
Figure 3.1 The CIPS purchasing and supply made/

I
• The supply chain function should be involved in corporate planning so that the broadest range of
supplier options and alternatives can be considered.
• The formalisation (sourcing) and implementation of the procurement correspond to the operational
activities of the function, eg considering suppliers, creating relationships with them, segmenting
chosen suppliers, maintaining and ending relationships with them.
• Evaluation captures performance and learning with which to improve current relationships and
processes and to build better ones for the future. Human resources
strategy strategy
Cox suggests that strategic procurement should be implemented in three broad steps.
1.2
-------
1
_,_- --
• Value chain positioning (VCP)- the process by which the organisation positions itself in the market to Supply chain Technical/leT
R&D strategy
reflect a margin-cost analysis of all the supply and value relationships within their market (ie their own strategy strategy

and others). cr---- f.._.:_------------...,

• Market positioning analysis- the organisation comes to understand the value creation and cost Distribution/dissemination
strategy
aspects of its own supply chains and how this benchmarks against competitors (not all market
participants will be competitors). P&SM strategy [ Operations strategy
• Extended relational competence approach- the organisation creates supplier and customer ---------~-----------
relationships that are underpinned with a solid idea of how value is created, what contracts should
look like, how to install efficient boundaries, and how best to exploit core competencies. 'As is' process 'As is' supply base
competence analysis analysis
1.3 There are particular features that will be prominent in strategic procurement approaches.
Spend analysis STRATeGIC SOURONG Supply/value stream
• Specifications of needs, concerning not just the supply but also the relationship (historical and future) ANAlY$1S mapping
• Tenders as a means of attracting the right suppliers (ie as a tool in supplier selection)
• Contracts that ensure sustainability and protection 'As is' political analysis Generate options
• The consideration of what will happen at the opposite end of the supply chain, with customers and
end-users
• Mapping of supply chain actions to the organisation's financial results
Managing direct spend Managing indirect spend
• Risk management
• Supplier base reduction in favour of stronger relationships with fewer, 'better' suppliers

1.4 Performance measurement is a core activity. Identification of need

Evaluate/select
suppliers
• Discussing performance with suppliers helps achieve (perceptions of) transparency and fairness.
• Performance measurement is key to realising benefits. Receive/evaluate
Procurement plan
offers
1.5 Ryals and Rogers identify five areas that receive particular attention.
Marketplace/solicitation Create the contract/
• Core transactional measures, eg price, quality conformance, delivery reliability. development relationship
• Service levels and responsiveness
• Process-based measures, eg hygiene factors, process innovation from suppliers, logistics, problem-
Contract/ relationship Receipt of product/service
solving and troubleshooting management
• Organisation-based supplier measures, eg financial health of suppliers, cultural compatibility, long-
term plans, financial stability and technological capability
• Communications
Post-contract 'lessons'
Asset management
management
Category Management in Procurement and Supply Strategic Acquisition Processes I CHAPTER 3

The model has the following features. • Performance monitoring, benchmarking, continuous improvement
• Management of supply markets.
• It presents a generic picture of an organisation and the way in which supply chain management fits
into it, at both strategic and operational levels. 1.13 The operations strategy typically includes:
• It shows where the organisation's supply chain strotegy fits in, what it covers, and how it can be
• Management of efficient processes
implemented.
• Inventory management
• It shows the high-level stages of supply chain activity and the key steps within each stage.
• Application of lean and agile principles

I
1.7 You may encounter more detailed versions than the one shown in Figure 3.1. We discuss the detailed • Management of plant and equipment
processes separately, throughout the unit. • Location of plant
• Virtual operations
Step 1: The organisation's vision, mission and values • Collaborations .

1.14 The distribution strategy usually includes:

1.8 All organisations have reasons to exist, and pressures and influences to which they respond. All decisions,
attitudes, and aims begin here. • Customer relationship management

• Vision- the end-state that the organisation wishes to achieve. • Service levels
• Mission- what the organisation exists to do now and into the foreseeable future. • Fulfilment
• Values- the guiding principles and priorities that determine what the organisation will and will not • Delivery

allow itself to do. • Disposal.

• Strategies -long-range plans for furthering the mission and approaching the vision. 1.15 These three strategies must dovetail with each other, and with the corporate strategy. They should support
Many external factors impact on the development of the organisation's purpose. These can be assessed all the other functional strategies as appropriate.
1.9
with a STEEPLE analysis (see Chapter 7). Competitive forces can be assessed through Porter's five forces
Step 3: Strategic sourcing analysis
analysis (also Chapter 7).
1.16 Strategic sourcing proceeds by a series of familiar steps. The CIPS model has its own emphases and advice
1.10 The organisation can fall back on 'supporting enablers' to help it further its purposes and aims.
which we will try to highlight.
• Stakeholders- every organisation is accountable to various groups of stakeholders, and these groups
influence its strategic direction. Stakeholders include owners and shareholders, employees, customers Process ond competence analysis
and suppliers (see Chapter 6).
• Resources- every organisation has limited resources (eg finance, people, physical assets, knowledge, 1.17 This stage begins by identifying the internal stakeholders, constituents or customers of the organisation's
technology, information, reputation, relationships). These resources must be deployed to the best purchasing and supply management function in the organisation, from owners and directors down to
effect. invoice processors and switchboard operators.

• Constituency mapping- map stakeholders onto the organisation's structure, along with their roles,
Step 2: The organisation's (purchasing and supply management) strategy involvement and requirements from the purchasing and supply management function.

1.11 The organisation will have an overall corporate strategy from which key operational strategies devolve.
• Competency mapping- evaluate the competencies of all those involved in purchasing and supply
management, whether they work some or all of the time within the function. This forms the basis for
Thus the corporate strategy contains, for example, a supply chain strategy. The organisation's supply chain,
a skills gap analysis and organisational development plan.
as we are aware, contains a number of operations and departments each with their own more tightly-
focused strategies, and the CIPS model highlights three of these: the purchasing and supply management
• Awareness and understanding- how well do owners, directors and senior management colleagues
understand the purchasing and supply management function? How much more would it be useful for
strategy; the operations strategy; and the distribution strategy.
them to know, and how can that be achieved?
• Knowledge- establish who knows what within the purchasing and supply management function, both
1.12 The purchasing and supply management strategy, typically includes:
technical and organisational information, what problems are caused by any information asymmetry (when
• What the organisation needs from its purchasing and supply management function people who work together have different levels of knowledge of the same things), and how to fix them.
• How the function is positioned within the organisation • Controls- all systems, policies, procedures, and controls should be analysed and evaluated. These
• Its governance structure may be outdated, inefficient or weak in parts. Benchmarking is a useful approach here.
• Its objectives and activities
• Ideal capacity, capability, competence, and structure characteristics Spend analysis
• How it manages internal customers, users and buyers' needs
• Standing policies over eg rationalisation, standardisation, value management, supplier development, 1.18 A fundamental part of 'as is' analysis is identifying who buys what, from whom, when, how often, and on
corporate social responsibility what terms. The aim is to identify buying patterns, trends and the details of any locked-in arrangements.
• Key processes supporting the organisation's control framework, eg standing orders and procedures The contractual positions surrounding key assets must be understood. Asset specificity can be an issue
• Use of technology and systems -how much room for change does an organisation actually have with its suppliers? Also, are suppliers
• Definition of good practice exposing the organisation to unseen risks, such as ethics and environmental issues?
Category Management in Procurement and Supply Strategic Acquisition Processes I CHAPTER 3

Political analysis 1.29 Stage 3 Marketplace solicitation and development. The requirement is taken out into the supply market
to test the level of interest in the business (soft market testing). The organisation may solicit interest,
1.19 Although the organisation will (almost certainly) have conducted a corporate-level STEEPLE analysis, the or request information or proposals- generally explain what it is looking for, and invite and respond to
purchasing and supply management function should conduct its own, highlighting those features that fall interest. The organisation may develop a wish-list of suppliers it would like to work with, and actively
beneath the radar of a corporate-level analysis. These will typically centre on political and legal issues that target these and develop their interest
have a deep though narrow impact, especially in respect of globalised supply chains.
1.30 Sometimes there are no immediately suitable suppliers, and the organisation will have to work with the

I
Supply base analysis most likely options and develop their capacity and/or capability to match what they need.

1.20 This is done at the level ofthe supply market and individual supplier. The process provides current-state 1.31 The end point of this stage is to have a large enough number of qualified suppliers sufficiently enthusiastic
information and trend information, and integrates closely with spend analysis. There are many suitable about the requirement to prepare their individual offers.
tools which we will have covered in full by the end of the unit (eg portfolio analysis, supplier preferencing,
Pareto analysis). 1.32 Stage 4 Evaluate and select suppliers. Suitably qualified and enthusiastic suppliers need to be appraised.
The organisation should have a set, unbiased, transparent procedure for this that takes in not just
1.21 It is important to identify suppliers' isolating mechanisms, those features that protect them from proposed suppliers, but also key parts of their supply chains. A supplier may have already been appraised
competition (eg economies of scale, switching costs, information asymmetry), as these weaken the (supplier pre-qualification), either as part of an earlier sourcing exercise, or to 'register' with the
organisation's position. organisation.

Supply/value stream mapping 1.33 Stage 5 Receive and evaluate offers. Any criteria used at this point should have been identified and
notified as appropriate at earlier points in the process. Whole-life costing, cost analysis and modelling, and
1.22 The organisation should trace how supply, and the value that accompanies it, flows into, through, and out risk analysis are all important tools. The final decision will probably involve some sort oftrade-off between
of themselves. The organisation needs to be aware of key value-adding stages, vulnerabilities, choke points various aims, and will be subject to bid clarification and post-tender negotiation
and other critical stages at which substantial value can be gained or lost. It needs to learn what makes
these points work as well as they do, and what could make them better. 1.34 Stage 6 Create contractual relationship. There will be a checklist (eg terms and conditions, service levels,
service descriptions, schedules) of issues to negotiate and agree. Unsuccessful suppliers need to be de-
Generating options briefed and records of the transaction retained.

1.23 This entire process is about establishing what the organisation could do (given unlimited resources), what Step 6: Acquisition- post-contract
it can do (given its starting position), and what it should do- which of its options is the most justified?
1.35 This step deals with the remainder of the tactical purchasing cycle. There are four stages which are broadly
Step 4: Proactive demand management sequential (they overlap) and should be familiar to you.

1.24 Rather than wait for other functions to notify their requirements, the purchasing and supply function 1.36 Stage 1 Contract and relationship management. All new contracts and their implications need to be
should proactively work with other functions to plan their sourcing requirements, and to determine communicated to all stakeholders in the specified supply. Quite apart from efficiency and effectiveness
volumes, schedules and priorities. From this they should establish appropriate sourcing plans. arguments, it is unprofessional and poor people management not to do this. The organisation should
install feedback channels so that stakeholders can report their experiences of living with the contract, and
1.25 Sourcing plans should be owned by people who will drive them forwards. CIPS recommends the use
the contract manager can then take up any pertinent issues with the supplier. Equally, suppliers' comments
of cross-functional teams for this, though it is up to the purchasing and supply function to provide the
should be sought- the organisation should aim to be a good customer. The over-arching aim should be
framework of appropriate policies, procedures, processes, contracts, networks, relationships, information,
continuous improvement.
monitoring and technologies within which the team will operate.
1.37 Stage 2 Receipt of product or service. This is the key stage-gate that passes the supply into the
Step 5: Acquisition- pre-contract organisation (checks that it matches expectations) and authorises payment (notifies that the supplier has
kept their end of the bargain).
1.26 This is non-strategic sourcing, the pre-contract steps in a tactical purchasing cycle of the sort we began
with in Chapter 1. There are six sequential stages which should be familiar to you.
1.38 Stage 3 Asset management. This means managing and maintaining the purchase through its lifecycle, and
then disposing of it in an appropriate manner (eg sell-off, repurpose, recycle).
1.27 Stage !Identification of need. A need comprises a requirement and a specification. There should be no better
alternative. There is always at least one alternative, and that is not fulfilling the need at all. The organisation
1.39 Stage 4 Lessons management. The knowledge and experience gained should be captured and used.
can: defer (acquire later), diminish (acquire less), or delete (not acquire at all). Diminishing includes complexity
reduction through simplification or standardisation. Budget controls are applied at this point. Step 7: Going forwards
1.28 Stage 2 Procurement plan. A sourcing team or individual determines a plan for approaching the market 1.40 The end of each contract is the start ofthe next. The need is reassessed: has its time passed? Will
and the features they are looking for in the purchase (eg sourcing strategy, timescales, price, quality, the organisation continue with the incumbent supplier? Do terms need to be renegotiated? Does the
ancillary services). organisation want to start the whole process over again?
 Category Management in Procurement and Supply Strategic Acquisition Proces:.es j CHAPTER 3

2 The OGC procurement process model Start-up

The Office of Government Commerce (OGC) was an independent office of the UK Treasury from 2000 to 2.6 Some purchases are better approached as projects. Think about your purchase's implications. How does
2.1
2010 (its responsibilities have now been transferred elsewhere). It was tasked with maximising value for it relate to the organisation? What will its outcomes be, beyond the obvious acquisition of the purchased
money in public procurement, and developed a comprehensive procurement process model. Figure 3.2 item? How does it contribute to overall organisational objectives?
provides an overview. The model is intended as generic guidance, applicable in the broadest variety of • Decide whether it stands alone or is best considered as part of a larger programme; consider its
situations possible. dependencies on other purchases.

Figure 3.2 The OGC procurement process model (OGC)

•
•
Develop critical success factors.
Identify stakeholders and ensure their interests will be represented.

Business case
I
2.7 There should be a business case that justifies the procurement activity and spend. This is critical to senior
management agreement and stakeholder buy-in.

Requirements definition and purchasing strategy

2.8 Your strategy should set out the key objectives and justification for the purchase. You should also have a
clear sourcing strategy and have considered the options for leveraging existing contracts and collaboration
opportunities.

• Develop the evaluation strategy. Decide the evaluation stages required, the overall evaluation criteria
and the evaluation process.
• Ensure end-users and stakeholders are involved in the specification- a purchase might not deliver if it
is disconnected from its end-users.
• Determine the procurement route: the appropriate route helps ensure a smooth purchase that
delivers value for money.
• Plan the purchase, ensuring all tasks and deliverables are identified in sufficient detail to allow
progress to be tracked and managed.

Market creation

2.9 There may potentially be limited response to a requirement because of its nature or the state of the
market. In these cases, the organisation should stimulate the market.

• Review the requirement to make it commercially viable.

• Develop a procurement approach that will attract suppliers.
General principles • Carry out market research.

2.2 All procurement should be subject to competition. A competitive process provides the best opportunity for Producing the requirement
value for money, but note that there may be valid exceptions to this principle, arising from the nature of
specific needs. 2.10 Requirements need to be clear and unambiguous. An inadequately thought-through requirement is
a common reason for procurement not providing the right goods or services, nor the best value for
2.3 Value for money includes both whole life costs and quality. money. Requirements should be defined as fully as possible, but there may be cases where you can only
develop a full requirement during the procurement process. This should not deter you from setting broad
2.4 Sustainability issues can be considered where appropriate and when relevant. These must be balanced parameters at the start that establish what the organisation can or will tolerate from its purchase.
against cost and afford ability. Sustainability issues should be addressed at the appropriate stage (normally
the business requirements stage). In some instances, particularly when environmental issues are relevant, Supplier selection
sustainable procurement can reduce whole life costs and improve quality through recycling or reducing
disposal costs. 2.11 Start the supplier selection and evaluation process early. This can begin with pre-qualification. Clearly
define, plan and document your approach from the start. Make sure you can demonstrate a fair and
2.5 All procurement should be fair, open and transparent. All contracting authorities should be seen to be transparent process. Supplier selection and evaluation should be a continuous process, each passing
acting in a fair manner. A well-managed purchase, with a well-defined requirement from the outset, will through a number of stage-gates.
help enable a successful result. Procurement failure usually points to a badly-defined requirement.

34
 Category Management ln Procurement and Supply Strategic Acquisition Processes 1 CHAPTER 3

Proposal evaluation 2.20 Communication is crucial. When problems arise, they need to be dealt with promptly- this requires good
communication channels aimed at delivering win-win outcomes. Monitor supplier performance against
2.12 Evaluation is a stage-gate hurdle: it passes every supplier that, at the particular stage, meets all the criteria agreed service levels. This requires you to have agreed quality measures in the contract that allow the
required of them. It picks no favourites, and does not prejudge the outcome of the overall process. Follow quality of a service to be measured. Aim to continuously improve performance or increase value for
your pre-defined evaluation model and criteria. money.

Contract preparation 3 An introduction to strategic sourcing models

2.13 Match the contracting process with the nature of the purchase. Take into account complexity, size, and
value. You should be able to answer 'yes' to the following questions.

•
•
Does the contract accurately represent the requirement?
Have stakeholder requirements and views been taken into account?
3.1 Emma Brooks (writing for CIPS) highlights the centrality of strategic sourcing to overall supply chain
strategy, and describes the typical issues and tasks an organisation faces in implementing it. She frames
this as an eight stage process.
I
• Do potential providers have realistic solutions to meeting the requirement? Stage 1: Positioning the function for strategic sourcing
• Does the organisation have the necessary skills and resources to meet its obligations under the
3.2 Strategic sourcing only works if the supply chain management function is positioned appropriately
contract, and for managing the contract?
within the organisation. It requires formal status, credibility and access to senior level decision-making,
• Have you had appropriate, expert legal advice?
recognised in the organisation's governance structure. It must be resourced appropriately with well
• Has the future contract manager been involved in the process?
supported, competent and authorised supply chain professionals who are integrated into the activities of
Bid evaluation the organisation's other functions, where their contributions are recognised.

2.14 Evaluate the financial and qualitative elements separately, then look at the results together and reach the 3.3 CIPS recommends that the supply chain management function should create a sourcing board or panel
trade-off (if one has to be made) that represents best value for money. (or procurement board or panel) to discuss high-level supply chain issues such as strategies, policies
and positions, to support decision-making, and to broaden and deepen the function's influence in the
Award organisation. It should comprise powerful stakeholders, decision-makers, opinion leaders and influencers.

2.15 Unsuccessful suppliers may require more attention than successful ones. You need to retain their Stage 2: As-is analysis
interest and goodwill for the future, convey lessons that will enable them to submit stronger bids, build
relationships and networks, and maintain transparency. Your chosen supplier may fail: at this moment 3.4 The as-is analysis is essentially a strategic audit of the supply chain function's and the organisation's
there is no more qualified alternative than the supplier that came second in the selection process. positions. This draws on the common strategic analysis tools, but also covers the following areas.

• Customer and business requirements- what do our customers need and what does the organisation
Purchasing project closure need?
• Spend analysis- historical usage analysis of goods and services; supplier positioning; supplier
2.16 Close each purchase in a controlled way. Capture the lessons you have learnt. Analysis should capture how
historical analysis; transaction cost analysis; criticality of products and services.
well the organisation and process have performed against aims and projections, especially planned costs,
• Future spend analysis- forward/expected usage of goods and services; trends in the market.
schedule, tolerances, and business case.
• Market analysis- assessment of market capability; analysis of power dependency in supply chains;
analysis of individual marketplaces; supplier preferencing; relative positioning of your organisation;
Implementation and transition
supply chain cost analysis; the nature of the market and appropriate sourcing strategy; potential and
2.17 There should be a clear transition process from the procurement stage to contract management- it is actual size of the supply base.
important to ensure your organisation understands and fulfils its obligations so as not to delay or derail
Stage 3: Mapping the organisation's supply chains
implementation.
3.5 Supply chain mapping can be complex and lengthy, so the extent to which it is done is commensurate with
Contract management
the value for and risk to the organisation. CIPS recommends that supply chain mapping should include the
2.18 Allocate expert and dedicated contract management for the term of the contract. You need to have robust following elements.
procedures, with people to manage the contract. The management provisions should be built into the • Identifying profit and gross margins
contract. • Understanding interdependencies
• Mapping the required products and services
2.19 The level of contract management you need will depend on the type of contract. Inadequate planning for, • Analysing spend by each supplier in respect of categories and business units
and carrying out of, contract management is a crucial reason for user dissatisfaction and not realising value • Buying patterns by product, service, supplier and business unit
for money. It is important to have continuity in the relationship and for the contract managers from both
• Sourcing patterns
the procuring organisation and the supplier to have been appointed early in the process. • Pricing patterns- historical and forecast, and also purchase price analysis
• Historical performance of suppliers

36 '7
Category Management in Procurement and Supply Strategic Acquisition Processes 1 CHAPTER 3

• Historical market trends and associated cost drivers Stage 7: Identifying new suppliers
• Value chain analysis
• Identifying and addressing dominant players in the supply chain 3.13 Sourcing plans that are introduced in this way are frequently dramatic and impactful, so can necessitate
• Critical asset analysis dealing with new suppliers. There will be two issues. A strategic sourcing process will typically arrive at a
• Technical analysis- alternative solutions to specifications more demanding need to present to suppliers. And the supply chain function will want to find suppliers
• Risk assessment capable of meeting the need- otherwise the exercise will have been futile.
• Cost modelling

I
3.14 This means that the organisation does not really enter the supply market as a prospector, but as an active
• Portfolio analysis
participant, identifying 'talent' (ie suppliers with potential) and nurturing it into becoming the better level
• STEEPLE analysis
of suppliers that the organisation now needs.
• Complexity reduction
• Ascertaining demand
Stage 8: Evaluation
• Challenging demand (defer, diminish, delete)
• Market potential and market modelling 3.15 Sourcing plans must be evaluated in terms of the benefits they realise as compared with those they were
• Policy areas that need to be addressed eg as part of CSR
expected to deliver, as set out in their original business case. Post-plan audits are appropriate, and their
• Funding findings should be captured for performance management and organisational learning purposes.

Stage 4: Consolidate data and generate options

4 The AT Kearney 7-step model
3.6 The organisation should be confronted with masses of data at this point. It now needs to analyse the data
to sift out the less important and highlight the more important, to join data together that seem to be
4.1 AT Kearney is one of the largest management consultancy companies in the world. Many organisations
use their approach to sourcing, or something close to it. There is little that is remarkable about their basic
making the same message, to consolidate data into evidence for options for action.
7-step model as shown in Figure 3.3 (compare it to the process Brooks described). What is remarkable
3.7 The process of generating options is iterative: people pass ideas and observations back and forth, is the volume of supporting research and implementation guidance that accompanies it. Clegg and
examining, discussing, criticising and modifying them until concrete options emerge that are capable of Montgomery provide one of the many walk-throughs of the AT Kearney model which you can consult as
being analysed. Options that pass these tests are prioritised on the basis of the benefits and savings that part of your studies.
may deliver.
Figure 3.3 The AT Kearney strategic sourcing model {Clegg and Montgomery)
Stage 5: Option selection
Generate supplier Negotiate and select Benchmark supply
Profile the category
3.8 Viable options must be presented to the sourcing board and main board so that they can be balanced portfolio suppliers market
against and compared to the organisation's corporate strategic position and objectives. Options need to
align with these in order to progress to become sourcing plans.
Select sourcing Select implementation
Integrate suppliers
strategy path
3.9 Some options may need to be investigated or clarified before any final decision is made. The sourcing team
may need to prepare additional business cases or return on investment (ROI) models.

3.10 CIPS recommends using broad-based, weighted evaluation criteria when prioritising options as this
Step 1: Profile the category
reassures internal colleagues that the supply chain function is not narrowly and bluntly focused on price
alone, but considers issues in the round. 4.2 The organisation begins by understanding its own demand and the market's supply. It is one of the most
time-consuming steps in the strategic sourcing process, so needs to take place well in advance of any
3.11 The supply chain function's representatives in this process should always remember that this sort of
contract negotiations.
presentation is an opportunity to demonstrate the case for strategic sourcing and a resourced strategic
supply chain function. • Spend analysis- identify your organisation's spends and spending patterns. Examine data on any
potentially relevant criteria.
Stage 6: Sourcing plans • Needs analysis- survey key current users in order to understand their needs, their assessments of
current suppliers' performances, their improvement goals. What are the key requirements?
3.12 Some sourcing options may be chosen to be developed into sourcing plans to be adopted by the • Supply market analysis- use all appropriate tools, eg Porter's five forces for a general market
organisation. Sourcing plans convert options into schedules, work programmes and resource allocations: competition analysis, and SWOT analyses of individual suppliers. What for example are the value chain
the options become 'real'. Outcomes and performance measurement plans are drawn up, other functions and pricing implications? What concessions can you realistically pursue during negotiations?
are drawn in to make their contributions, external organisations and individuals (principally suppliers)
begin to get involved.
 Strategic Acquisition Processes 1 CHAPTER 3
Category Management in Procurement and Supply

Step 4: Select the implementation path

Step 2: Select the sourcing strategy
arket(s) it wants to source from. There is a 4.6 The organisation will have identified a market strategy at Step 2; now it develops an 'execution' strategy
4.3 The organisation can now decide how to approac h th e m .. . . for choosing shortlisted suppliers.
· · · we saw with the KraiJIC matnx m Chapter
deterministic dimension to this: part of definmg categones, as .
· t ·ng strategies There is also an elective element, • Request for proposal- including criteria and processes for evaluating proposals.
2, is the process of matching them with appropna e soum ·
which AT Kearney describe with a sourcing gemstone (Figure 3.4). • Initial negotiations- suppliers that have successfully got through the proposal process will then be
vetted through a number of negotiation rounds until one remains. There may be only one successful
Figure 3.4 The AT Kearney strategic sourcing gemstone (Clegg and Montgomery) supplier, in which case the organisation proceeds straight to Step 5.

Step 5: Negotiate with and select supplier

4.7 The final negotiation or rounds of negotiation will need careful preparation.
I
• Assemble a skilled and knowledgeable negotiations team .
• Develop your negotiations strategy based on all you have learned so far, eg from proposals, needs
analysis, supplier market, and from the supplier's likely bargaining stance.
• Know exactly what you intend to spend on what and when. Understand your requirements in the
fullest detail.
• Understand your current bargaining position- your most favoured position (MFP), least favoured
position (LFP), your best alternative to a negotiated agreement (BATNA). Where is your negotiating
power?
• What compromises and trade-offs are you prepared to make?
R<Hngln!!er joirrt • Take the supplier's objectives into account.
processes • Develop the negotiation team's individual objectives and roles. You may need to give a mixed

~epr~s Best-price
Joint
process
ISUIPP'')~==~op:ier.mtions. •
message, and wish to do so by showing differences in attitude on the part of different team members.
Have a contingency plan to rescue the situation if you do not meet even your least favoured outcome.
Unbundle pricing evaluation improvement Share productivity gains • Make sure you can get everything that is significant recorded unambiguously.
Haldan online aw;tion o-lop integl"aled
supply chain Step 6: Integrate the supplier

4.8 The organisation will need to embed the new relationship (and possibly retire some existing ones).

• Identify any transition issues.

• Consider the organisational implications and any required changes.
• Create new processes and procedures if necessary.
• Create a transition and implementation plan.
• Communicate the changes to stakeholders.

Step 7: Monitor the supply market and supplier performance

4.9 It is a fallacy to imagine your work is now done. The organisation's next strategic sourcing exercise begins
the moment that the current one ends.

• All lessons learned from this round of sourcing are streamed into the next.
4.4 Dealing with suppliers is a downstream response, it is also valid and necessary to look upstream at the • Plan ahead and stay on top of supply market conditions.
specifiers in your own organisation and perform some demand analysis and demand management. • Devise performance metrics and improvement procedures for your new supplier, and follow through
on them; develop your relationship with the supplier.
Step 3: Generate the supplier portfolio

4.5 The organisation now engages with potential suppliers. The goal is to widen_ the s~pplier base and identify
all viable suppliers. use the Step 1 needs analysis to develop supplier selection cntena. As we have
stressed before, retain all qualified suppliers and do not pick favourites at this early stage.
 Category Management 1n Procurement and Supply Strategic Acquisition Processes ! CHAPTER 3

5 Category management models Figure 3.5 The CIPS category management model

5.1 Pierre Mitchell describes how fully-implemented category management involves relationship STEP6 STEP 1
management, communications, programme management, change management and leadership. It almost Improve and enhance Initiate/prepare
involves creating intersecting organisations within the organisation, and consequently a large degree of
planning and sophistication, and a strategic outlook.

5.2

5.3
Organisations are often drawn to the predictability of n-step models and processes, but category
management is not one of these. It does not lend itself to repeated iterations of a sequence of tasks where
Stage 6 (for example) always follows Stage 5 and always precedes Stage 7.

Category management is, for Mitchell, more like a series of overlapping waves of activity within a five-
I
phase framework.

• Segment the spend.

• Determine category strategies.
• Sets up the governance for the categories. STEP 2A/2B
STEP 5
• Execute the strategy and supporting projects and processes. Maintain Identifying opportunities
• Monitor performance. Prloritising opportunities

5.4 He notes especially that:

• A category management strategy is not the same as the commodity strategies developed in a strategic
sourcing process. Rather it examines the broader value objectives, drivers and enablers that work
both within and across categories.
• Categories are segmented and structured not just in terms of supply type, but also by demand type. STEP4 STEP3
Implementing changes Prepare/present strategy
• Category strategy innovations are concentrated at the 'front end'. Excellent sourcing, supplier
management, supplier collaboration and supply chain redesign processes are nothing new. The
difference with category management is in the way in which it is tied to the needs of the primary
stakeholders who consume the inputs in the categories. Table 3.1 Principal management models potentially relevant to the CIPS category management process
• Category performance management focuses on both the demand and planning activity that drives
category management, but also questions how best to measure the performance of the category
management processes and the stakeholders who participate in them.
• Category management requires a whole new level of technical sophistication and cross-organisational
integration than strategic sourcing if it is to deliver the further benefits it is capable of providing.

The CIPS category management model

5.5 CIPS has its own category management model that divides the process into four phases covering six key
activity steps (Figure 3.5). Each activity comprises key questions which must be asked, and core tasks that
the organisation is likely to undertake during the activity. It is a comprehensive model that may be over-
specified in many situations. It is up to each organisation to decide for itself which of the elements may be
helpful. For example, CIPS suggests 40 management models which may have some relevance (Table 3.1).
Not all of them will be relevant in any given case, and not all potentially relevant models are included on
the list.

Phase 1 Kick-off; Step 1/nitiate/prepare

5.6 The key questions that must be answered in this step are as follows.

• What is the scope of the category?

• Who are the key stakeholders?
• What key issues or problems need to be addressed; are you aware of the key business objectives you
need to consider?

42 41
 Strategic Acquisition Processes 1 CHAPTER 3
Category Management in Procurement and Supply

• Do you have support for this work? Phase 2 Prepare strategy; Step 2B Prioritising opportunities
• Do you have the resources and skills to undertake the work?
• Are you clear about the high-level benefits and risks you might face?
5.10 The key questions that must be answered in this step are as follows.

• What are the changes and opportunities that will drive improved performance?
5.7 Your Step 1 programme task list may look something like this.
• What risks need to be addressed?
• Initiate project (if required). • What priorities make sense for the organisation?
• Define initial scope and objectives.

I
5.11 Your Step 2B programme task list may look something like this.
• Engage stakeholders and gain support.
• Identify and secure resources and access to specialist skills. • Screen and prioritise opportunities.
• Form a cross-functional team. • Identify potential suppliers.
• Map stakeholders and create a stakeholder management plan. • Determine desired relationship type and segmentation approach.
• Build a project timeline. • Qualify suppliers.
• Create a communication plan. • Conduct impact assessment, including corporate responsibility and sustainability factors.
• Define data, information and knowledge management requirements. • Assess the capability of the internal procurement process to deliver suggested changes.
• Define roles and responsibilities (RACI). • Socialise proposed opportunities with significant stakeholders.
• Confirm initial scope, potential benefits and risks.
• Formal 'stop and think' before proceeding, eg hold a stage gate review with senior stakeholders. Phase 2 Prepare strategy, Step 3 Prepare/present category strategy

Phase 2 Prepare strategy; Step 2A Identifying opportunities 5.12 The key questions that must be answered in this step are as follows.

• Is the strategy grounded and are the recommendations supported by the research and analysis?
5.8 The key questions that must be answered in this step are as follows.
• What is the benefit, how will it be measured, and is it realistic and tangible?
• Do we understand our business needs and issues (now and into the future as far as possible)? • Do the expected benefits stack up in relation to the anticipated risks and to the resources required to
• Do we have a deep understanding of the external market place, its trends and dynamics, and an deliver them?
appreciation of our organisation's position within this? • Does the strategy address the business issues and objectives identified at the outset?
• What opportunities for improvement can be gained through commercial and economic insight and an
5.13 Your Step 3 programme task list may look something like this.
appreciation of best practice?
• Are there any quick win opportunities that emerge through our immediate research and analysis? Can • Develop sourcing strategy, route to market and other recommended changes .
we implement these before developing a final strategy? • Quantify expected benefits; define resource and cost implications.
• Quantify risk and develop mitigation plans.
5.9 Your Step 2A programme task list may look something like this.
• Prepare detailed implementation plan.
• Research • Define relationship management and governance structures.
- Define scope and purpose and source(s) of research. Agree roles and responsibilities. • Confirm segmentation approach, relationship profiles and roles.
- Conduct product research and data gathering. • Confirm transaction process.
- Conduct portfolio research and data gathering. • Hold formal review before proceeding, ie gate review with senior stakeholders.
- Conduct supply market research and data gathering. Undertake requests for information if needed.
- Conduct relationship history research and data gathering. Phase 3 Deliver strategy; Step 4/mp/ement category strategy/Change recommendations
- Conduct internal stakeholder needs analysis and determine strategic business priorities.
• Analysis 5.14 The key questions that must be answered in this step are as follows
- Derive competitive insight- Porter's five forces, capacity and demand analysis, switching costs, • Is the implementation and change programme being communicated effectively?
SWOT analysis, pricing behaviour, industry competitiveness. • Is implementation proceeding as outlined in the strategy?
- Derive economic insight- value chain mapping, costs structures, cost modelling, margin analysis, • Are relationships and supporting structures in place?
lifecycle costing. • Are performance measurement and reporting systems established?
- Understand supplier capability and preferencing. • Are benefits secured and captured?
- Determine category sourcing characteristics. • Are transition risks being effectively managed?
- Understand the corporate responsibility position of the product and supplier in relation to • Are stakeholders satisfied?
corporate responsibility policy and standards.
- Understand the procurement implications of existing legislative requirements, standards and 5.15 Your Step 4 programme task list may look something like this.

policies. • Create service specification and requirements.

- Review existing supplier relationships and performance. • Conduct market enquiry.
- Understand immediate and future stakeholder needs and wants. • Analyse responses.
- Understand the performance and efficiency of existing procurement process and transaction • Select preferred suppliers.
systems.
 Category Management in Procurement and Supply Strategic Acquisition Processes 1 CHAPTER 3

• Negotiate. • Capture and share learning and knowledge.

• Select supplier. • Consider internal and external events which change, challenge, provide opportunity or risk
• Contract with supplier. procurement deliverables.
• Mobilise other strategy change initiatives. • Continue to align strategy and business needs.
• Measure and communicate progress. • Communicate progress in delivering strategy and benefits.
• Manage transition risk. • Formal review to re-affirm strategy effectiveness or as a result of a major internal or external trigger
• Initiate relationship management process. event.
•
•
•
•
•
Deliver training for new or changed resources, systems, processes.
Apply supplier segmentation rules.
Agree internal stakeholder relationship outputs.
Agree supplier development actions.
Transition to business as usual.
The O'Brien model

5.20 The CIPS reading list highlights Jonathan O'Brien's book, so we will briefly review his model (Figure 3.6).
There is no need to go into it in detail here; we will be working with it throughout the unit. This main thing
I
• Undertake post-transition review. to note is that it is highly practical. The temptation with models is to produce something that is highly
idealised and abstract. Obrien's model provides more of a process and method that the organisation
Phase 3 Deliver strategy; Step 5 Maintain continually repeats, with clear directions as to what to do when, and what you should expect (Table 3.2).

5.16 The key questions that must be answered in this step are as follows. Figure 3.6 The basic steps in O'Brien's category management process

• Are we managing supplier relationships effectively?

• Are we managing internal stakeholder relationships effectively? Initiation
• Are risks identified and managed?
• Is the strategy delivering the expected benefits?
• Is performance monitored and are issues effectively managed and resolved?

5.17 Your Step 5 programme task list may look something like this.

• Manage and evaluate supplier relationships.

• Manage and evaluate internal relationships.
Implementation
• Manage performance; non-conformance events, problem resolution, learning.
• Manage supplier contract.
• Manage supplier contract variation and changes. Improvement
• Manage supplier contract termination.
• Measure and review performance.
• Communicate with stakeholders and suppliers.
• Manage ongoing risk and continuity planning. Table 3.2 What happens when during O'Brien's process
• Manage transactions (fulfilment); demand notification, aggregation, forward demand planning,
supplier allocation and payment.
• Apply audit and controls.

Phase 4, Align and improve; Step 6 Improve and enhance

5.18 The key questions that must be answered in this step are as follows.

• Do we have mechanisms which identify and seek to deliver continuous improvements?

• Do we have the right internal and external behaviours and structures to generate and deliver change
and innovation?
• Are we aware of internal and external changes and do we routinely assess how they might present risk
or opportunity?
• Is the category strategy still aligned to the needs and priorities of the organisation? Pick a model and stick with it
5.19 Your Step 6 programme task list may look something like this.
5.21 O'Brien cautions that there are very many sourcing and category models and that organisations, driven
• Identify improvement opportunities. to show they are acting to optimise their practices, may jump from one to the next endlessly. O'Brien
• Deliver continuous improvement actions; benchmarking, problem analysis, competitor analysis, suggests that this is the surest route to failure. Constant change of this sort prevents the organisation
supplier networking and development. from realising any of the benefits of any of the models, and simply embeds confusion, short-termism and

46
 Strategic Acquisition Processes 1 CHAPTER 3
Category Management in Procurement an.d Supply

distrust- the polar opposites of what strategic sourcing and category management should achieve. His
advice is:
• Only one process should be in place within an organisation.
• Everyone should understand it and actively embrace it.
• The language of the process should be relevant to the organisation.
• The process should broadly follow and reflect the fundamentals of category management, change

I
management and best-practice business improvement.
5.22 That is, pick a suitable model and stick with it so that it has a chance to realise the benefits it has been
designed to deliver.

Self-test questions
Numbers in brackets refer to the paragraphs above where your answers can be checked.

1 What are the three steps in implementation of strategic procurement, according to Andrew Cox? (1.2)

2 Describe general features of the CIPS purchasing and supply model. (1.6)

3 What is meant by a supplier's isolating mechanisms? (1.21)

4 List as many as you can of the stages in the OGC procurement process model. (Figure 3.2)

5 What is meant by an 'as-is analysis'? (3.4)

6 In Step 1 of the AT Kearney strategic sourcing model ('profile the category') what are the three areas of
analysis that must be carried out? (4.2)

7 What are the five phases in Pierre Mitchell's category management framework? (5.3)
CHAPTER 4

Skills for Category Management

Assessment criteria and indicative content

II Analyse the main technical and behavioural skills for the implementation of approaches to strategic
sourcing and category management

• Technical skills such as financial management and cost analysis, supply chain analysis, supply base
research, sourcing processes, risk management, legal aspects and negotiation
• Behavioural skills such as communication, influencing, working with teams, cross-functional working
and acting as a change agent

Section headings
1 What does a category manager do?
2 Technical skills
3 Behavioural skills

Introduction
We have discussed how strategic sourcing and category management are developing fields, and have seen
some of the models that are used to organise strategic sourcing and category management activities.

This chapter is about the skill set with which category managers should be equipped. We will not look too
closely at the individual skills, but we will catalogue the ones that appear to be relevant, then say a few
words about those that CIPS themselves have highlighted.

CIPS believe that strategic sourcing and category management responsibilities are accompanied by specific
skill sets which must be 'learned, developed and refreshed'. These, as we will see, comprise both hard,
technical skills and soft, inter-personal, behavioural ones.

1 What does a category manager do?

1.1 Kay Bayen has investigated 69 skills for their current (2010) and likely future (by 2015) relevance to
category management. Table 4.1 Shows the two top lOs that she uncovered for those two time periods.
None of the projected top 5 for 2015 are even in the top 10 for 2010; only two of the top 5 for 2010 are
in the top 10 for 2015; change management, ranked 50'h of 69 in 2010, is projected to be the lO'h most
important skill by 2015; strategic thinking, ranked 24'h of 69 in 2010, is projected to be the most important
skill of all by 2015. We repeat three of the points we made in Chapter 1.

• There are no settled concepts of what strategic sourcing and category management are or entail.
• Ideas are changing rapidly.
• The activities are moving ever more into the strategic frame.
 SkiHs for Category Management 1 CHAPTER 4
Category Management in Procurement and Supply

Table 4.1 The changing skill profile required by category managers (Bayen) 1.5 Bayen suggests that such a manager is 'in charge of strategy for the category, a market intelligence expert
in this category and is capable of communicating this strategy for implementation in a regional or global
level. In the course of his role, he or she should work upstream in a cross functional or cross organisational
manner to influence important decisions while being updated on important input from internal and
external sources for strategy definition.'

1.6 Tony White provides a simpler picture. He identifies ten skills divided into three groups (Table 4.3). His
research indicates that these groups are not equally important, but are weighted. That is, category
management success is:

• 39% Strategy success

1.7
•
•
36% Relationship management success
25% 'Domain' (technical) expertise success.

The ten skills vary according to the category in which a category manager operates.

Table 4.3 A different breakdown of the category management skill set (White)
I
1.2 In all, six skills jumped 20 or more ranking positions between 2010 and 2015; there is a clear progression
towards the strategic decision frame: change management (jumped 40 places), networking (29), risk
management (28), strategic thinking (23), environmental regulations & CSR (23), cross-cultural skills (22).

1.3 There is some suggestion that ideas on what a category manager ought to be able to do are crystallising.
Bayen notes that the relevancy scores for the 2015 top 10 range from 4.69 to 4.42 out of 5; those for 2010
range from 4.27 to 3.81. In effect, her survey respondents were less sure about the relevancy of the top-
ranked 2010 skill than they were about the lO'h-ranked 2015 skill.

1.4 From her research, Bayen proposes a core skill set for category management (Table 4.2), and notes that
35% (8 from 23) ofthese are at present under-developed in many supply chain managers. This skill set
1.8 Paul Snell discusses the issues with industry experts and finds a familiar lack of consensus. However, like
would support a category manager, who she describes as being concerned with:
Bayen, he notes that there are skills that are considered key that category managers often lack, thereby
• Value generation compromising their category management efforts. He also notes that many managers are not able to
• Cross-functional collaboration adopt the necessary mind-set.
• Alignment of corporate purchasing initiatives with internal users
• Many organisations do not understand what is needed and rely on their established competencies.
• Risk management
• There is a shift to a more strategic and holistic perspective. Process and project management are less
• Getting indirect spend under control
important; creative thinking, influencing and innovation are more important. Category managers must
• Optimising and developing the supplier base
be able to contribute to the organisation's development.
• Sustainability and responsible sourcing
• Category management is bigger than procurement.
• Developing talent, the organisation, and processes.
• Strong leadership is crucial, which is not traditionally a key procurement requirement. Purchasers are
Table 4.2 Category manager skill set (Bayen) not used to being the authoritative voice in the room.
• There are impacts on organisational culture.
• Flexibility, pragmatism and lateral thinking are important- there are fewer 'correct' ways to do things.
• Category managers need to be on top of the numbers, in a rounded way, all of the time.
• Business partnering is a larger and more necessary part of the job.
• Organisations must have the right people trained to the right level of capability and competence.
• Organisations should expect culture change and to have to train their people.
• Some people, perhaps a majority, might not be able to adapt.
• Category managers must be prepared for change- making step-change improvements is a basic aim.
1.9 Snell's category manager skill set is as follows.

• Change management- convincing people of the need for change .

• Commercial awareness- understanding the organisation's operations and value drivers, and how
procurement activity impacts on them.
• Communication- to build relationships with diverse groups of people .
H Category Management in Procurement and Supply SkH!s for Category Management 1 CHAPTER 4

• Creativity- to innovate and find new ways to add value. • What are financial resources buying? Are they paying for pointlessly differentiated inputs? Could they
• Flexibility- to adapt processes and practices to stakeholder needs and motivations. be more effective if used on commodities?
• Leadership- running cross-functional projects and keeping them on track, while maintaining respect • What are the trends in spend?
and authority. • Which assets add most value? Which have the most strategic value?
• Market knowledge- to provide category expertise and the insight to make changes successfully. • Are financial resources gaining value for money? Are they being directed to the most value-adding,
• Persuasion- to influence and convince stakeholders of different ideas. efficient and effective people, processes, suppliers and so on?
• Procurement skills- established, 'mainstream' skills remain important. • How flexible is spend? How much is locked in to contracts? On what terms? What can be
• Tenacity- to overcome obstacles and complete projects. renegotiated?
• Vision- understanding how category management aligns with overall organisational goals. • Where does orderly financial resource use break down and why? Where are the maverick spends and
budget variances?
1.10 Finally, we have the skills CIPS themselves highlight, which we will now review briefly (you will have
studied them elsewhere, in this unit and others).
•

•
Technical skills- financial management, cost analysis, supply chain analysis, supply base research,
sourcing processes, risk management, legal aspects, negotiation.
Behavioural skills- communication, influencing, working with teams, cross-functional working, acting
Cost analysis

2.7 Cost analysis is a fundamental tool in financial management.

I
as a change agent. 2.8 A traditional view is that the supply chain function spends money and incurs costs; it is a conspicuous drain
on the organisation's financial resources, and can only add value by cutting costs. That is a non-strategic,
2 Technical skills disjointed viewpoint. The truth is that every function contributes to costs, and every function contributes
to revenue. However no function is in a better position to understand and control costs, so cost analysis is
2.1 Technical skills are also referred to as hard skills. They concern matters where the data is unambiguous a central part of what the supply chain function does.
(though its analysis may be contentious), and definitive answers and courses of action are possible. In
simplistic terms, technical skills result in proofs whereas behavioural skills result in preferences, though 2.9 Cost analysis has to be done from a strategic perspective, which is what this unit is about. However this
this does not mean that technical skills provide the more trustworthy answers. Technical skills, if anything, still means mastering the basic concepts and skills.
are more vulnerable to any errors made. They make extensive use of programmes of steps and stages
Standard casting and variance analysis
where the people using them rarely reflect back on their earlier conclusions.
2.10 According to CIMA, a standard cost is the, 'planned unit cost of the product, component or service
2.2 Category management and strategic sourcing are both highly technical activities. Decisions are optimised
produced in a period. The standard cost may be determined on a number of bases. The main use of
through behavioural skills, but they are made on facts; options are opened with behavioural skills, but
standard costs is in performance measurement, control, stock valuation and in the establishment of selling
they are identified with technical skills. Behavioural skills may provide the drive for achieving category
prices.'
management or strategic sourcing, but it is technical skills that will map the route to getting there.
2.11 Standard costing is the control system that tracks and analyses variances from standard or budget costs.
Financial management
This enables cost control by means of the following process.
2.3 Financial management in the procurement and supply chain context concerns the function's need for and • Set cost standards for each organisational operation.
use of financial resources. As this is the category management and strategic sourcing unit, we will add • Compare actuals with standard performance.
that this stewardship extends beyond short-term budgeting and control, and into long-term planning and • Analyse and report variances.
decision-making. • Investigate significant variances and take appropriate corrective action.

2.4 2.12 Standard costs are set by analysing historical costs, and building a cost model of an idealised process or
The financial management task most associated with and expected of the supply chain function is making
operation.
savings, ie not spending money. As a result, the cultural step that may be least intuitive in moving to the
strategic decision frame is that short-term inefficiency (eg as caused during change programmes) may
2.13 Both these approaches presuppose that the organisation's activities can be standardised or made
bring longer-term benefits that more than compensate.
repetitive. If each new activity is significantly different from the previous ones, then there is no standard to
use as your costing benchmark.
2.5 This long-term perspective and the closer relationships with partners in the supply chain entails paying
attention to the value earned by every member in the value chain, ie minimising costs and risks for
2.14 While category management and strategic sourcing are properly responsive to external influences and
everyone. This fits in with the idea that some customer markets no longer feature competition between
internal strategy, they are at the same time aiming to aggregate spend and form long-term agreements, so
lone customer-facing providers, but between entire supply chains.
standard costing should become more rather than less relevant.
2.6 Here are some typical questions that the supply chain function might need to answer in financial
2.15 CIMA also says that variance analysis is the 'evaluation of performance by means of variances, whose
management.
timely reporting should maximise the opportunity for managerial action.' So this will have its part in the
• How does financial resource use break down over the organisation? Which business unit and cost extensive performance management component of category and strategic sourcing approaches. Variance
centre accounts for what? Are there opportunities to aggregate spend and gain efficiencies and buyer analysis breaks down a variance to establish:
power?

54
Category Management in Procurement and Supply Skills for Category Management I CHAPTER 4

• How much is due to non-standard use of resources. has happened or will probably soon happen. Like a balance sheet in accounting or a STEEPLE analysis in
• How much is due to non-standard cost of resources. strategic audit it provides a snapshot of a current state that is easy to take in and may reveal important
information that is otherwise obscured by movement and activity in the organisation.
Whole life costing
The supply chain as a collection of processes
2.16 Whole life costing (WLC) means costing an organisational input on the basis of costs incurred over its
entire existence within the organisation, that is costs due to for example: 2.23 The supply chain is also a collection of processes- things that are getting done. These all need to be
designed, understood, controlled and joined up. Croxton eta/ describe eight core supply chain processes
• Its existence as a possibility (ega design option, feasibility studies)
likely to be found in any organisation.
• Researching sourcing options
• Selecting suppliers • Customer relationship management

I
• Drawing up contracts • Customer service management
• Hedging and mitigating risks (eg currency movements, security measures) • Demand management
• Quality control • Manufacturing flow management
• Service level received • Order fulfilment
• Other resources consumed in use • Product development and commercialisation
• Transport • Returns management
• Storage • Supplier relationship management
• Certification 2.24 These will be different and of different importance in every organisation, but they will all have to be
• Safety managed, both at the strategic and the operational level.
• Disposal and by-products
• Reputational impact. The supply chain as a system of flows
2.17 It is a concept that is used inter-changeably with total cost of ownership (TCO), though the way TCO is
2.25 The supply chain exists to supply, to meet a demand created by an end-user. Supply chains are commonly
framed tends to imply an emphasis on the post-purchase costs of capital items.
seen as comprising four types of flow.
2.18 Three basic principles are fundamental to whole life costing. • Materials and services -the actual building blocks of the supply chain, the inputs into each link that
• Analysis of the cost structure- all cost elements should be readily identifiable. are processed to create its outputs.
• Cost estimating- for each part ofthe cost structure. • Information- the organising structure of the supply chain, letting every part know what is expected of
• Discounting- expressing future cost commitments in a common time frame, ie their present day it.
(present value) equivalents. (This is not the same as adjusting for inflation.) • Finance- the compensation exchanged through the supply chain that rewards earlier stages for the
parts they have played in providing inputs to later stages.
2.19 In practice, there are some costs which it is reasonable and feasible to include, and others that are
• Value- the point of the chain is to create value for the participants in the chain. Value should flow
impossible to quantify (eg costs incurred because a given component was occupying space in the
from step to step to step, growing at each stage.
warehouse and the organisation wanted to use it up before it expired).
2.26 Flows need to be mapped from the supply chain's point of origin to the end-user and all the way back.
2.20 That said, there are certain costs which should always be trackable. Special care is needed at the links between organisations, where faults and mismatches are likeliest.

• Purchase price The supply chain as an idealised model

• Purchase administration costs
• Development and maintenance costs 2.27 We have seen many models now for the processes in the supply chain, but none of the supply chain as an
• Acquisition costs entity, a thing. These provide a benchmark against which to compare real-world supply chains. There are
• Operating costs many models that provide this. The Supply Chain Operations Reference model (SCOR) developed by the
• End of life costs Supply-Chain Council (SCC) in the US is a well-established and widely-known one. It allows the organisation
to represent, analyse and configure its supply chains. The SCOR-model is a reference model. It is a tool for
Supply chain analysis describing how supply chains work, and provides no prescriptions for improving them.

2.21 We have already considered some of the basic tools for supply chain analysis in Chapter 3, eg as-is analysis
Supply base research
and supply chain mapping. We will now step behind the tools and consider the range of perspectives we
might take. 2.28 Before a category manager or sourcing specialist begins working with individual suppliers, he or she needs
to research and understand the organisation's supply base. The supply base, essentially, is the collected
The supply chain as a collection of assets group of suppliers with which the organisation currently works.

2.22 This is the 'inventory' view of the supply chain- what assets do we have, where are they, what are they
2.29 Some organisations never consider their supply base, except to resolve to shrink it. A reduced supply base
doing, and how do they inter-relate? It gives a static picture that does not tell us anything about what
Category Management in Procurement and Supply Skills for Category Management I CHAPTER 4

is typically assumed to be a good thing, except that from some perspectives and in some situations it is 2.37 Internal COnsultancy can be a successful model for ensuring that supply chain disciplines are pursued
not throughout the organisation. It can also help the supply chain function to raise its status, credibility and
influence in the organisation, encouraging it to develop a list of services to its internal customers, and
2.30 Some organisations consider their supply base to stop at Tier 1 suppliers; others look at Tiers 2, 3 and to market its services on the basis of customer benefits, value for money and business case. It may also
beyond. We argue in this unit for a strategic perspective, therefore we consider all active suppliers in all help to minimise potential political problems in the organisation, since the function is seen as advising,
tiers to belong to the supply base. There are three challenges that determine the scale of the task we face. consulting and serving users, rather than 'interfering' in their activities or 'imposing' supply chain
• Variety solutions.
• Complexity
2.38 However, effective internal consultancy is not always easy to develop or apply.
• Heterogeneity
2.31 Clearly, this will be a huge research job in many circumstances, so the organisation will need to focus on • The structure, senior management and culture of the organisation must support the cross-functional
key information that it can readily utilise to support strategic decisions. Holmen, Pedersen and Jansen
suggest the most important issues in the supply base are as follows.

•
•
Numbers of suppliers
Reducing the number of suppliers
•
sharing of information and expertise, and the acceptance of the value of specialist knowledge (rather
than functions resenting 'interference' by others).
Procurement, as an internal consultant, must develop skills, expertise, contacts and knowledge which
are valued by other functions- and the organisation as a whole- and must market these effectively to
potential internal clients, presenting a clear business case for its services.
I
• Relationships between the organisation and the suppliers • There must be clear, effective mechanisms in place for gathering and sharing information; for
• How suppliers are organised monitoring, measuring and feeding back performance data; and (where relevant) for costing, valuing
• How organisation-supplier relationships can change over time and charging for internal consultancy services.
• Management of supply performance

2.32 From this point, suitable, organisation-appropriate research initiatives can be drawn up. Supplier Risk management
evaluation should be familiar to you by now.
2.39 A key aim of risk management is summed up in the phrase 'no surprises'. By managing threats effectively
an organisation will be in a stronger position to ensure continuity, provide better services and offer value
Sourcing processes- being the internal consultant
for money.
2.33 CIPS identify sourcing processes as a key technical skill. This makes sense: this unit is all about sourcing
processes. There is little to say in this chapter except that your organisation will look to you to be its 2.40 Risk management is the sum of all proactive management-directed activities within an organisation
sourcing expert; you will need to act as its internal consultant on sourcing matters. that are intended to acceptably accommodate the possibility offailures in elements of the organisation.
'Acceptably' is as judged by the customer in the final analysis, but from an organisation's perspective a
2.34 Consulting a consultant helps an individual, group or organisation (their client) to mobilise internal failure is anything accomplished in less than a professional manner.
and external resources so as to deal with specific problems. The outcomes are typically an analysis,
recommendations, and possibly the development and implementation of an action plan in collaboration 2.41 The purpose of risk management is to identify potential problems before they occur so that risk-handling
with the client We can safely group it with the technical skills as it is based on knowledge and expertise, activities may be planned and invoked as needed in order to mitigate adverse impacts on achieving
objectives.
though a consultant will need behavioural skills too, to fulfil their potential in the role.
• Objectives are more likely to be achieved.
2.35 Internal consultancy is where the consultant and client are part of the same organisation, ie the client is a • Damaging outcomes will either not happen or will become less likely to happen.
colleague or stakeholder. It is a complex role, requiring careful relationship management. The consultant • Beneficial outcomes will either be achieved or will be more likely to happen.
will often have no direct authority over the client's decisions, and will have to use his or her expertise and
influence to gain the client's agreement to implement recommendations and the support of executive 2.42 Risk management involves putting in place processes, methods and tools to deal with potential threats
management to enforce them. On the other hand, both the consultant and client share the same that have been identified. This can be as simple as setting financial reserves aside to ease cashflow
corporate goals, which should support collaboration. problems. Similarly, it can refer to ensuring the effective back-up of information systems. In more extreme
cases, it can refer to planning for eventualities such as a terrorist attack.
2.36 There are some questions that need to be asked to establish whether a given individual is capable of
2.43 When risk management goes well it often remains unnoticed. When it fails, however, the consequences
fulfilling the consultancy role.
can be dramatic.
• Attitude- how they approach the work
• Skills- what they can do 2.44 Risk management is a continuous, forward-looking activity that is an important part of organisational,
• Knowledge -what they know business and technical management processes. Risk management should address issues that could
• Differentiation- what unique benefits they bring to the work endanger achievement of critical objectives. A continuous risk management approach is applied to
• Currency- how up-to-date they are effectively anticipate and mitigate the risks that have critical impact on a project.
• Client focus- how they see service and the wider social interest
• Ethics- their positions on standards, trust, confidentiality, impartiality and objectivity 2.45 Effective risk management helps an organisation to achieve its wider aims such as understanding and
• Cost-effectiveness- their flexibility, quality and value for money delivering change management, the efficient use of objectives, better project management, minimising
waste and fraud, and supporting development and innovation.
-------------------
Category Management in Procurement and Supply
Skl!ls for Category Management ! CHAPTER 4

2.46 Effective risk management includes early and aggressive risk identification through the collaboration and 2.54 Negotiation is considered a technical skill by CIPS; negotiations follow recognised paths and patterns, and
involvement of relevant stakeholders. Strong leadership across all relevant stakeholders is needed to are built on masses of hard information, though influence and persuasion also play key roles.
establish an environment for the free and open disclosure and discussion of risk.
2.55 Dobler, Lee and Burt suggest that, in the procurement context, negotiation is 'a process of planning,
legal aspects reviewing and analysing used by a buyer and a seller to reach acceptable agreements or compromises
[which] include all aspects of the business transaction, not just price.'
2.47 There is a lot of law in supply chain operations. CIPS stresses the necessity for at least a basic familiarity
with the laws, regulations and standards as they relate to procurement and supply- enough to not make 3 Behavioural skills
mistakes in commonplace situations, and enough to know when to call upon expert legal advice. It is a key
part of the supply chain professional's responsibilities to protect their organisation from legal risks (eg bad 3.1 Behavioural skills are also referred to as people skills and soft skills. They are the skills that relate to
contracts, ethics breaches) arising from supply chain operations. relationships between people. The various behavioural skills affect the speed at which people make

2.48 Supply chain professionals should have a working knowledge of all of the legislative frameworks in all
of the legal jurisdictions in which they operate. 'Working' means enough to get the job done safely:
an organisation's activities will vary from jurisdiction to jurisdiction, and what you need to know to
commission software in India is not necessarily what you need to know to ship minerals across Australia. A
3.2
personal connections, align themselves in a common direction, and get each other to recognise,
appreciate and further each other's goals.

Given that forming strong, mutually-supportive relationships is at the heart of the practice of dealing with
suppliers on a long-term basis, these skills are self-evidently central to category managers and sourcing
I
working knowledge is also an up to date knowledge- the law is one of the strongest and fastest-changing specialists.
influences on the organisation.
Communication
2.49 Supply chain professionals will at least need to be aware of:

• Locallaw 3.3 In broad terms, communication is the 'first-order' skill from which all other soft skills derive (ie they are
• Nationallaw 'second-order' skills). Communication includes: observing, listening, questioning, establishing rapport,
• Region a I, trading bloc law (eg EU) relevant to supply chain operations expressing empathy, communicating assertively, giving and receiving feedback.
• International law (eg WTO) relevant to supply chains, eg mercantile law, cross-border operations
3.4 Second-order skills, in which the first-order sub-skills are applied in specific contexts or for specific
regulations, competition law, e-commerce law.
purposes, include: influencing, persuading, teamworking, managing conflict, managing people through
2.50 There may be additional laws and obligations that are relevant to specific sectors that most professionals change, coaching and leading.
do not need to know about, eg public sector procurement legislation, harmful emissions from industrial
processes, organic produce standards, powers and duties of auditors, inspectors, ombudsmen and Promotion
monitoring officers.
3.5 Communication is used to promote ega wanted outcome, a vision, goa Is, values- they are expressed
2.51 Supply chain professionals will at least need to be able to read and understand legal documents so that in ways that make them look attractive, desirable and beneficial for the people who will have to adopt
they can competently negotiate and change contracts. They should be able to appreciate the implications or implement them. They are marketed. Category managers and sourcing specialists may need to
of each individual clause. sell themselves as authorities to emphasise the credibility of the organisational changes they pursue.
This involves self-promotion and image management, inspiring confidence and attracting power and
Negotiation opportunity.

2.52 Negotiation is the process by which conflicting parties come together to confer with a view to concluding a Inspiration
jointly-acceptable outcome. It involves:
3.6
Inspirational communication involves the expression (and modelling in the communicator's own behaviour
• Purposeful persuasion whereby each party tries to persuade the other(s) to accept its case or see its
and attitudes) of powerful and compelling visions of the future, which appeal to the aspirations of others.
viewpoint.
• Constructive compromise whereby all parties accept the need to move closer to the other position(s), Support and challenge
identifying the areas of common ground where there is room for concessions to be made.
3.7
2.53 Negotiation can be seen as an interpersonal problem-solving technique, enabling parties to meet their Individual, team and organisational motivation depends on a balance between supportive communication
own needs (as far as possible) in a conflict of interests, without damaging ongoing relations between (eg coaching, facilitating, team-building, praise, encouragement, empathy) and challenging communication
them. It should be obvious that this is as important in the management of teams as in the formulation of (eg goal articulation, constructive feedback, thought-provoking questions, continuous improvement
contracts. In any business relationship, an organisation may need to negotiate: targets, stretch targets for development). Without support, others may lose confidence and experience
stress; without challenge, they may lose motivation, cease to develop or lapse into dangerous
• The objectives it will set and give priority to, given the potentially differing needs of stakeholders, complacency.
particularly in the management of strategic change
• Mutually-acceptable terms and conditions of work, both with staff and in commercial relationships Emotional intelligence (EQ)
• Approaches to conflicts and problems that may arise in the course of work, eg differences of values,
3.8
expectations, interests, priorities or schedules; competition for scarce resources. Daniel Goleman suggests the key attribute is emotional intelligence (EQ), 'the capacity for recognising our

61
Category Management in Procurement and Supply Skills for Category Management I CHAPTER 4

own feelings and those of others, for motivating ourselves, and for managing emotions well in ourselves them to feel heard (through empathy), then seeks to help them understand the alternative point of
and in our relationships'. He identifies five basic components to this. view (through clear, assertive communication), and finally invites or leads them to agree (through
rapport-building and persuasion).
• Self-awareness- 'Knowing what we are feeling in the moment, and using those preferences to guide
our decision making; having a realistic assessment of our own abilities and a well-grounded sense of 3.13 Manipulative influencing can be effective in the short term, but it tends to have negative side-effects
self-confidence.' such as resentment, unhelpfulness, and lack of ownership of what has been agreed. In contrast, positive
• Self-regulation- 'Handling our emotions so that they facilitate rather than interfere with the task influencing secures sustainable commitment.
at hand; being conscientious and delaying gratification to pursue goals; recovering from emotional
distress.'
Influencing as an inter-personal process
• Motivation- 'Using our deepest preferences to move and guide us toward our goals, to help us take
3.14 Remember you are dealing with people. This may seem obvious, but it is all too possible to approach
initiative and strive to improve, and to persevere in the face of setbacks and frustrations.'
people as if they are resources, steps in the value chain or problems- without remembering that they are
• Empathy- 'Sensing what people are feeling, being able to take their perspective, and cultivating
also human beings. Emotional intelligence includes being aware of, or sensitive to, the needs and emotions
rapport and attunement with a broad diversity of people.'
of other people- and being able to respond flexibly to them in such a way as to build relationships and get
• Social skills- 'Handling emotions in relationships well and accurately reading social situations and
the best out of people. This is key to the ability to influence: empathy and sincerity.
networks; interacting smoothly; using these skills to persuade and lead, negotiate and settle disputes,
for cooperation and teamwork.' Rapport
Influencing 3.15 Some people are easier to relate to than others. Some individuals seem distant or uninterested in us, or
we feel less comfortable around them. Rapport is the sense of relationship or connection we have when
3.9 Influencing is the process of applying some form of pressure in order to change other people's attitudes
we relate to another person. We have positive rapport with people we find warm, attentive and easy to
or behaviours. The aim is to secure their compliance (with requests), obedience (to orders), conformity (to
talk to; we are inclined to feel comfortable and relaxed with them, or attracted to them.
norms or expectations), or commitment (to a shared vision). Influence is not power.

• Power drives. It comes with sanctions that can be applied directly to its subject. 3.16 Establishing positive rapport is a skill which can be learned. It is a core skill for influencing because
• Influence steers. Its sanctions are applied through its ability to change the actions of factors around influencing is easier if the other person feels comfortable with you. Key rapport-building techniques are
the subject. based on the idea that it is easier to relate to someone who is (or appears to be) like us in some way;
with whom we share some beliefs, values, interests or characteristics; and who treats us as a valued and
Influencing: not negotiation interesting person. Here are some useful techniques for building rapport.

3.10 Negotiation is the process through which two parties come together intentionally to make a jointly • Subtly matching or mirroring the other person's posture, body language and/or volume, speed and
acceptable agreement. Influencing is thus different from negotiation in several key respects. tone of voice
• Picking up on the other person's use of technical words, colloquialisms and metaphors- and using
• Influencing is not a single event or series of events- it is a continuous process. them too, or incorporating them in comments and discussion summaries
• Influencing need not be an intentional (or even conscious) process for either or both parties You can • Picking up on the other person's dominant way of experiencing and expressing things, which tend to
influence someone without knowing it, and you can influence someone without their knowing it. be based on sight, sound or feeling, and using similar modes of expression
• Influencing need not involve conferring, or two-way presentation of arguments. It can simply be • Listening attentively and actively to what the other person is saying; demonstrating this with
applied from one party to another. encouraging gestures, eye contact (where culturally appropriate) and so on; and asking supportive
• Influencing need not end with an explicit joint agreement. questions or summarising, in order to show that you are interested and want to understand
• Influencing need not involve compromise or movement by both parties to reach middle ground. Its • Finding topics of common interest, and emphasising areas of agreement or common ground where
aim is to draw the influencee over to the influencer's position. possible
3.11 In some ways, though, the processes are linked. Techniques and tactics of influence and persuasion are, by • Remembering and using people's names
definition, used by both parties in a negotiation. And the aims of ethical influencing are not dissimilar to
Trust
a negotiated approach: the aim is to allow both parties to have their views and needs taken into account,
and to integrate their goals and interests so that the outcome is perceived as a win-win.
3.17 Trust is a crucial pre-condition for open, honest communication- which in turn is the basis for positive
and deepening collaborative relationships. Trust must be earned through doing what you say you will do;
Influencing: not manipulation
not letting people down; showing that you understand and take into account the other person's needs and
3.12 Terry Gillen distinguishes between manipulative and positive (ethical) influencing. best interests; showing consistent integrity; maintaining the confidentiality of personal and commercial
information.
• Manipulative influencing uses tactics based on dishonest logic or negative emotion (such as fear or
guilt). This approach seeks to dismiss or override the influencee's beliefs or interests, using tactics 3.18 At work, trust depends on a combination of competence and capability (your ability to do what someone
such as bullying, false logic, cajoling, bribing and emotional blackmail. asks of you) and care (your sensitivity to their needs). Affection may be based on high care (regardless of
• Positive influencing involves treating people openly, honestly and respectfully. A positive influencer competence), and respect may be based on high competence (regardless of care), but trust requires both.
seeks to understand the influencee's point of view (through questioning and active listening), allows
 Category Management in Procurement and Supply Skills for Category Management ! CHAPTER 4

Communication skills Figure 4.1 Resolving conflict (Thomas)

3.19 Influence draws on a broad repertoire of communication skills, eg probing (using questions), active Importance of relationship
listening, expressing empathy, communicating assertively, building and maintaining rapport, focusing
Assertive
on inter-personal processes, and using and interpreting body language. Communication also has to be Forcing/competing Collaborating
sensitive to context, which is a skill in itself. You need to understand when the other person is receptive to
what you have to say and when they may be busy, distracted or hostile.
Importance of
Compromising the issue/
Persuasion Attempt to satisfy
outcome
own concerns
3.20 Persuasion is influence through rational argument, typically supported by relevant and verifiable evidence.

3.21
Persuasion is stronger if you can demonstrate objectivity and fairness to both sides of an issue.

Logical argument is essentially a facilitative approach, whereby each step ofthe argument is clearly
explained and linked. For someone to be convinced of something, the argument has to make sense to
them. No matter how obvious a thing is to you, if you want another person's agreement, it has to be
Unassertive
Avoiding
t __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __j

Unco-operative
Attempt to satisfy
others' concerns
Accommodating

Co-operative I
obvious to them.
3.27 An avoiding approach means denying or concealing the incompatibility between your interests and those
of others in order to avoid dealing with it. This is not very effective- because no-one gets their needs met,
3.22 Facilitative techniques include questions and answers, summaries, asking for feedback (checking
and interpersonal or inter-group issues don't get resolved. However, it may be an appropriate approach
understanding) and other forms of active listening. Above all, it requires sensitivity and flexibility to
if there is no reason for you to get involved in an issue: if it is trivial or irrelevant to the relationship, for
respond to signals of resistance, perplexity, readiness to move forward and so on. You can be more
example. (Leaders do not have to go around changing people to their way of thinking on all issues, all the
persuasive with rapport, open body language, and speaking with appropriate emphasis, appeal and
time.)
interest (ie 'passion').

3.28 Competition (or adversarialism) is based on getting your own way- if necessary, at the expense of others.
3.23 A persuasive strategy is one that appeals to the needs, goals and interests of the influencee. Persuasion
This does not foster long-term constructive relationships, but it may be appropriate if the issue is the most
is a form of motivation: if you can make it look as if aligning themselves with your viewpoint or plans
will offer others something of benefit to them, they will be more amenable. This may take the form of important consideration: if you have to implement unpopular measures in a team, say, or impose quality
standards on a supplier.
positive reinforcement (offering satisfaction of a need or desire, or the solution to a problem), or negative
reinforcement (confronting people with the potential negative outcomes of not agreeing or changing).
3.29 Accommodation is based on maintaining a harmonious relationship at your own cost: you concede
the issue to others, regardless of your own legitimate interests. This is disempowering- but it may be
Working in teams
appropriate if relationship is the most important thing and the issue is relatively trivial. This may also be
3.24 No one person can make category management or strategic sourcing happen on their own. Collaboration the only option for a party with low power in the relationship: a supplier dependent on a major buyer, for
is the coming together of disparate individuals in the pursuit of (temporarily) compatible goals. It is the example.
essence of teamwork; you will need to be able to get teams to work to implement category management
3.30 Collaboration is both assertive and co-operative: you work together with others to find a solution
and strategic sourcing, to get people to collaborate.
or outcome in which the needs and interests of everyone are taken into account as far as possible.
Team building This approach fosters trust- and is potentially the basis for long-term constructive and co-operative
relationships. It also facilitates learning and innovation, through the merging of viewpoints and the
3.25 Teams are not generally left to develop by themselves. One of the basic tasks involved in implementing creation of fresh options.
category management is the building of teams: initiating or accelerating the stages of their development,
to support progress towards mature performance. Team building poses a particular challenge for leaders Collaborative relationships in the supply chain
in loosely structured, physically dispersed and matrix-structured organisations- including supply chain
3.31 Category management and strategic sourcing embrace the idea of collaborative relationships between
partnerships and virtual teams.
organisations and suppliers. In this context, collaboration implies integration and adaptation by both
3.26 Building a team means resolving conflict between its members. Kenneth W Thomas maps conflict handling parties, in terms of:
styles on two dimensions: assertiveness (trying to satisfy one's own needs), and co-operativeness (trying • Product and process information exchange
to satisfy others' needs), as shown in Figure 4.1. • Operationallinkages
• Co-operative definition of norms and expectations
• Relationship-specific adaptations to products, processes or procedures

3.32 A collaborative approach implies some form of mutual benefit, or sharing of the added value created by
the relationship: in effect, a win-win outcome. In contrast, an adversarial approach may feature arm's
length communication, competitive (win-lose) behaviour, lack of trust, little direct contact or information

64
1 Category Management in Procurement and Supply Ski!ls for Category Management j CHAPTER 4

sharing, and emphasis on individual transactions, short-term contracts and tight controls (rather than 3.40 Networks are the key to 'connection power'- the ability to create power for others, to contact and access
collaboration on quality, development and so on). relevant people when we need help, to cross boundaries and disputed territories (including hierarchies) to
get things done. David Taylor stresses the need to promote one's own function and teams, in order to raise
3.33 A collaborative relationship in a supply chain may involve close operational working and value sharing, their profile, and manage perceptions of them in the organisation,
especially if the organisation and supplier are interdependent. However, it may also have adversarial
elements. There will be a power relationship between buyer and supplier such that while they are working 'People, and what they think of us, are the key. The active promotion of your team's services, and results, is
together to create the greatest total benefits, they are also competing with each other for the largest a growing priority on business leaders' agendas ... That will buy us time, and support, to carry out our roles
possible share of those benefits. and achieve even more. ... Make sure you are communicating with [other functions and superiors] when
things are going well, and not just in response to complaints ...'
Cross-functional working
Acting as a change agent
3.34 Category management and strategic sourcing bring in interested stakeholders and draw on expertise from
the entire organisation. Multi-disciplinary or cross-functional (project) teams are brought together so
that individuals with different skills and specialisms, competencies and resources, goals and interests, can
handle specific category management and strategic sourcing tasks. They are 'task force' or problem-solving
3.41 The category management approach often entails the organisation making a step-change in its culture
and practices. In addition to the organisational and cultural conditions supporting this change, its success
depends to a large extent on the attributes and skills of the change agent or champion.
I
teams, often short-term in nature, and empowered to take action within the limited remit of the task and
• Vision and leadership- change agents must be able to visualise where the organisation needs to be,
its terms of reference. and what it needs to look like, in order to be able to articulate and model the vision and goals to other
stakeholders.
Cross-functional influence
• Managing strategy- during the change management process, the change agent must continually refer
3.35 The category manager or sourcing specialist will often need to reach across functional boundaries to to overall corporate objectives to ensure that the changes implemented make a positive contribution
assemble cross-functional teams or build support for and understanding of procurement initiatives in towards them.
other functions. • Managing processes- it is not sufficient to understand the desired change outcomes; it is also
important to achieve them by effective processes.
3.36 He may exercise 'lateral' influence through cross-functional teams or in cross-functional communication. • Project management skills- this implies a mix of talents, partly technical partly behavioural.
Burt, Dobler and Starling identify four basic postures. • Team-building skills- change programmes cannot be driven or completed single-handed. If only in
order to co-opt key stakeholders and influencers into the process, the change agent will need to be
• Providing process knowledge and expertise (internal consultant)
able to select, build and manage teams for planning and implementing change.
• Providing content knowledge (expert power)
• Liaising with their own functional staff to ensure other functions' needs get attention and priority
• Interpersonal skills- successful change management requires extensive inter-personal communication
and skills in areas such as articulating goals and values, in order to motivate change; influencing,
(status power)
persuading and negotiating, in order to change attitudes; conflict management and resolution, in
• Putting forward the supply chain management point of view (functional champion)
order to confront resistance and opposition; supportive communication and counselling, in order to
3.37 Each of these will require some form of influence, to get the supply function's voice heard, valued and address fears and insecurities.
acted upon. The key issue for lateral influence is that, like upward influence, it may not be supported by • Personal flexibility- change managers must themselves be open to challenge, uncertainty, risk
legitimate positional power: the supply chain manager may have expert power, but additional influencing and continuous learning, in order to set an example and convince others of the benefits of change.
tactics may be required if the expert power is not recognised or valued by others. Innovation and learning may be required as part of the change programme. Setbacks and mistakes,
inevitable in the early stages of change, should be regarded as learning opportunities and useful
3.38 When influencing across functions, managers use influencing tactics in the following order of preference. feedback, not as failures, either by the change agent or by the people affected.
• Personal appeal and ingratiation- reflects the balance of power between the two parties and • Commitment, perseverance and stamina- a change programme is typically a long-term project,
investment in networking and relationship-building. and the energy must be kept up throughout. Setbacks must be overcome and not allowed to derail
• Rational persuasion and consultation- capitalises on the potential for expert power and fosters trust, the process. A positive outlook, and deep commitment to the organisation's future, are required to
information-sharing, co-operation and integration. maintain focus and momentum.
• Exchange- the equality of power and interdependency gives particular value to the concept of
reciprocity in this case. The parties may be able to trade relatively equal benefits or favours, to mutual
advantage, and without one party gaining a hold over the other.
• Legitimating- in the absence of positional authority, this might involve appeals to organisational
policies, procedures and interests.

Networking

3.39 A key source of cross-functional and cross-organisational influence is networking: making and cultivating
inter-personal contacts. This is what makes consultation, friendliness, coalition and other forms of
influencing possible.
I Category Management in Procurement and Supply

CHAPTER 5

Understanding the Data

Assessment criteria and indicative content

Evaluate data for the development of a strategic sourcing or category management process

• Historical and forecast data on categories of spend

• Demand patterns for category groups
• Current contracts with suppliers and terms that are being applied
• Reviews of existing relationships and performance

Self-test questions • Market trends

Numbers in brackets refer to the paragraphs above where your answers can be checked. Section headings
1 Gaining initial insights into a category
1 List category management skills that are expected to increase in profile in the next few years. (1.2)
2 Demand patterns for category groups
List as many as you can of the category management skills identified by (a) Bayen and (b) White. (Tables 3 Current contracts, suppliers and terms
2
4 Reviewing existing relationships and performance
4.2 and 4.3)
5 Market trends
3 List some typical questions concerning financial management that are relevant to category managers. (2.6)
Introduction
4 List the steps involved in applying a system of standard costing and variance analysis. (2.11)
Category management takes a strategic approach to the majority of the organisation's spend on products
5 List the eight core supply chain processes identified by Croxton eta/. (2.23) and services with third-party suppliers. The return on investment can be very large if it is deployed
effectively. This strategic approach works because it is possible to segment the products and services
6 What is meant by 'internal consultancy'? (2.35) bought into discrete groups (categories) according to their use in the organisation. These discrete groups
must, in their designated categories, be capable of being procured easily from the supply market. Thus,
7 What are the five basic components in Goleman's analysis of emotional intelligence? (3.8)
the suppliers in the market place must recognise the categories as ones which they themselves find it
Distinguish between influencing and negotiation. (3.10) useful to use.
8

List techniques for building rapport. (3.16) Here are some key issues to keep in mind as you study this chapter.
9
• Historical behaviour shapes future actions and promotes ideas for change. Historical analysis is
important to understanding where the organisation is, so as to develop a path to change and future
organisational behaviour.
• All stakeholders inside the organisation irrespective of their role are customers or consumers in the
wider market place. They bring in expectations, generally high ones, formed by their experiences
in those outside market places. These are transferred into the organisation, then into what they
expect to be provided for them, in both direct and indirect categories of products and services in the
workplace.
• Similarly, the organisational buyer is also trying to exploit these external consumer traits for the
organisation and to connect supply chain possibilities with consumer needs in the finished products
and services, and innovations in new products, that are brought to those consumers through their
work. Category management is a vehicle for that.
• Knowing the commercial landscape of your organisation is critical to begin category management
planning and to create the sourcing plan.
 Category Management in Procurement and Supply Understanding the Data I CHAPTER 5

Gaining initial insights into a category 1.6 Which leads us on to the tasks we will consider in the remainder of this section of the chapter.
1
1.1 Category management implementation, as we have discovered, begins a process comprising a sequence of Historical and forecast data on categories of spend
activities that starts with a review of spend information held within the organisation. This provides the first
1.7 This may not be easy as many organisations do not have the systems to fully record spend and therefore
picture of how spend at the organisation works, and what categories may be useful to the organisation.
do not have a clear picture of what they are spending, with whom, and on what. Some organisations may
1.2 O'Brien suggests using the situation, target, proposal tool (STP) for gathering this information from record spend by supplier as this generally has been how products and services have been procured within
various sources across the organisation. It is a useful general-purpose problem-solving tool that is used the organisation, not by category or item type.
throughout the category management process, and crops up again and again.
1.8 Often the move to category management will not only necessitate a re-examination of the spend data and
• Define the problem or issue you are trying to understand. This frames the process. Brainstorm and what is required for the organisation, but also an examination of the existing procurement mechanisms
list everything you know about the current situation as regards the problem or issue as you have just and contracts that support product and service procurement in the organisation. These may need to
defined it. Sort the results from the brainstorming into some suitable categories. be de-constructed to learn what is being procured, and also to facilitate exit management with existing
• Decide on the outcomes, positions and resolutions you want to result from this process. These are the contracts. A lot of effort will go to understanding both the items supplied in individual contracts and the

I
target. Targets should be well-defined and 'SMART'. associated spend.
• Decide on an action by which you will achieve the target- this is the proposal.
• You can also plan out the action and determine the benefits that will result. This will give you an 1.9 Many organisations do not have integrated systems to support appropriate spend analysis, especially if
'STPPB' tool. divisions, departments or business units have split or been merged in the past. It may be necessary to
create a rationale for spend analysis yourself; O'Brien gives some pointers as to how to undertake this.
1.3 We use STP here as the tool to start the process of evaluating the data and gaining insight from it. The
emphasis is on 'situation' and what that is telling us. O'Brien describes a 'toolkit' for this stage which is • Extract data using whatever information systems are available to you, however primitive they are.
basically a set of tasks to do and questions to be answered. Combine multiple data sources and assess them in terms of segmentation of spend.
• Interrogate purchase orders and review purchases and purchase patterns over time to build up a
• Supplier conditioning
category stance on what the organisation has bought.
• Internal data gathering
• Ask suppliers for a category breakdown of your spend with them, but recognise that this may be costly
• Supplier data gathering
or impossible for some suppliers to do.
• Market data gathering
• Liaise with stakeholders and budget-holders to understand what has been spent in key areas.
• Pricing (approach being used)
• Analyse finished products and services to identify the nature of and spend upon inputs.
• Where value is added within the supply chain
• Cost vs price breakdown 1.10 It will be a challenge to break down, or perhaps build up, useful categories from the products and services
• Current vs future technology bought and provided, but remember that at its core a category has to be capable of supporting a clear
• External environment analysis strategy that will be the focus of a sourcing plan and, ultimately, demonstrate the worth of category
• Market competitiveness management to the organisation.
• Potential sources of leverage
• How the supplier views the relationship or account 2 Demand patterns for category groups
1.4 This tool starts our journey with a review of existing procurement circumstances within the organisation,
2.1 Your understanding ofthe organisation's requirements for products and services is built up from the spend
and continues on to provide: an assessment of the situation at the beginning of category management
context (discussed above), the contractual perspective (discussed below), and from the organisational
strategy development; a series of steps by which to gather various types of data from various sources both
demand perspective and its implications externally within the marketplace.
internal and external to the organisation; a look at the costs and price of products; and then a move on to
determining strategic direction. All of this is supported by ongoing activities such as refining the business 2.2 Demand factors are not as simple as a quantity, but include how specialised or generic a demanded item
case, communications, stakeholder engagement, and gathering quick wins as you go along. is, both in its use in the organisation and its position in the market. This affects whether the item will be
easy or difficult to source, which has implications when it comes to attracting suppliers and reducing costs.
1.5 Generally, as O'Brien says, we are seeking to answer the following questions.

• What have we bought in the past and what do we need in the future? 2.3 Various models exist to assist organisations in determining how important products are to their operations
• How much did we buy in the past and how much do we need in the future? and working practices and how they sit in the market place in respect of supplier availability. AT Kearney
• Who buys this and why and how do they use it? have a model that supports their 7-step process (Chapter 3). This segmentation analysis is ideal in helping
• Are we buying the right things? position the demand for business requirements (or rather the products and services bought to meet
• What scope is there to buy something different that fulfils the same need? them).
• Are there any opportunities for improving efficiency in the way we buy and use this category?
2.4 O'Brien's contribution to the problem is his Day One analysis (ie how things look right at the start of the
• Are there any technological advances now or coming that will present opportunities to us?
category management process). This maps the products and services procured on to a grid reflecting four
generic buyer-supplier relationships.

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 Category Management in Procurement and Supply Understanding the Data l CHAPTERS

• Generic- fairly commonly specified products and services for which there are many customers and 2.9 Strategies and plans cannot exist without forecasting; it is forecasting that grounds them in reality and
suppliers. maps out the terrain through which they determine the route.
• Tailored- products or services made uniquely for the organisation. There are likely to be many
suppliers, but by definition only one buyer. There will be implications on what is being sold with Getting the level right
regard to process and capabilities.
2.10 Forecasting is so important and uncertain that often organisations will do as much of it as they can. This
• Custom- a product or service is made specifically by one supplier for one buyer. The uniqueness will
can be counter-productive.
bring specific capacity, capability and legal issues with it.
• Proprietary- a supplier that has achieved and protected unique features in what they supply, but • All forecasting has costs- does the extra benefit gained from a forecast outweigh the extra cost, both
within a category that possesses many buyers. in producing and in using it?
• Are all forecasts as reliable as each other? Do the less reliable ones discredit the entire process?
2.5 Figure 5.1 maps some common categories on to a Day One grid. For O'Brien, category management is
• Is more information being produced than can actually be used?
about positioning the organisation's demands in the most appropriate spaces on the grid.
• Does the volume of forecasting being done mean that forecasts arrive too late to realise their full
Figure 5.1 O'Brien's Day One analysis with example products value?

I
• Are there forecasts that essentially are looking at the same thing?

2.11 Forecasts should be decision-useful; the forecasts you make should be the ones that generate the most
Tailored Generic useful information in making a decision. They should be:
Printed packaging Commodities
More • Relevant- they make a difference to the decision; they predict and/or confirm.
than one Contract manufacture Stationery/office supplies
Colour concentrates Bulk chemicals • A faithful representation- they match reality; are complete, neutral, and error-free.

2.12 Decision-usefulness is improved when forecasts are: comparable (enable comparisons), verifiable, timely,
NUMBER OF
SUPPLIERS and understandable.
Custom Proprietary
Fragrances Software When do you stop trusting the forecast?
One Flavours Speciality or patented
Named, designer-generated chemicals 2.13 Your organisation will already have a lot of forecasting information. Do you trust this, or do you
advertising concepts Branded products commission new forecasts?

One More than one • The older a forecast, the less likely it is to be right. The key question is: if I were re-running the forecast
NUMBER OF CUSTOMERS today, would that cause me to take different decisions, and is that important? You need to set a
satisfaction level that specifies how useful the forecast needs to be; whether it always returns the best
decision, a sufficiently good decision, or simply prevents bad decisions.
2.6 Once demands have been mapped to the grid, the organisation can analyse why each product and service
• How accurate is the forecast? How many mistakes have been made in the forecasting process; how
has been chosen, why they are needed, the implications of choosing them (eg for power relationships with
reliable is the forecast. Mistakes can occur in gathering the data on which the forecast is made, and
suppliers), and importantly what can be done to unlock value going forward.
in processing the data to produce the forecast. Reliability is essentially the amount of confidence
2.7 It may be possible to unlock value by bundling products and services together, eg by selecting a group we have that the forecast will be true. This is usually indicated using the significance level idea from
of generic spends and consolidating them into a proprietary service contract. It may be, to continue the statistics, ie we say eg that we are 99% or 95% or perhaps only 60% sure that our forecast is correct.
example, that the organisation should not be dealing with many generic services itself (it is not core to its
A picture of the future
business), but outsourcing their management. This is an example of how a sourcing strategy option may
emerge from using the Day One tool. The organisation can then consider it in the round, looking eg at the 2.14 In forecasting, a trend is a consistent pattern that has been in place for some time and is likely to continue
way this bundling creates a new, powerful supplier that may be able to erect difficult contract exit barriers into the foreseeable future. Trends can be complicated. Few are permanent, and events may happen at
for the organisation. any time to change their behaviour. Trends reinforce or cancel out each other.

Demand forecasting for category groups 2.15 When you examine past demand data, you may see the following at work.

2.8 Strategies are about living in the future; about having a long-term perspective, whatever that may mean in • Seasonality is a consistent pattern tied into a particular timeframe, eg the season of the year.
a given industry (fashion clothing and power station construction companies will have very different ideas). • Products and services behave in different ways at different stages in their lifecycle; adoption, maturity
Tactical procurement may typically look no further than the current budget period. Strategic sourcing and decline all have in-built trends.
and category management necessitate that the supply chain function look every bit as far forward as the • Business cycles are longer-term patterns characteristic to many industries; when they coincide they
organisation's strategic planners, which may mean: can form a general economic cycle.
• Events are self-contained shocks that can cause a substantial change which may or may not be
• Mastering a new set of forecasting tools
permanent, long-lasting or short.
• Learning to deal with a larger amount of forecasting uncertainty.
• Noise is unexplained behaviour and random fluctuations in behaviour that is by definition

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Category Management in Procurement and Supply Understanding the Data ! CHAPTER 5

unpredictable and cannot be forecast; it needs to be stripped out of historical data so that it does not Table 5.1 The RAQSC! requirements explained {O'Brien)
skew the forecast.
2.16 Causal relationships are useful in identifying trends. Few trends are completely self-contained and
independent. Where a trend is affected by another, it is said to be dependent on it. Trends may affect each
other and so be mutually dependent. They may not affect each other at all, and so be independent. It may
be easier to spot trends in dependent factors than in the ones you are interested in.

2.17 Dependent and mutually dependent relationships are not necessarily synchronised. A change in one may
happen before -lead- the change in the other, which lags behind. Leading factors can help you look into
the longer-term future more reliably than the factors you are interested in.

Types offorecasting

2.18 We will not go into the technical aspects here, but there are some issues you should be aware of. The first
is the distinction between qualitative and quantitative forecasting. These are often respectively identified
with subjectivity and objectivity. However, to some extent all forecasting is subjective- it all involves
individual judgement in eg choosing which methods to use, how they are applied, when and in what order,
and how to interpret the results.
I
• Quantitative forecasting is based on measurable numbers and other hard evaluation methods, and is
strongly objective.
• Qualitative forecasting is based on opinions, instincts, experience and other soft evaluation methods,
and is much more subjective. It is better at dealing with uncertainty and the unexpected.

2.19 A key part of how you process the data will depend on how you get it.

• Primary data- data collected by you, directly and according to your own plan.
• Secondary data- data collected by someone else, for their own purposes, and bought in by you.

Reconciling business requirements and category plans

2.20 An important part of creating sourcing strategies, category plans and indeed understanding the categories
natural to the organisation is to review and understand its business requirements. These essentially
identify what we need- they describe the product or service we require, its specification, the required
lead time, delivery requirements, target price and so on. The business requirement comes from within the
organisation, from the individual, department or function with the need. The requirement should align
with the organisation's needs as a whole (eg not contradict any general policy such as CSR).

2.21 O'Brien organises the organisation's business requirements into a step-by-step analytical process that he 2.23 Business requirements are central to the entire strategic sourcing or category management process, and
labels RAQSCI. Each step in the process builds on the ones preceding it. will: influence the development of the evaluation criteria for selecting the sourcing options; support the
development of the supplier selection criteria; form the basis of negotiation strategy as these drive the
• Regulatory requirements
negotiation outcomes; become the basis for the contracts awarded after any competition or interaction
• Assurance of supply requirements
with the market; ground the performance of the suppliers delivering the products or services as they will
• Quality requirements
point up performance measures; become the basis for ongoing management of suppliers and categories;
• Service requirements
and be the trigger for reviews of categories in the future.
• Cost requirements
• Innovation requirements 2.24 There will not only be a need to look internally to assess the business requirements, but a need to look
2.22 The RAQSCI approach provides the themes and headings under which each category's business externally also. The analysis of external factors will be examined in later chapters.
requirements can be defined. Table 5.1 explains each category and outlines the scope of the factors each
one might cover.
Category Managen1ent In Procurement and Supply Understanding the Data I CHAPTERS

3 Current contracts, suppliers and terms 4 Reviewing existing relationships and performance
3.1 One of the most challenging areas to understand, not only in terms of finance as discussed above, but 4.1 Whilst still inwards-facing, we also need to understand the organisation's supply base. Table 5.2 details the
in terms of actually determining what is currently happening, is the organisation's existing contractual relevant supply base and supplier data that we need to collect.
landscape with its supplier base. Not many organisations are centrally organised in respect of
procurement, but even when they are it is unlikely that they possess a full knowledge of all the commercial Table 5.2 Gathering data on suppliers (O'Brien)
arrangements with suppliers and the terms under which they are conducted.

3 .2 We discuss the legal implications of dealing commercially in respect of when and how a contract is
made, and the implications of certain procurement procedures or stakeholder actions, later in the unit.
Nevertheless, as full an understanding of the existing organisational commercial landscape as is possible is
needed before starting any category management process.

o To formulate that analysis of the spend, category development and so on.

I
o To see how the organisation actually operates in terms of its buying behaviour and the strength or
weakness of the contracts it holds.
o To enable review of structures, systems and processes within the organisation pertaining to buying so
that new ones can later be planned.
o To assist in understanding what stakeholders currently want and need, and to shape future requirements.
o An exploration of the existing commercial landscape can be used to build engagement within the
organisation's stakeholders to positively effect category management within the organisation.
o To understand the enormity of, and highlight the improvements that can be made through, the
changes that categorisation can bring.
o To assist in the development of necessary exit management strategies from existing contractual 4.2 This tells us much about our own organisation and the markets it moves within, too. Essentially, we seek to
arrangements. understand who the suppliers are and what they can do; where they are; who else could supply what they
o To identify quick wins where value can be extracted early or cost reduction made. do. We need also to ask what is the market place and what is happening there? What is likely to happen
there in the future and why? What alternative market places exist and will they be of use to us in fulfilling
3.3 O'Brien examines the topic, suggesting that it is good to produce gains early to keep stakeholders
the category plans that we have? What are the trends in that market place?
interested, and to pocket these gains easily and quickly before they become lost in the bigger projects that
result later in the process. O'Brien suggests that some work needs to be done on the analysis to determine
where these quick wins could be; that the category team ensure that a process to look for quick wins is in
5 Market trends
place, and that there is structure to ensure that a realisation against benefit is initially assessed, quick-wins
5.1 Organisations need to know what is happening in the markets that they buy from as this affects the
action plans are made, and gains measured.
behaviour of the suppliers within them and the buyers operating amongst those suppliers. Table 5.3
If there is no comprehensive contracts register or supplier record, this needs to be established through itemises some of the issues.
3.4
data gathering. Similarly to O'Brien's advice above, information can be gleaned on:
Table 5.3 Gathering data on markets (O'Brien)
o Existing contracts- parties involved, contract start and duration, suppliers, commercial nature,
specification and requirements, terms of engagement, exit strategies, costs, pricing model, quantities,
products and services delivered, extension opportunity and renewal approaches.
o Existing suppliers- names and business details, market position, importance to the organisation, what
they supply, over what period, to whom in the organisation, who their stakeholder contacts are, who
their influencers are, our organisation's importance to them.

3 .5 A clear understanding of the terms and conditions that are in existence within the organisation is of vital
importance for several reasons.

o To determine the value extracted from existing contracts by virtue of the terms applied; these might
be enhanced quality factors in the deal or simply advantageous delivery terms or payment terms that
apply due to relationships or achieved through sound negotiation.
o To ensure that there is compliance across the organisation to the terms and that value is being gained 5.2 Undertaking this activity is not easy as there are many suppliers, products and services that make up a
and/or liability is not being attracted through misdemeanour. market place, and they reach far and wide. It also depends on the designation of the category and the
o To ensure that default remedy and exit clauses are understood if there are to be changes to the degree to which this is broken down in the terms of market place as to how complex the task will be.
contract through negotiation or re-competition. There may be a need for early exit if other deals are
more beneficial, so clarity of the organisation's position would be vital in these circumstances.

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 Category Management in Procurement and Supply Understanding the Data 1 CHAPTER 5

5.3 For commodities, trend information is important as these markets are driven by forces based on supply
and demand, often at the global level. Regulatory bodies affect market activity. As organisations will have
little or no influence on the pricing, it is important that trends are understood so as to anticipate price
movements and consequently strike good deals. Understanding market trends and the impact such trends
have on each category, or on individual products in categories, enables effective modelling of categories
and effective market management. Having a trend focus can ensure that you buy at the right time and in
the right way to minimise exposure to price hikes, and to optimise buying position. This area is important
and requires attention, and should be seen as commercial intelligence to determine when and how to buy.

Self-test questions
Numbers in brackets refer to the paragraphs above where your answers can be checked.

Describe O'Brien's STP tool. (1.2)

I
1

2 What questions must be answered for effective use of the STP tool? (1.5)

3 What are the four classes of buyer-supplier relationships highlighted by O'Brien's Day One analysis? (2.4)

4 Why may demand forecasting sometimes be counter-productive? (2.10)

5 Distinguish between quantitative forecasting and qualitative forecasting. (2.18)

6 Why is it important for a category manager to begin with a clear understanding of existing contractual
terms and conditions? (3.5)

7 Suggest types of data that may be worth collecting in relation to (a) existing suppliers and (b) potential
suppliers. (Table 5.2)

8 Suggest types of data that may be worth collecting in relation to market trends. (Table 5.3)

78 7Q
CHAPTER 6

Preparing for the Process

Assessment criteria and indicative content

Interpret the requirements for initiating and preparing the introduction of a strategic sourcing or category
management process

• Producing category hierarchies for both direct and indirect expenditures

• Applying portfolio tools to map the categories of expenditures
• Creating total cost models for category management
• Conducting stakeholder needs analysis
• Forming cross-functional teams and preparing responsible, accountable, consultative and informing
roles within the team
• Reviewing the implications of existing legislative requirements and standards

Section headings
1 Requirements for the preparation of sourcing plans
2 Total cost models for category management
3 Portfolio tools in category management
4 Stakeholder needs analysis
5 Cross-functional teams
6 legislative requirements and standards

Introduction
This chapter brings us forward from the identification of internal data in the last chapter to the
interpretation of it. We examine the implications of what we have found so that we can begin to formulate
the content of the sourcing plan, and make sense of the information upon which sourcing options and
decisions can be made.

This chapter looks at the people (roles) who will introduce category management to the organisation.
These include the category management team and stakeholders. We look at how we identify them,
work with them, and unite them into an effective system to deliver category management across the
organisation, set objectives and goals, and achieve them.

Here are some key issues to keep in mind as you study this chapter.

• Category management is almost totally reliant upon process systems and people to be effective.
There are different people playing different roles in the success of the planning, decision-making, and
implementation of category management.
• Knowing where the products and services sit in the relevant analysis tools, and their potential to offer
improvements, profits or other benefits, will assist us in our ability to prioritise those with the most
potential for immediate action, and defer those with the least potential for later attention.
• One of the critical aims behind our data gathering and analysis is to uncover sourcing strategies that
will recategorise spend items more favourably. This is primarily achieved by influencing the market in
some way.

81
 Preparing for the Process ! CHAPTER 6
Category Management in Procurement and Supply

Figure 6.1 Opportunity analysis (O'Brien)

1 Requirements for the preparation of sourcing plans
High Worth the effort, Priorities
1.1 In the last chapter we distinguished our product and service spend categories into 'generic', 'tailored',
but later
'custom', and 'proprietary' types in order to investigate demand patterns and to understand the ways
in which these spends are important to our organisation. These types also helped us to reflect on how POTENTIAL BENEFITS
V'V' V'V'V'
Avoid for now Quick wins
the market would respond should we seek suppliers for specific products and services. We learned, for
example, that:

• If we are using generic products or services the buyer has more ability to swap out and change
products and suppliers in the market place.
LOW
Low
• V'
EASE OF IMPLEMENTATION
High

• If we are using tailored products or services, then the tailoring will come at a cost to us in respect
of eg intellectual property rights over specifications and plans which will be protected legally. The
supplier thereby has power that the buyer does not, which makes changes to those products and 1.5 O'Brien uses the opportunity analysis to prioritise categorisation efforts to the most promising areas. It is
services less easy in the short term. There will be more than one supplier in the market for these also a very important tool in placing a hierarchy around categories in the two distinct expenditure types
products and services, but nevertheless switching will be more difficult. of direct and indirect expenditures. He suggests that 'A well-structured category management programme
• If we have chosen to deploy custom·made products and services, then there is only one supplier and with multiple categories and category teams will ideally have been developed around a detailed multiple-
category opportunity analysis using spend data, market knowledge and consultation with stakeholders.'

I
the uniqueness is the key to the business. Either party, buyer or seller, may have the rights in the
custom-made design, but there needs to be a strong relationship between the parties to the business
1.6 The opportunity analysis offers a quick route to determining whether it is worth mobilising a team to take
to make it work. Shared intellectual property rights and long-term relationships are a feature of this. If
on improvement in certain categories based on two factors.
anything, it will be the supplier who will have the edge in the relationship, therefore it is less likely to
be easy to change products and services fundamentally. It is more likely that improvements could be • Potential benefits
made, or total redundancy decisions made, upon the utility of products and services together. • Ease of implementation
• If we have chosen to use proprietary products, then the buyer is strongly influenced to continue to
There are two aspects to ease of implementation.
1.7
buy that product or service through supplier control. This is usually through parts and components
that are branded to that product. Warranties and guarantees are voided if those components and • Ease to effect the change within the organisation commensurate with the likely levels of resistance
parts are not used. Buying a specific brand has the same effect. from stakeholders or users and the process or system changes that would follow that change. The less
complex the change is, the easier it is to implement.
1.2 In this chapter, we look more deeply into these categorisations and criteria as they will support us in
• Ease in the market place in terms of difficulty to source from the market place. A reflection or
determining hierarchies for our categories. We will be keen to establish the effects for us in terms of the assessment upon the ease of switching will provide useful indicators as to the impact in the market,
potential of existing products and services to offer new benefits should we move towards others that
and from the market upon these products or services.
the market place has to offer, to bundle them differently, or to procure them from other suppliers and in
different ways. 1.8 It very much depends upon the nature of what you are buying. Issues such as knowledge of the
organisational or business environment, continuity of service, and risks to supply may be influential. The
1.3 Knowing how products and services map to our analysis tools and their potential to offer up assessment of these factors provides guidance for developing prioritisation and a hierarchy of categories,
improvements, increased profits or other benefits will help us prioritise categories into a plan of action, ie the order in which to tackle them.
making some obvious candidates for immediate attention, and others obviously worth deferring until the
larger potential benefits have been secured. Cost reduction benefits

Producing category hierarchies 1.9 The other factor in the opportunity analysis is the potential benefits gained. One commonly intended
benefit is savings through reductions in costs or prices. The two are not necessarily the same, and may
1.4 The data we earlier uncovered on our organisation's commercial landscape and the utility of the products sometimes be traded off against each other.
and services it procures, combined with our demand patterns and ability to exert leverage in respect of
them, will provide us with an opportunity analysis- essentially a way of prioritising our attention (Figure 1.10 Prices are a powerful influence on decision-making because they are so conspicuous, yet prices often are
6.1). variable whereas costs are not -the gains made in negotiating prices down may simply be transferred
to higher losses arising from quality issues. Total cost, as we discussed earlier, is a key concept for the
category manager.

1.11 Suppliers want to maximise their revenues, and do so by conditioning buyers to believe that their price
is right or even a bargain for what the buyer is buying. A price is not simply a number, it is a function of
buyer perception and market positioning. Consider offers such as, 'Buy one, get one free' or '30% off our
published price list'- if prices equated with suppliers' costs, these offers would not be possible. A buyer
needs to understand his suppliers' prices and costs.

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Category Management in Procurement and Supply Preparing for the Process 1 CHAPTER 6

1.12 The concept of value is important here, too. What are we getting in the round for a given price? It may be Portfolio tools in category management
3
there are added features of reliability, functionality, reassurance or prestige for example that you would
not get with other products. As an example, O'Brien cites buying insurance at a price premium, but gaining 3.1 We have established that our primary aim in all of our internal assessment, and data gathering and
swifter payouts and improved customer service. The role of such factors in pricing is hard to assess as they interpretation activity, is to be able to create sourcing strategies for categories of products and services
are valued by different buyers differently. However, the buyer's perspective on value is important as it will that will realise improvements through the influencing of the relevant markets. The influence we possess
shape how we proceed to buy. The supplier's perspective on value is to find aspects of value that they is our leverage.
think the buyer will respond to, and lock them into their offer.
3.2 We have explored the concept of leverage and the types of leverage that can be used. We move here to
2 Total cost models for category management specifically examine value levers in the context of the range of products and services the organisation uses,
and the actions we could take to change our position and enhance our power in the relevant markets. The
2.1 We are interested here in data that helps us to interpret the current and likely future situations regarding range of products and services we use is termed our portfolio, and the way we examine it is with a suitable
our business requirements so that we can determine the best sourcing approach for our organisation. portfolio analysis tool.
By looking at current prices and judging how these will be impacted and change going forwards, we
can assess the best ways to procure the goods and services the organisation will need. This is a time- 3.3 We saw O'Brien's variation on the Kraljic portfolio analysis in Chapter 2. This is a key tool and the one we
consuming process, so it is important for us to determine which specific categories we should prioritise for will use. It indicates to us where our leverage lies in the range of products and services our organisation
this treatment. uses. By interpreting our findings from using it, we will better understand what we need to do to apply the
leverage available to us to its best effect.
2.2 Challenging the difference between price and cost is one of the key tasks in procurement. The tool we use
here is a 'should-cost' analysis- the purchase price cost analysis (PPCA)- but it is not suitable for every 3.4 O'Brien explains that there are three key steps to using the Kraljic portfolio matrix.
scenario. O'Brien indicates that its suitability is all to do with power in the exchange with the market; weak • Classify using portfolio matrix.
buyer power will not allow much room for negotiation on the price versus cost debate. • Assess the strength of the organisation's position in the marketplace.
• Determine the required strategic response- either Exploit, Balance or Diversify.
2.3 Essentially, if you are working with 'tailored' or 'custom' categories, then PPCA is useful; there are some
gains to be made from negotiation. Otherwise, effort is better spent on determining why you are using Step 1: Classification with the portfolio matrix
proprietary goods, or in developing leverage in the generic space.
3.5 The position of each category and notthe supplier is mapped. Categories are mapped according to the
2.4 O'Brien develops a PPCA as follows. degree of market difficulty or supplier risk first. Remember that this is from the buyer's perspective, so
• Determine the direct and indirect costs that sit behind a product or service, eg component parts or reflects:
service elements. • Inability to switch to other suppliers
• List all indirect costs associated with the running of the organisation behind these products or • Scarcity of suppliers in the market for that category
services. • Complexity of item supplied, necessitating close working with the supplier before they are able to
• For both the direct and indirect costs, identify cost estimates for as many items as you can. Consult
supply
stakeholders and other informed people in the organisation. It may be necessary to look at the • Unavailability, ie limited supply or capability in the market
suppliers' reports or other research to enlarge the process. Remember that price is not the only • Competition from other buyers
consideration; value also needs to be mapped. Take account of product size, weight, volume, degree
of processing. Similarly, for services, account for hours of effort, associated consumables and so on. 3.6 Then we look at the degree of profit impact or spend, 'Profit impact is concerned with the degree to
• For those areas that cannot be estimated, agree actions as to how to assess these costs. which a small benefit per unit purchased would have a significant and positive impact on the overall profit
• Once your research is complete, review it and interpret what it is telling you. of your organisation. This could be a saving per unit, dramatically multiplied due to high volume or high
spend, but could equally be mitigation of risk, improved effectiveness or something that will improve
2.5 The analysis should extend out across the entire supply chain eg to your suppliers' purchases. Value chain future profit potential.' (O'Brien) Factors that heighten the degree of profit impact are as follows.
analysis, which we consider elsewhere in this unit, augments the PPCA tool. Cost analysis, likewise, is
explored elsewhere. • Spend on a category relative to the organisation's overall spend. Note that this is not relative to the
supplier's size or the market, but a purely internal measure.
The benefits of using opportunity analysis • The percentage that a category represents against the total purchase cost of the final goods or
services.
2.6 Having identified cost reduction as a key benefit, we need to recognise that there are other significant • Volume purchased.
benefits which must not be overlooked, eg those stemming from efficiency gains, reduced risk or • Impact upon final product quality.
added value in the supply chain. By looking at benefits and ease of implementation, the opportunity • Impact on business growth.
analysis provides the ability to assess the scale of these gains and how difficult it would be to effect
3.7 Thus each category should be placed (classified) in the appropriate box on the matrix. Remember there
any improvement to a given category and release them. It is looking at the grid's two factors of analysis
are no hierarchical priority-setting implications at this stage- just simple classification that indicates
combined with the organisation's goals that facilitates alignment to the types of benefits to be had from
suitable, distinctive purchasing approaches and future sourcing strategies.
the prioritisation of certain categories, and the products and services within them.
• If a category is mapped to the right-hand side, it points to there being a high profit impact and
 Category Management in Procurement and Supply Preparing for the Process 1 CHAPTER 6

therefore great worth in allocating resources to optimise the category position through category • Exploit- to maximise the strength of the current position and use it to leverage results.
management. • Balance- maintain the current position.
• If a category falls in the leverage box, the appropriate improvement activity might be to secure better • Diversify- do something that enables the organisation to move away from the current position to a
pricing from the market. more favourable one.
• If a category is strategic, the organisation perhaps should develop a long-term relationship with a
supplier to optimise value and minimise risk. supplier behaviour
• If you are working in the critical box, then there will be market difficulties and little impact to be made
on profit for all the effort being put in. Risk of supply failures leave you with limited alternatives. 3.12 The supplier is not a passive recipient of the buyer's actions. We have been looking from the buyer's
Clearly this is a challenge that cannot be ignored, and we have highlighted before the need to alter the perspective. No analysis is complete until the suppliers' likely reactions have been fed back into the buyers'
position of dependency upon such products and services in our portfolio. strategy making.
• If we are in the acquisition box, then this warrants little effort as there will probably be little gain. It is
3.13 Suppliers want buyers to believe that the products or services they provide are the ones that buyers
likely that switching suppliers is easy.
truly and most need; indeed, that buyers need the suppliers to deliver them more than they actually
Step 2: Assess the organisation's position in the marketplace do. Suppliers are keen to show buyers that they add great value to them. In this way a buyer may map a
particular category to the critical box on the portfolio diagram when the leverage box may be its natural
3.8 Each box on the portfolio diagram has a natural power relationship associated with it. In some cases, position.
either the buyer or supplier will naturally be dominant; they will be the power broker. Figure 6.2 shows

I
the 'boundary' along which buyers and suppliers can be considered evenly-matched. 3.14 Remember, categories should be positioned from the buyer's own internal perspective according to
market difficulty and impact upon profit, not on the basis of what (for example) a sales rep convinces the
• In the leverage box, the potential profit impact is high as is the buyer's ability to leverage its position buyer to believe. Recall the experience lens; the 'supplier behaviour lens' biases the buyer's analysis just
in the market place. The buyer can easily switch suppliers if it does not get the price terms it seeks, as strongly. Buyers looking to shift power in a category on to their own terms may need to address supplier
and its market strength allows it to dictate terms; suppliers want to gain or retain the buyer's business. displays of power and the effects these may have on colleagues and stakeholders.
• In the critical box, the market is difficult and power is in the suppliers' hands; profit impact is also low.
In this case, buyers have no leverage, which disinclines them from pursuing changes or benefits. Stakeholder needs analysis
4
Figure 6.2 The balance of power mapped on to the portfolio analysis (O'Brien)
4.1 We need to be sensitive to the needs of stakeholders. Stakeholders are those individuals and organisations
who have a legitimate interest or stake in an organisation, process, project or decision. Not everyone

D Supplier has the balance of power

who declares themselves a stakeholder necessarily has a justifiable stake. The scale of change typically
contemplated with category management attracts interest from all quarters.
DEGREE OF / Power is balanced
MARKET DIFFICULTY
D Buyer has the balance of power
4.2 There are elements of both joint success and mutual impact to stakeholding, 'Stakeholders are those
individuals or groups who depend on an organisation to fulfil their own goals and on whom, in turn, the
organisation depends.' (Johnson, Scholes and Whittington) Equally, a stakeholder of an organisation is an
Low High individual or group who is either harmed by the organisation, or whose rights can be violated or have to be
DEGREE OF PROFIT IMPACT respected by it.

4.3 Stakeholders are affected by the organisation's activities in different ways and to different degrees.
3.9 Power positioning needs to be assessed against the market place. One way of doing this is to look at
Any given stakeholder will have a bundle of needs, wants, expectations and concerns in regard to
volumes and spend. However this is very crude and there are other forces at play. Porter studied this, and
the organisation: 'interests' which they will seek to protect or promote in their relationship with the
we will look at these factors later when we focus on the supply market forces. Kraljic added market power
organisation. Stakeholders also have the power to affect the organisation's activities in different ways and
to his original matrix, noting the effects of: to different degrees.
• Large volumes being purchased relative to sizes of suppliers
• Low utilisation of capacity in the market 4.4 Categorising stakeholders often helps us understand their interactions with the organisation. There are
• Ability to switch suppliers many different divisions in which to categorise stakeholders. For example, they can be classified according
• Non-differentiation of products. to their position within the organisation.

3.10 It is important to assess strength of position in the market place in portfolio analysis. • Internal stakeholders- these are members of the organisation who operate within its boundaries.
• Connected stakeholders- outside the organisation, but with a significant stake in its activities,
Step 3: Strategic response frequently through formal ties such as contracts.
• External stakeholders- the wider range of groups who are less directly affected by the organisation's
3.11 The organisation has to interpret category positions on the portfolio matrix and decide what they mean in activities and their results.
terms of sourcing strategies and action plans. These often amount to shifting given categories' positions
from where the supplier is in control to where the buyer has leverage and power. Kraljic noted three
distinct strategic responses that an organisation can make.

86 R7
Category Management in Procurement and Supply
Preparing for the Process I CHAPTER 6

4.5 Or they can be classified in respect of the supply or value chain. 4.10 It is important that stakeholder needs are unambiguously documented in the stakeholders' own words
so that no misinterpretation or misunderstanding results and a meaningful agreement can be achieved.
• Suppliers and outsourced service providers- providers of inputs. Stakeholder needs should be reviewed, constraints should be identified, the determined needs should be
• The owners or sponsors of the organisation's operations- from the Board of directors through to
realistic, the findings should be documented and, most importantly, approval from the key stakeholders
production line operatives. should be obtained in writing.
• Internal customers, external customers and end-users- receivers of outputs.
• Secondary stakeholders- not directly connected to the organisation's activities, but impacted by its
5 Cross-functional teams
actions.
5.1 Category management is built on processes, systems and, above all, people. There are different people
Stakeholder analysis playing different roles contributing to the success or failure of the planning, decision-making and
implementation of category management. Here we look at the various roles and people involved and how
4.6 We use stakeholder analysis to meet stakeholder needs. The sort of questions that may be asked include:
they work together to take responsibility and accountability for the sourcing decisions made, and how they
• Where does your organisation create stakeholder value? consult in and inform the processes leading up to the decision-making and those after.
• How can you do that better?
• Can you eliminate or reduce focus on processes which do not add stakeholder value? Creating the team
4.7 To achieve this involves the following steps.
5.2 The Supply Management Guide to Strategic Sourcing declares that procurement is not simply an
•
•
•
•
•
Identifying all of the stakeholders
Identifying stakeholder needs and interests
Classifying groups of interests
Identifying areas of conflict- organisation vs stakeholder; stakeholder vs stakeholder
Prioritising, reconciling and balancing stakeholders 5.3
organisational function, it is, 'a competence, the ability to structure a deal, understand a commercial
environment and create a solution to a business problem. To effect this in a business environment, you
need good quality people or 'talent'.'

Organisations will typically draw together teams from across their operations to lead, drive and achieve
I
• Aligning significant stakeholder needs with the organisation's strategies and actions strategic sourcing and category management initiatives. The people involved in these teams will rarely
be devoting all of their time to them, but will concurrently be working in their usual roles in their usual
4.8 Mitchell, Agle and Wood offer a helpful analysis (Figure 6.3) based on the urgency stakeholders feel for their
functional workplaces. This is a benefit and a strength: it embeds the strategic sourcing or category
issues, the legitimacy of their interest, and the power they have to impact on your programme. It results
management initiative in the wider life of the organisation. Any initiative will have to feature the
in eight types of stakeholder (with implicit management strategies attached), and may help you to better
collaboration of all departments and functions other than procurement, and this is a head start.
understand stakeholder wants and needs, and how these correlate with your wants and needs of them.
• Appropriate executive sponsorship is essential; it challenges and reduces resistance.
Figure 6.3 Mapping stakeholders (Mitchell, Agle and Wood) • Managers of staff members seconded to the team will want to know how the initiative affects them,
so be prepared for this.
• Do not be surprised if some managers blame time lost to the initiative for sub-standard departmental
performance.
• Market the initiative to gain the widest possible organisational buy-in.

Executive sponsor

5.4 Sponsors are important people in a strategic sourcing or category management project, especially
during those periods when the improvements or changes that implementation can bring challenge the
organisation.

5.5 The organisation needs to be receptive to the concept of sponsors and champions who actively promote
the strategic sourcing and category management initiatives in order for these to have effective outcomes.
They are a conspicuous dedication on the part of the organisation to getting the job done. Sponsorship
needs to be proactive and to be recognised at board level; anything less makes it hard for the project
leader to rally attention and resources to the cause.
Non-stakeholder

5.6 The choice of sponsor is key. While the sponsor may need to commit comparatively little time to the
strategic sourcing or category management project over its entire duration, they need to be able to
4.9 Identifying and reaching out to stakeholders are key in the category management implementation process, commit all the time that it needs immediately as soon as it needs it. Sponsors must also carry sufficient
and later in this unit we explore stakeholder involvement in strategic sourcing decisions. Suffice to say power within the organisation to sway those others that need recruiting to the project and to convince
for now that there evidently is a wide range of potential stakeholders, which suggests a large task of data uninterested peers. The authority of the sponsor in terms of their managerial power to assert direction
gathering and analysis. and commitment to making favourable decisions and following through on them is crucial.
 Category Management in Procurement and Supply Preparing for the Process l CHAPTER 6

5.7 Typically, a sponsor may engage others on the level of 'Can I count on you for your support?' The Team members
emphasis is deliberate; inter-personal skills are central to success. The sponsor must not sit on the fringes
of the project; it is far better that they are seen to be involved and integrated at the heart of things to 5.11 Drawing people together from across the organisation is one of the key actions (and arguably benefits)
demonstrate their buy-in, gain deep understanding of the project, and so be able to communicate insight, in category management. Getting the right team in place is important; getting a team that can operate as
belief and enthusiasm to others. Sponsors, however, must not be assumed to be good at their roles to a team is fundamental. Category management will be driven by a cross-functional core team that works
begin with, or to automatically know what to do and how to interact with others. They will need guidance closely together. This team interacts with an extended team containing the sponsor, the facilitator who
and direction if they are to be good at their role. Meetings with potential sponsors should be held early has enabled the project to happen, and stakeholders whose interests and influence lead to them taking a
on to develop this understanding and the approach to the initiative covering, for example, the following part.
issues.
5.12 A team role demands a reasonable level of time commitment, but not necessarily full-time commitment.
• A briefing on category management, its nature, how it works, and the people affected and involved
Team activities according to O'Brien are as follows.
(eg cross-functional teams)
• The nature and anticipated scale of the opportunity • Participation in the category management process
• The executive sponsor's role within the initiative and the commitment required • Delivery of actions arising
• An explicit commitment from the potential sponsor to the initiative • Communications activity and engaging with stakeholders
• Planning ahead • Collection of data and information
• Pursuing quick-win opportunities
5.8 To begin with, the sponsor will need to help assemble the team and its resources- to encourage people in
different parts of the organisation to become team members, convince peers to release resources, inspire 5.13 O'Brien suggests that a core team of 5 to 7 people is typical, and this is added to on a temporary need-to
the organisation with the project's potential. This is an ongoing task: as the project runs on there will be basis when particular expertise or experience is required. The team owns the category that it is tasked
tendencies for team members to be pulled back to the regular roles, managers to want their resources with improving and should reflect its requirements and possess the necessary category knowledge. It is a
back, the organisation as a whole to become bored with the project or lose confidence. good idea to represent constituencies in the organisations that might be affected by any changes brought
in as a result of the project, and offer them the facility to champion changes based on their perspective
5.9 Without this effort, the organisation's commitment to secure the promised benefits could be lost, and and standing in the organisation.
people's natural reluctance to change will dominate their behaviour. Again, the encouragement role of
the sponsor comes to the fore. O'Brien lists specific duties that the sponsor should be responsible for, and 5.14 That said, organising a strong, tight team that represents all of the organisation is likely to be impossible
makes the role a key aspect of his team charter (see later). unless the organisation is small. Some groups with reasonable claims to participation may have to be
excluded, which makes good stakeholder management and communication all the more important.
• Being the figurehead for the initiative and its visible executive lead
• Being responsible for securing initial and ongoing provision of team members seconded from other Team charter
functions and departments, and any other required resource
• Briefing and inspiring the team and attending kick-off meetings 5.15 O'Brien sets out the need for a team charter so as to bond the team in terms of activities and goals for
• Corresponding with those involved, requesting involvement and thanking them for participating their project. This is usually developed at the earliest feasible stage to set the outputs for the project so
• Representing the project and communicating its progress at the executive level that all parties are agreed on what is to be achieved. O'Brien offers a series of questions that the team are
• Ensuring that any high-level business requirement or issues that might impact the project are trying to have answered in the early stage of the project.
communicated to the team
• What are the structure and composition of the team?
• Signing off the sourcing strategy in consultation with stakeholders
• Who is the project or team leader and what is their role?
• Being an ambassador for implementation, and securing the necessary support and resources required
• Who is the sponsor and what is their role?
to convert the strategy and plan into action
• What are the roles of the team members?
• Removing any obstacles to progress
• What is the purpose of the project and are there any boundaries?
Project leader • Where do we want to be and what are the targets and constraints?
• Are there special roles tasked to specific individuals eg communications, planning?
5.10 The project leader is another critical role. The leader is in operational command of the project and works 5.16 O'Brien says that a team charter serves five main purposes.
within the enabling framework that the sponsor builds. The project leader in turn backs up the sponsor
by realising the quick wins, progress and budget information and convincing tangibles that enable the • To gain alignment of understanding of the project and the roles of the team members
sponsor to go to their executive colleagues confidently, bearing the results that they are looking for • To serve as a basis for discussions with the sponsor about what is expected of them
and the sponsor has promised. Regular, action-oriented meetings between these two are important • To provide a basis to secure agreement for the team and project remit
to ensure that progress and work plans are agreed. The project leader needs also to have some status • To provide a definitive document that summarises the project; its aims, people and targets
within the organisation and a broad understanding of how the organisation works to carry off the role. • To gain the commitment of the team to the project
It may be unusual for these levels of management to work so closely together, but it is needed in these 5.17 If the charter is agreed and all commit to it, then there is an agreed platform for all to work from.
circumstances.

90 Q1
Category Management in Procurement and Supply
Preparing for the Proce:,s I CHAPTER 6

Defining team roles 6 Legislative requirements and standards

5.18 Everybody in a team needs a clear understanding of their purpose for being there. Well-defined team 6.1 Later in the unit we will examine the legal implications of contracting and competition in the market.
roles:
Here we are concerned with the products and services that are procured and any legislative requirements
• Set clear expectations of people; they map participation and involvement. and standards relating to them. During the course of the category management process, there needs to
• Minimise conflict and confusion. be a review of the requirements, specifications and change plans as they are impacted by all potentially
• Maintain structure and consistency when members leave the team and are replaced. relevant standards and legislative requirements. These need to be mapped into the decision-making
process to ensure compliance.
5.19 R Meredith Bel bin suggests that an effective team is made up of people who, between them, fill nine roles
(Table 6.1). He notes that strength of the contribution in each role is commonly associated with specific 6.2 We cannot review all potentially important legislation here because that would be a unit of study in
'allowable' weaknesses.
itself, but the following example statutes and areas should underline the breadth of issues that you may
potentially have to consider.
Table 6.1 Typical team roles (Be/bin)
• Contract law
• Rights of third parties
• The law of agency
• Sales legislation
•

I
Product liability
• Consumer protection
• Health and safety
• Misleading or false descriptions
• Weights and measures
• Intellectual property rights
• International trade
• Insurance
• Corporate governance
• Data protection
• Freedom of information
• Working conditions
• Transfer of undertakings

5.20 These team roles are not fixed. Within any given individual team members can occupy more than one role,
or switch roles according to need. Effective teamworking requires a mix and balance of all the roles, which
between them support task functions (eg ideas generation, problem-solving, implementation, follow-up)
and team maintenance functions (eg support, conflict management, leadership).

5.21 There will be certain, situational responsibilities associated with each of these roles. In every situation,
somebody will need to:

• Define the task or deliverable .

• Execute the task or deliverable and see that it is completed .
• Validate or gain approval for activities, requests and deliverables .
• Inform the task or deliverable (ie gain the information inputs needed) .
• Participate in the execution and completion oftasks and deliverables.
• Review the task or deliverable and determine whether the goals have been met.
• Sign off the completed task or deliverable, ie arrange for the transfer of the outputs and the
accountability for them to their new 'owners'.
 Catego;yry M;~~;;;:.;;;;;;;~ PP~co~;c~u,;r~ement and Supply

CHAPTER 7

Supply Market Factors

Assessment criteria and indicative content

Assess supply market factors in the development of a strategic sourcing or category management process

o Analysing industry dynamics, competitiveness and pricing behaviour

o Analysing financial data on potential suppliers
o Using requests for information (RFis) to assess market factors
o Reviewing STEEPLE, SWOT and market share/growth factors that influence categories
o Conducting impact assessments of CSR/sustainability factors
o Conducting supply chain and value chain analysis
o Analysing supplier perceptions

Self-test questions Section headings

1 Industry dynamics, competitiveness and pricing behaviour
Numbers in brackets refer to the paragraphs above where your answers can be checked. 2 Financial data on potential suppliers
1 3 Using requests for information to assess market factors
Sketch O'Brien's opportunity analysis model. (Figure 6.1)
4 Internal and external influences on category management
2
What is meant by 'ease of implementation' in the opportunity analysis model? (1.7) 5 Corporate social responsibility and sustainability
3 6 Supply chain and value chain analysis
List steps in the development of a purchase price cost analysis. (2.4) 7 Analysing supplier perceptions
4 In the context of categ .
ory management, what IS meant by our portfolio? (3. 2) Introduction
5
What is meant by the three possible strategies of exploit, balance and diversify? (3.11)
The last chapter very much set up the sourcing readiness of the organisation. It developed our knowledge
6 of the organisation's internal position on category spend, and the behaviour of the internal environment
Suggest how stakeholders may be classified in respect of the supply or value chain. (4.5)
in which procurement works. This chapter focuses on the external environment influencing and shaping
7 the world within which the categories operate. Together, these two perspectives allow us to contemplate
What three factors are used by Mitchell et of to classify stakeholders? (4.8)
sourcing strategies.
8 In the context of catego .
ry management, what 1s meant by a sponsor? (5.4)
Here are some key issues to keep in mind as you study this chapter.
9
What are the purposes of a team charter? (5.16)
o Environmental influences can be thought of as the layers around the organisation which need to be
10 understood to ensure that competitive advantage can be gained through sourcing strategies.
List the typical team roles identified by Belbin. (Table 6.1)
o Different environments may be more or less rich in opportunities, more or less threatening. Strategic
analysis of the external environment built on a sound understanding of organisational scope and
direction can provide a sound basis for category management to make a real difference.
o A systematic analysis of suppliers or potential suppliers is necessary across the organisation as a
recognised part of supplier management.
o Organisations have an impact upon society and must recognise their responsibility for their actions
and the potential implications of their activities for people and the environment. Organisations
are governed by internal arrangements and external regulatory frameworks, but these cannot take
account of all stakeholders that might be impacted (unevenly) by specific aspects of specific activities.
o A value chain is a group of activities within the organisation which together create a product or
service. Most organisations are also part of a wider value network, the set of inter-organisational links
and relationships that are necessary to create a product or service.
94

95
 Category Management in Procurement and Supply
Supply Market Factors I CHAPTER 7

1 Industry dynamics, competitiveness and pricing behaviour area is often not given the attention it deserves. We will look at it in later chapters when considering
1.1 the creation of sourcing plans.
Johnson, Scholes and Whittington explain how organisations operate within immediate sector or industry
• The power of buyers- powerful buyers can demand cheap prices or product improvements in
boundaries. It is important to understand these to ensure they plan courses of action that will maximise exchange for their loyalty. Power is likely to be high where spend is high and concentrated on a few
advantage in the future. One tool for this is industry analysis. The competition effects surrounding the large buyers. Buyers switching suppliers is a constant threat to suppliers.
sector or industry within specific markets are felt more keenly than wider environmental influences.
• The power of suppliers- supplier power mirrors buyer power. It is strong when there is a
1.2 concentration of supply and a few suppliers dominate the market. Where it is expensive or disruptive
An industry is a group of organisations producing products and services that are essentially the same.
for a buyer to change to another supplier, then the buyer becomes weaker and relatively dependent
A market is a group of customers for specific products or services that are essentially the same. In
upon that supplier. Competition with other buyers for supply is another aspect buyers need to
this section we first examine the competitive forces at work in markets and then pursue a deeper
be aware of. How does the supplier see you? Are other buyers more attractive customers for the
understanding of the dynamics of industries to better understand how they operate and the behaviours
within them. supplier? Will you slip in their priorities as a consequence? Another aspect is suppliers' moves to
vertically integrate supply chains, cutting out intermediate steps (ie organisational buyers) between
Porter's five forces themselves and the end users of the products or services.
• Competitive rivalry- all of these forces create competitive pressure in a market that stimulates rivalry
1.3 Porter's five forces framework is a well-known tool that supports the assessment of the attractiveness of amongst players that are operating to gain advantage. Each will respond to position themselves as
an industry in terms of five competitive forces: entrants to the market, substitutes for the market, buyer best they can, therefore managing this rivalry is key to success.
power, supplier power, and rivalry between competitors (Figure 7.1). Johnson, Scholes and Whittington
assert that together these five forces constitute an industry structure which is fairly stable. Industry types

Figure 7.1 Porter's five forces (Porter} 1.6 Having explored the forces in the industry environment and market, it is pertinent to examine the industry

Threats from new entrants

1.7
dynamics themselves to understand the types of structure that organisations operate within as this will
throw up specific competitive behaviour in the environment.

We started with an organisation in a market competing with other organisations amid known competitive
forces and threats, culminating in competitive rivalry behaviour. We now move on to understand the wider
I
industry dynamics and structures which influence this environment and shape competitive behaviour on
Competitive
that structural level.
rlvar.y
within the • Monopolies- industries with just one supplier and therefore no competitive rivalry. Clearly a
lndu~
monopoly supplier has great power over buyers and has a strong influence on profit. These industries
are rare and are regulated in the main.
• Oligopolies- just a few suppliers dominate the industry. There is limited potential for rivalry and great
potential for power over buyers. In practice, there is probably less rivalry in this industry type as it is in
Threats from substitutes
the interests of the suppliers to present a common approach to buyers.
• Hyper-competition- where the frequency, boldness and aggression of competitor interactions
1.4 creates a condition of constant disequilibrium and change. Competitor behaviour focuses on
Porter aimed to identify the level of profitability available in the industry with his analysis. If competitive destabilising the market with innovation, expensive marketing initiatives and aggressive price cuts, all
pressure is too high in an industry, then it is not an attractive proposition to compete in it, as there will
affecting profits.
be too much competition to allow reasonable profits to be gained by any organisation. The tool can be
• Perfect competition- where barriers to entry are low and rivals are equally matched. Profits in these
adapted for public sector organisations by considering other definitions of profit. At more detailed levels markets are not high, but are stable at the minimum levels for survival. Price is the key driver as there
examining each force can highlight specific issues that need to be addressed in an organisation's approa;h is little investment in innovation or development. Entry barriers being low may seem attractive for
to its involvement in an industry.
new entrants, but likewise there will not be much to gain.
1.5
You will encounter Porter's five forces many times in your studies, so we will concentrate our attention on
Industry lifecycles
how they may be used in category management and what they tell us in respect of industry dynamics and
the behaviour of competing organisations within an industry.
1.8 Porter's five forces analysis offers a snapshot view of industry attractiveness and competitive rivalry.
• Threat of entry- the likelihood of new competitors starting up in the industry, the barriers to their Industry structure analysis offers further understanding, but is still a static picture. Organisations and the
entry, and how these can be overcome. Barriers include experience and expertise, and minimum environments they operate in change over time. There can be a danger that organisational change fails to
organisational size and resource base requirements, which are hard for new entrants to match or match environmental change; the two lose synchronisation, and the organisation experiences strategic
aspire to. These require investment and risk acceptance that could be hard to achieve. drift.
• The threat of substitutes- 'Substitutes are products or services that offer a similar benefit to an
industry's products or services, but by a different process.' (Johnson, Scholes and Whittington) This 1.9 Industries, products, even organisations all tend to follow generally a basic lifecycle, from their beginnings
to their ends. One thing that an organisation needs to do to understand markets and industries is to

96
97
Category Management in Procurement and Supply Supply Market Factors I CHAPTER 7

determine the lifecycle stage that they have reached. Industry lifecycle analysis is a predictive tool, and competitive cycles
sourcing strategies require an understanding of an industry's likely future in order to work.
1.11 Markets are not like swimming races, where each swimmer stays in their own lane and does their best.
1.10 The five forces will present differently at different stages in the lifecycle (Figure 7.2). Industries start small, They are more like chess, where competitors respond to each other's moves. Market games are fought
go through a period of rapid growth after which weaker competitors are shaken out during a calmer period on factors such as innovation and price, and these interactions form cycles of competition. Figure 7.3
of consolidation, before the industry stayers milk the positions they have won until such point as other shows where entrants to the market are likely to attack existing players, and their responses in terms of
options become more attractive, and they start to leave the industry. competitive behaviour. All of this affects profits or likely profits, and reinforces customer loyalty through
increased differentiation.
• Competitive rivalry and industry attractiveness will be weaker at the start, then build as the market
grows, organisations begin to understand the market, invest more in it, and have more to lose.
Figure 7.3 Cycles of competition (D'Aveni and Gunther)
• During growth, buyers begin adopting the market's offers and finding uses fort hem. Their buying
decisions may be weak or ill-informed, which acts against better-value suppliers gaining the market INCUMBENT ENTRANT
share they deserve. This lack of buying skill gives high-visibility suppliers power. Growth may be
I ~---~------1
slower than expected if products require parts or components as the supply chain will need to be Builds or inherits I Attacks 'soft' I
!41---
sophisticated to catch up with fast-growing demand and production. Expansion may be hindered. entry barriers I
market segment 1
I _ _ _ _ _ _ _ _ _ _ _ _ _j

--
_

• The rate of growth may decline as shake-out begins. Rivalry grows as new entrants jump on the
bandwagon, especially if barriers are low and there have been many other new entrants. Longer- 1 ----
I
established suppliers may begin to exhaust their resources, with sales not making up for earlier I Widens attack to
No response
investment. These will fall out now, and the industry will start to settle down with the strongest adjacent segments
_____________
I _)

staying in the market.

---
• At maturity, buyers start to become more powerful; more viable suppliers have come to the market,
--- -----------1
and buyer confidence may allow behaviours such as switching. Market share is crucial for suppliers I
I
I
at this stage, so they will want to retain buyers as well as attracting new ones. However, leverage Reinforces barriers Starts price war
_____________
I

-
....)

will remain with the supplier as the market is mature, so barriers to entry are high and competitive
advantage on cost is critical.
-----
• Decline can promote more rivalry, especially where exit costs are high as the industry players hang on -----------1
I
Attacks entrant's I Restarts the cycle I
fiercely to their positions. r---
home market in adjacent market
___________
I _)

Figure 7.2 The industry lifecycle and Parter's five forces (Johnson, Scholes and Whittington)

Market segments
Market size
1.12 A market segment is a group of customers who have similar needs that are distinguishable from customer
needs in other parts of the market. Strength of position in a market segment can be valuable as we
have seen from the analysis of the five forces, but this is less secure than being dominant across the
entire industry. To be consistently strong in a market segment, an organisation needs to make sustaining
customer focus the main driver for its strategy. This is important to keep in mind for category management
and sourcing strategies going forward.

1.13 Johnson, Scholes and Whittington identify some significant issues here.

• Variation in customer needs- not only is it difficult to ascertain customer needs, these needs vary
over time. Moreover, customers will have unique combinations of needs that are being met by a given
Typical product or service.
five forces • Specialisation- important to success where organisations have built up experience in specific or niche
areas. Costs may be lower because of learning curve effects, and product or service specifications can
be perfected. Specialisation is difficult to sustain and is not compatible with competing on a broad
basis.
• Strategic customers- the principal targets of the organisation's strategies; they have the most
influence over which products and services are purchased. Their needs determine the organisation's
objectives in presenting their offer to market and in positioning themselves. Customers are not always
clear about what their needs are; they may say price, but switch supply because of reliability issues.
Also, buyers are not necessarily authorisers or specifiers; in organisational purchasing situations it may
be unclear who is deciding and why.
 Supply Market Factors I CHAPTER 7
Category Management in Procurement and Supply

Pricing behaviour
2 Financial data on potential suppliers
. d · d t and market behaviour, competitive forces, and industry attractiveness. 2.1 Systematic analysis of existing and potential suppliers is a recognised part of supplier management. It is
1.14 We h ave exam me m us ry
All of these factors affect how suppliers price their products and services. We ~ave seen how market central to setting a sourcing strategy and adopting a category management approach.
.. f d att·c changes in price (eg price cuts and price 'wars), but now we need to
competition may orce ram .
. h . et and what influences th1s process. 2.2 Thus far, we have focused on our own organisational readiness and, in this chapter, external,
exam me ow pnces ares
environmental influences. This gives us a context for appraising suppliers. In this section, we will look
briefly at supplier performance in terms of their financial strength and stability and how these affect their
1.15 Accord.mg to Ba1·1y et a,1 three factors enter into most pricing decisions.
capability to meet our organisation's business requirements. We are interested in mitigating the risk of
• Competition and other market considerations- price mechanism
supply failure and consequent time-consuming and expensive measures to exit from arrangements with
• Value as perceived by customers what turned out to be the 'wrong supplier'.
• Cost of production
. . f t d to pull in different directions, and one may influence the price decision more 2.3 The identification of potential new suppliers should be an ongoing process, and we will assume the
1.16 The t h ree pncmg actors en .
, . ht' pr·1ce that which the market will bear, is determined by supply and demand m organisation has one. 'New suppliers' includes those existing suppliers that are being considered for
t h ant he ot hers. Th e ng ,
the market- what economists call the price mechanism. products or services they do not currently supply- a supplier should not be automatically considered
equally capable in dissimilar areas of supply. A financial validation of the supplier is necessary in both
. ff h ti.tt. produced- at a given price, supply will fall if there is unsold stock (ie there cases to ascertain whether they will have the basis to deliver the requirements and manage the necessary
1.17 The pnce a ects t e quan es .
. . . h . d t and suppliers withdraw or exit), and will rise ifthere are unfulfilled orders cashflows in the supply chain to secure supply on your required terms.
1s over-capacity m t e m us ry .
. h . d .t ) The industry type will influence market pricing; the number of competitors
(1e t ere IS un er-capac1 y .
. g on what basis, and so on. Economies of scale will also play a part here 2.4 The relationship between the buyer and the supplier will influence the extent of overt analysis and co-
there are, w ho t hey are servm , .

I
. b • • t cost of production, but there is a point at which dis-economies of scale k1ck operation that might be expected. It is arguable that a supplier should have good reasons for maintaining
m a1ancmg vo 1ume agams .
. h b. • d e ·s exhausted. Modern buying behaviour implies that buyer and supplier their distance since the ethos of category management points towards better relationships rather than
m w en capa 111ty to pro uc 1 .
. h . rt h· p can effect better results on cost reduction through the supply cham and stand-offish ones.
wor kmg toget er m pa ners 1 .
.
t here by re duce pnce. Th.1s ·s1 achieved by the followmg means.
2.5 Basic context information for financial appraisal will be necessary.
• Reducing the number of suppliers in the supply chain
• The relative sizes of the buyer and the potential supplier
• Joint development of new products
• Whether they have done business previously, with whom and for how long
• Having responsive suppliers
• What type of industry and power base is in operation for the products or services
• Use of integrated databases and systems
• Who else the supplier is supplying and the degree of reliance upon them that those customers have
• Continuous improvement programmes
.f ff ff t ·c· ng For example, in the early stages of a product or service's lifecycle, 2.6 The purpose of analysis is two-fold: are they the right supplier to supply your organisation; do they create
1.18 L1 ecyc 1e e ects a1so a ec pn 1 ·
.ff . d . b harged as organisations 'skim' the market- limited capacity means they can the right associations for third parties such as customers, other suppliers, regulating bodies? There are
d1 erentiate pnces can e c
. h . f h rt periods However, as capacity increases and other suppliers join the market, many sources of relevant information (eg references, standards held, previous customers' feedback,
charge h 1g pnces or s o · .
· · t d trati·on pricing so as to mcrease market share. costings, organisational structure, staffing, governance, quality processes), but here we specifically focus
pncmg moves owar pene
on financial viability and business performance.
Price behaviour and perceived value 2.7 Assessing financial viability is particularly sensitive but very important, particularly when considering
• t 'A th r factor in pricing decisions is how customers value the offering. [It] may longer-term relationships. It is important to gain a picture of recent and current financial structure and
1.19 Ba1 1yet a1sugges : no e . . . .
. d • b. . d b.l.ty good service and prompt delivery. Perce1ved-value pncmg 1s based on the position. There are recognised sources for this, such as company registration authorities, credit rating
me 1u e ... re 1ta 111ty ura 1 1
1 1 }

, ti. f elati·ve value rather than on cost. agencies, and financial markets.
customers percep on o r
. h d·fferent measures of value, and hence have different preferences concerning 2.8 This can be a long process, but a financially-healthy supplier will be more able to reduce cost. Such a
1.20 Different customers ave 1 . .
. h . h b b pared to pay more for certain features. As suppliers set high pnces to begm supplier is more likely to be operating in a committed and high-performance manner. Financially stable
1t. T ey WI 11 t ere y e pre
. t these can usually fall off to attract steady business, leading to lower costs of suppliers will generally have less risk attached to their overall dealings with your organisation and require
w1th to recover set-up cos s,
. d · f scale facilitating the establishment of dominance in the market, thereby fewer contractual or sourcing controls to protect your organisation against their default or failure.
pro d uctton an econom1es o '
achieving profit within the pricing set. 2.9 In assessing financial data, we are looking for profitable suppliers who manage their finances well.
services are very sensitive to price changes, but others show little sensitivity All dealings with external providers impact your costs, so the more you are able to learn about cost
1.21 Many consumer pro duct sa nd .
.d bl necessity or there is little competition in the market). Baily eta/ Judge that management within potential suppliers, the more able you will be to understand the potential impact on
(eg they are an unav01 a e .
. • d · 1 price insensitive (inelastic), since few of them have true substitutes to wh1ch your costs that such a supplier would have.
mdustna 1goo s are mam Y . . . .
. h ·ly This is important information in the understandmg of pncmg behav1our for
customers can sw1tc eas1 .
category strategy.
 Category Management in Procurement and Supply

r Supply Market Factors j CHAPTER 7

2.10 Analysing the financial health of a supplier requires several steps.

• Get and review the supplier's financial statements, ie fully audited, unqualified financial statements as
at the end of the last financial year.
I 3.5
market without commitment to solicit information from multiple suppliers and potential suppliers not yet
engaged in your business.

Whilst the RFI is often sent out in the initial part of a competitive tendering process, it does not form part
• Calculate significant business ratios and, importantly, compare them against the best in their industry
of that tender and can be used at any stage in category management; although more effectively early on in
and location. The key ratios look at three things: solvency, efficiency, profitability. What are considered
the process.
to be strong values will depend on the specific item being purchased and the location of the supplier.
On its own, this data will give you a 'health-check' in so far as the supplier would be expected to An organisation will often use pre-qualification questionnaires as part of RFI to ask potential suppliers to
3.6
perform to certain levels. However the information is more telling when compared to competitors. It disclose specific information affecting their capability relative to a specific bid or need. This is an expected
should be considered though that the comparison needs to be done on similar organisations over the part of competitive bidding. RFis are often the first stage-gate followed by requests for proposal (RFP) and
same period (like with like) to make it worthwhile. requests for quotation (RFQ) as the organisation homes in on the most suitable suppliers.
• Do a credit check on the supplier.

4 Internal and external influences on category management

Supplier status ratings
4.1 Categories are partly defined as groups of items that ought to be procured with the same sourcing
2.11 Having gathered and analysed the supplier data, the potential supplier needs to be assigned a status or
strategy. Sourcing strategies, like all strategies, are products of evidence, assumptions and beliefs
rating based on the outcome of the analysis. Generally, a supplier will either be acceptable, unacceptable,
concerning the organisation's long-term future, so will be influenced by the organisation's current and
or acceptable within specific restrictions (which may change over time according to performance).
projected internal and external environments. Hence we should investigate and understand these. We will
Expressions such as 'approved supplier' need to be used cautiously in the light of competition law, and
now look at several tools that you can use to do this.
having such lists might limit opportunities for other new suppliers. Care should be taken over the speed
and management of the supplier appraisal process as this will impact the availability of suitable suppliers

I
STEEPLE analysis
to the organisation and the willingness of new suppliers to undergo the process.
4.2 An organisation's 'macro environment' comprises those external, 'big picture' influences that impact on its
2.12 Suppliers should be aware of their standing with the organisation, the basis upon which it was decided,
activities. They are commonly grouped together in some form of analysis described by acronyms such as
and the potential for their status to change over time. Even so-called approved suppliers should be kept
PEST or SLEPT. Possibly the most comprehensive version- and the version specified by your syllabus- is
under analysis for improvement, and certainly financial assessment, given the speed and scale of change in
STEEPLE analysis: Table 7.1.
economies and markets.
Table 7.1 STEEPLE analysis: some key drivers
3 Using requests for information to assess market factors
3.1 Uncovering 'breakthroughs' is part of the category management data-gathering phase. Breakthroughs
are a pillar of category management (Chapter 9), and are the step changes in understanding and practice
that allow us to reinvent our sourcing and procurement. We uncover breakthroughs partly by investigating
the market and asking suppliers in the industry what they are currently doing and planning. In this way,
we may find out that there are alternative locations offering low-cost sourcing or alternative markets that
might be opened up, fulfilling the fundamental needs of the category in a different way.

3.2 O'Brien suggests we need to ask and answer some basic questions.

• What is the marketplace?

• What is happening in the marketplace and, importantly, why?
• What is likely to happen in the future and why?
• What are the trends in the market?
• What alternative marketplaces exist? Would any of these be better?

3.3 In this chapter we have now moved close to the supplier and what they will deliver within a specific
market context. When we approach the market to determine its activity we need to be clear what we
are looking for and expecting to receive in order to make sense of the offers we get and analyse them.
Understanding the market trends and the impact each has upon the overall category or individual product
or service enables effective market and category modelling. Such information, says O'Brien, can support
the buyer in assessing the best time to procure.
4.3 Analysers need to look at the STEEPLE factors with regard to establishing what they are, but more
3.4 We can investigate the market by using requests for information (RFis). These can capture vital activity importantly in the context of how they are changing in the organisation's own business environment. The
and supplier innovation and performance that we might otherwise miss. An RFI is an early approach to the interaction between factors is also key to understanding the environment.

107
 Supply Market Factors I CHAPTER 7
Category Management in Procurement and Supply

4.8 In terms of the organisation's own categorisation efforts, this is a way of identifying which of the
4.4 The size and scope of a full STEEPLE analysis can be overwhelming, and there is a need to step back
organisation's own offers should be prioritised over others. These considerations can be tracked back along
from the detail and determine what you are trying to achieve and what the key drivers for change are.
the supply chain into how the organisation categorises its inputs. In terms of creating sourcing strategies,
Remember that the macro-environmental drivers most pertinent to an industry are those which are likely
the Boston matrix offers insights into what suppliers are aiming to achieve with their offers, and thus
to have the highest impact on the success or failure of a strategy.
informs negotiations with them.

4.5
Risk analysis (see Chapter 16) is a suitable complementary tool. Rank or score the likelihood that a factor
4.9 Over time, offers will move around the matrix because of market dynamics and lifecycle effects. They all
will change and match this to the impact it would have if it did. The higher the likelihood of a change
fall down the grid so that stars become cash cows and question marks become dogs, provided that the
happening, and the greater the impact of the change, the more attention the factor should be given in the
relative share position has been maintained.
organisation's activities.

4.6 To put things into context for us, the purpose of STEEPLE analysis is to see change and to plan to
SWOT analysis
respond to it with the organisation's category strategy and sourcing plans. Where there are high levels of
4.10 SWOT analysis is a commonly used thought-organising and planning tool. Its main usefulness is in
uncertainty, it becomes more difficult to develop a clear picture of the world or industry. Assessing the
locating an organisation in its operating environment and assessing its internal and external capabilities
picture as best you can will be the way ahead. and vulnerabilities. Using a SWOT analysis is a good way of organising all the information you may
• Identify the scope of the analysis that you seek to do. have gathered through other analyses into a format which makes it easier to assimilate and use. Every
• Identify the key drivers for change. potentially relevant point can be mapped to the grid, then all the points in a given box can be consolidated
• Select opposing key drivers for change to consider alternative stances given the uncertainty of the to the key factors and listed as bullets (Figure 7.5).
current market position.
• Develop a series of scenarios or 'what if?' questions to map the drivers into the market and analysis tools. Figure 7.5 How a SWOT analysis is laid out

I
• Identify impacts on the organisation to attempt to build strategies.
HELPFUL HARMFUL
to your objective to your objective
The Boston matrix
4.7 The Boston matrix (or growth/share matrix, BCG product portfolio, see Figure 7.4) is an analytical tool
that uses relative market share (compared to its largest competitor) and rate of market growth to position
INTERNAL Strengths weakness.. I
(within organisation)
products within a portfolio. The resulting quadrants are used to designate product types, each with its own
strategic implications.
• Stars represent products or services ('offers') where the organisation has a high share of the market
EXTERNAL Opportunities Threats
and the market is growing. They should be invested in further to maintain growth. (outside organisation)
• Cash cows- offers in which the organisation has a high market share, but where the market is
mature and slow-growing or even declining. These products should be 'milked' to provide cash for
investments in future product areas. 4.11 It is simple enough to exclude trivial factors from the bullet lists in the diagram, but prioritising the
Dogs- offers where the organisation has low market share and where the market itself is not growing .
• mcluded factors in terms of impact is less straightforward. It is possible, too, for a factor to 'cross the line'-
These should be dropped from the portfolio to release funds for investment in more attractive
for example, one year it is a weakness, the next it is a strength.
opportunities.
Question marks- offers where the organisation has low share, but the market is beginning to take off 4.12
• Strengths and weaknesses are relative to the organisation's capabilities and resources at a given point in
or has significant growth potential. They need to be watched closely and investment maintained to time: These change. Also, they are relative to those of the organisation's competitors, who might have
keep a presence since they could become tomorrow's stars, but equally the commitment should not relatively better or more appropriate competencies and resources. Opportunities and threats are also
be too high since they could also turn out to be tomorrow's dogs. relative in this way.
Figure 7.4 The Boston matrix 4.13 So when conducting a SWOT analysis make sure that you focus only on the items that are important. This
High Question marks
means that you may have to discard a point that took a lot of time and effort to develop, but its absence
Stars
from your final. analysis will be as useful as the presence of other factors. Make sure you are objective, and
o~ . , _ Product movement
....- {))
(A to B to C. representing
that any assertions you make are backed up by evidence. A good SWOT analysis has to:

t l/'y the product lifecycle) • Enable you to put shorter-term plans together to consolidate strengths and address weaknesses.
RELATIVE MARKET
GROWTH v
z
4-- Cash movement
(from product z to
• Identify more research, analysis and idea generation about the environmental factors, the threats and
the opportunities.
G
Cash cows Dogs
products x andy)
4.14 SWOT is useful if done properly, which means honing every single point to its core relevance. Often, the
best SWOT analyses are those that take a great deal of hard thought and effort to produce something that
Low
High Low looks short and simple.
RELATIVE MARKET SHARE
---------~-- ---------- -----------
Category Management \n Procurement and Supply Supply Market Factors I CHAPTER 7

Corporate social responsibility and sustainability 5.6 CSR is necessarily a cost. Why should the organisation accept or even pursue it?
5
• It is good to do good, the alternative is to do bad. Simplistic, but most people in most cultures
5.1 Organisations have an impact upon the world and must recognise their responsibility for their actions consider this self-evident, even if they selfishly bend the rules on occasion.
-the implications and consequences for people and the environment. Organisations are governed • Both customers and suppliers expect to see ethical behaviour from an organisation. If a customer or
by internal arrangements and external regulatory frameworks, but these cannot take account of all a supplier has doubts about the honesty and 'rightness' of an organisation's business practices, there
stakeholders that might be affected by an organisation's business dealings. will be a lack of trust, and absence of trust will affect the relationship with that customer or supplier.
Customers might refuse to buy from the organisation. When the customers are consumers, there
Corporate social responsibility could even be the possibility of an organised boycott of the organisation's products.
• It is better for the organisation's reputation and the goodwill shown to it to be ahead of legal
5.2 The concept of corporate social responsibility (CSR) has both a technical and a philosophical aspect.
requirements, rather than striving to stay just within them. It is more trusted to have been innocent
• It is a management tool for gathering together all of the organisation's ethical activities, should an ethics breach be discovered.
responsibilities and duties into an integrated framework and a proactive mind-set, ie this is our • Accidental breaches of compliance are more likely.
programme for making the world a better place. • Profit is a very narrow and short-term definition of value; banked profits cannot be spent in a world
• It acknowledges that, although the organisation is not a human being, it still has an 'identity': where the environment, the economy or social order has collapsed. All stakeholders should be
purpose, culture, values and norms that give it a personality and behaviour patterns. Because of considered in value growth.
this, it is reasonable to treat it as an ethical actor, capable of being held responsible for its actions, as • The organisation cannot distance itself from society. By investing in society it improves the chances its
carried out by the individuals within it. future markets will be better.
5.3 CIPS suggest that CSR encompasses four kinds of responsibility. • Being a proactive member of society increases the organisation's knowledge of and access to potential
suppliers and markets.
• Economic responsibilities, the foundation upon which all others rest
• Closer supply chain relationships increase ethics risks, as organisations within the supply chain are
• Legal responsibilities, to obey the law and play by the rules of the game
more integrated and reliant on each other. Hard measures on delivery, quality etc can be put in place,
• Ethical responsibilities to do what is right, just, and fair while avoiding harm
but it is the softer measures, the effective interface between suppliers and partners, that underpin the
• Philanthropic responsibilities, by contributing resources to the community and improving the quality
relationship .
of life
5.7 Are there any possible objections?
5.4 So CSR implies the organisation's responsibility to society (and stakeholders). There are three sets of
compelling, driving forces acting to make the organisation behave responsibly. • There is the view that the organisation's first obligation is to its owners, and that the organisation
discharges its responsibilities by paying taxes. This idea has to be challenged by the observations that
• Legal requirements an organisation's owners cannot live in isolation from the world, and that companies routinely look for
• Regulatory requirements every opportunity to avoid taxes.
• Codes of practice to which the organisation has subscribed
• For-profit organisations are not best equipped to design programmes that will benefit humanity and
5.5 Codes of practice are voluntary, so it is with these that organisations distinguish themselves when it comes the world- it is not their area of expertise.
to CSR and through these that they demonstratre their consideration for who they consider important • Social responsibility is anti-competitive- it increases the costs of doing business for some, and keeps
stakeholders to be. There is a range of potential commitments the organisation can make, as shown in businesses going that rightfully should either close down or improve by subsidising them as they are
Table 7.2. (eg they lock in their customers by being local or green suppliers).
5.8 In many cases, objections to corporate social responsibility can be countered on their own terms, ie
Table 7.2 Characterisation of typical CSR stances (Johnson, Scholes and Whittington)
on the basis that they are incorrect in their cost assumptions. For example, by working closely with
LAISSEZ-FAIRE ENLIGHTENED WORKING WITH MAKING A suppliers, a buyer may be able to use recycled materials without any increase in cost. But ultimately the
arguments take place within a moral framework: society, in the form of legislators and opinion formers,
has simply decided that certain practices are undesirable, even if in some cases they might maximise
profits. Fundamentally, it is not an option for supply chain professionals to ignore the requirements of
legislation and ethical codes. Such matters are genuinely- and intentionally- a constraint on supply chain
decision-making and relationships. Organisations need to conduct impact assessments for corporate social
responsibility which should include questions referencing such topics.

Sustainability

5.9 5ustainability is the ability to carry on operating indefinitely, and so is a responsibility to future
generations. By implication it implies the reduction of vulnerability and risk, first below the threshold at
which an end to operation is inevitable, and then to as low a level as possible.

5.10 The concept can be defined and used in many different ways. Financial and environmental sustainability
 Category Management in Procurement and Supply Supply Market Factors ! CHAPTER 7

are common concerns. Mostly, ideas on sustainability have three factors in common. Figure 7.6 Assessing the impact of responding to CSR (Barth, Wolff and Schmitt)
• Limits
• Inter-dependence
• Equity in distribution External factors of influence

5.11 In applying category management to its processes, an organisation has the opportunity to develop them
sustainably. The idea of sustainable development was crystallised and popularised by the United Nations
through Our Common Future, the 'Brundtland Commission' report published in 1987.

5.12 The Brundtland characterisation of sustainable development is 'development that meets the needs of the Sustainability CSR
present without compromising the ability of future generations to meet their own needs'. It rests on three issues commitment
sustainable 'pillars'.

• Social development- meeting the needs of all people CSR impact

• Environmental protection- safeguarding the continuation of the Earth

• Economic development- profit-making/or all to improve continually everybody's quality of life

5.13 Sustainability has become part of the business landscape for many organisations, with investors often
looking for tangible proof of companies' commitments to achieving sustainability. Andrew Dearing
suggests leading organisations adopt three guiding principles.
THE CONTEXT: SOCIETY ANO THE ENVIRONMENT
• Attitude- ensuring the organisation understands society's expectations of it, states its own values

•
clearly, then reinforces these in a way that creates a process of continuous improvement.
Building the capacity to act- developing the tools and approaches to improve performance across the
three pillars of sustainable development.
Checking progress- setting targets and measuring performance.
The triple bottom line

5.17 The triple bottom line (TBL or 3BL) is a balanced scorecard approach to resolving the tensions inherent in
the organisation's efforts to reconcile its responsibilities towards people, the planet, and profit, the three
I
CSR and sustainability impact analysis pillars defined by the Brundtland Commission. It gives equal weight to the 'bottom line' (to borrow the
accounting term) in each of the economic, social and environmental performance perspectives.
5.14 CSR and sustainability are high-level concerns. They impact sourcing and category management in that
they inform us what we can buy, from whom, and the terms on which it is justifiable to buy. In this way we 5.18 It is a way by which CSR can be measured in that the implication is that the organisation's efforts in
establish, for example, that we cannot buy diamonds from a war zone, cloth from a sweatshop, or fish that all three directions should be proportionate to each other. In this way it is also a means by which the
is in danger of extinction. organisation's response to the broad set of its stakeholders can be judged.

5.15 As well as establishing prohibitions and controls, CSR and sustainability indicate best practice and it is Practical CSR
here that we get to exercise some personal judgement and reflect organisational values, culture and
preferences. In these circumstances we are faced with options for action- more and less 'ethical' options 5.19 There are a number of key drivers to develop and improve CSR within a purchasing and supply
-and we need to devise evaluation criteria for choosing between them. environment.

• Board level directives

5.16 Part of this will be to conduct an impact assessment for each option. Barth, Wolff and Schmitt suggest a
• Meeting stakeholder expectations
three-stage process. The relationships between the various relevant factors are shown in Figure 7.6.
• Public opinion and media concerns
• Identify the effects resulting from CSR, taking into account changes in commitment and strategy (CSR • Expectations of trade unions and employees
outputs), to actual practices (CSR outcomes), and the consequences (CSR impact).
5.20 Managers and leaders have a responsibility to communicate and promote ethical standards and practices,
• Identify whether CSR has added (or destroyed) value as compared to the baseline where CSR is not
as part of:
implemented.
• Identify causal relationships and attempt to understand them. • Their duty to comply with national and international law- including the need to avoid corporate
liability (among other negative outcomes) for wrong-doing.
• Their duty to comply with professional and corporate ethical guidelines and codes of practice.
• Their responsibility for fulfilling corporate objectives, and maintaining constructive ongoing trading
and employment relationships.
• Their responsibility for developing staff and managing discipline in the organisation.
5.21 CIPS give advice on minimising purchasing and supply chain management's negative impact on CSR and
maximising its positive impact.

lOR
 Category Management in Procurement and Supply Supply Market Factors I CHAPTER 7

• Link with the organisation's overall CSR policy and exert influence on its approach from the supply-side 6.3 Everything that the organisation is good at or has an advantage in begins with the resources it has or can
perspective. call upon. Resources are physical assets, intangible assets, or capabilities (ie the things it can do). These
• Ensure the responsible sourcing strategy delivers what the organisation as a whole is aiming for, and form the basis for its core competencies- the things it does so well that they are worth building its
that its commitments are entirely practicable within overall existing policies in more general terms, strategies upon, as demonstrated in Table 7.3.
such as value for money or cost reduction.
• Identify which aspects of CSR are likely to be important to the organisation overall, and particularly Table 7.3 The hierarchy of the development of core competencies -each step underpins the next
within the supply chain. (Woodcock and Beamish)
• Get high-level corporate buy-in for the supply-side and communicate this to suppliers.
• Review products, services and suppliers for potential benefits or risks from CSR impact, and identify
the likelihood and potential impact of risk and reward from each.
• Prioritise analysis and action on higher risk and reward areas, and check the likely impact throughout
the supply chain.
• Balance the CSR impact within the organisation's overall sourcing strategy.
• No two organisations have the same requirements and therefore a unique risk model will need to be
developed that encompasses social, environmental and economic risks (triple bottom line).

5.22 Specifically in terms of suppliers:

• Involve suppliers in the analysis. If there is a potentially excellent supplier who is poor on a particular
aspect of corporate social responsibility, then assess whether it is worth working with them to
improve this aspect of their business.
• Scarce resources. Is the supplier using scarce resources responsibly?
• Pollution. Is the supplier responsible for pollution, or what measures does the supplier take to prevent
pollution?
• Energy efficiency. Is the supplier energy efficient? What measures has the supplier taken to reduce its
consumption of energy? 6.4 Johnson, Scholes and Whittington suggest using the VRIN analysis (value; rarity; inimitability; non-
• Who owns the supplier organisation? Are there any ethical concerns about the ownership of the substitutability) to assess the distinctive resources available to the organisation before analysing its supply
organisation? chains.
• Does the supplier pay its employees a proper wage?
• Does the supplier have ethical employment and working practices? 6.5 Value provides potential competitive advantage in a market at a cost that allows the organisation to realise
• Do the suppliers themselves use any suppliers about which there are concerns? acceptable levels of return. It can comprise:
• Does the supplier have any history of operating unethically or illegally?
• Taking advantage of opportunities and neutral ising threats
• Does the supplier discriminate in any way on the grounds of race, gender, religion, age or any other
• Value to customers
basis other than competence?
• Providing potential competitive advantage
5.23 Corporate social responsibility in the supply chain can be formalised by codes of conduct passed through • Cost.
the tiering system. Owing to the fluid nature of supply chains, these codes should be regularly reviewed in
6.6 Rarity refers to those capabilities possessed uniquely by one organisation or by only a few others.
the light of ever-changing situations.
Competitive advantage built on rarity might be longer-lasting. Intellectual capital and particularly talented
individuals are rare. Components to consider include:
6 Supply chain and value chain analysis
• Meeting customer needs- rarity in itself is of little vale unless a desire is there for the product or
6.1 Thus far we have considered the industry, market and supplier factors that might affect our decision service it enables
making. These considerations have informed our understanding of our organisation, and would now be • Sustainability- rarity could be temporary; people move on to other organisations.
deepened by an examination of the supply chain and value network that are to be improved through the
6.7 lnimitability capabilities are those that competitors find it difficult to imitate or obtain. Components to
use of category management.
consider include:
6.2 This is a closer look then into strategic capabilities and competencies as a function of the sourcing • Superior performance
strategy. Fundamental questions need to be asked at this stage to begin any analysis. • Linked competencies- distinctive combinations and integrations of capabilities, activities, skills,
knowledge, organisations and processes. These linkages may be particularly difficult to imitate. This
• What are the strategic capabilities?
may express itself through complexity of systems, relationships that are not easily copied and so on.
• How do strategic capabilities contribute to advantage and superior performance?
Culture and history have a large effect here.
• How do we diagnose these strategic capabilities?
• How do we manage the development of strategic capabilities? 6.8 Non-substitutability refers to providing products and services that are valued by customers but are
difficult to usurp. This quality needs protection from, for example:

110 111
 Supply Market Factors I CHAPTER 7
Category Management in Procurement and Supply

• Product or service substitution, which was examined in Porter's five forces model reduce waste, reassigning activities elsewhere to reduce cost or become more efficient and effective).
• Competence substitution whereby resource-based organisations have replaced certain tasks with Consider backward and forward integration.

automated processes. 6.13 Once the mapping activity is complete, there should be a number of opportunities that can be exploited
Assessing the organisation's resource capabilities with the VRIN model will assist in the identification of to alter the current state of value within the supply chain. These could provide breakthrough ideas for the
6.9
organisation.
the most important activities throughout the supply chain.

6.14 The most powerful analyses draw on expertise from across the organisation, and from third-party
Value chain analysis and the value network
providers, too, depending on the sensitivity and confidentiality of any information considered. It is difficult
6.10 'The value chain describes the categories of activities within and around an organisation, which together to see things from new perspectives, so a quick route to fresh ideas is to 'import' new perspectives into
create a product or service.' Most organisations are also 'part of a wider value network ... the set of the process. Also, although as supply chain professionals we undertake to understand the workings of
interorganisationallinks and relationships that are necessary to create a product or service.' (Johnson, entire supply chains, how certain individual steps actually work in practice may be outside our direct
Scholes and Whittington) Figure 7.7 shows a generic value chain. We will look at this topic in greater depth experience, so first-hand insight on these is valuable.
in coming chapters, but there are some aspects we need to introduce here.
6.15 The analysis should investigate all activities to the point where all influences with an effect across multiple
Figure 7.7 A generic value chain (Woodcock and Beamish) steps (ie upon the chain) have been examined. O'Brien highlights the need to think most broadly and
carefully in terms of corporate social responsibility. This is a growing and poorly-understood component of
Total industry activity cost chain value added (and value destroyed) analysis.
I
Price or transfer Price or transfer Price or t ransfer
cost to manufacture cost to distributors cost toe nd user 7 Analysing supplier perceptions
e e
+- Supplier channel activities

Supplier activities Purchased

Manufacturing~related activities

General and administrative activities

Distribution channel activities-J

Wholesale
distributor and
Retailer activities
and relations
7.1 We have concentrated on our own perspective thus far, even in considering how suppliers affect our
category management plans. This is inevitably a biased view unless it is balanced by an attempt to put
ourselves in the position of a third-party provider to our organisation. Certainly if we want to understand
the value network, it is important to understand the perceptions that our suppliers have of our
organisation and their relationships with us.
I
and relations materials, In-house staff support activities
components, dealer network
inputs and Production Marketing and Customer service activities 7.2 We should imagine what it is like being in the supplier's company, being presented with your organisation's
inbound activities and sales activities and outbound
logistics
wants and reacting to its actions. Would you, as the supplier, really want to do business with your
logistics operations
organisation? Switch back to your own organisation's perspective: how vulnerable is your organisation for
continuity of supply because of your suppliers' desire (or lack of desire) to deal with you as a business?

6.11 Throughout our discussions thus far we have highlighted the concept of value. If this is to be offered 7.3 Suppliers want to maintain and grow the accounts that are important to them; to create a sufficiently well-
to the marketplace by organisations, then they need to understand what activities undertaken within developed relationship with these accounts such that the supplier feels strong in its position with them.
the organisation create that value, and certainly those that do not. Given the increasing propensity for Different accounts are more or less desirable to suppliers, and this will have an effect on the priorities that
organisations to rely on third parties to deliver their services and products, it is important to understand they have in dealing with your organisation. An investigation into how your suppliers manage accounts,
the value stream flowing through those third-party organisations. This is where the value network concept and where your organisation fits in, reveals much in terms of understanding a supplier's perceptions. Are
you difficult to deal with eg contractually or on payment? Are you unprofitable? Unless we appreciate
comes to the fore.
the supplier's perception of our organisation, then we are at risk, especially if we rely on a supplier
6.12 This analysis aids the determination of the real scope ofthe organisation, links to the operational business, strategically that sees us as an account to manage out.
exposes the activities that create value, and highlights stakeholders and their importance across the
organisation and beyond. It also uncovers the organisation's capabilities, which provides information to 7.4 There is an analytical tool that can be used for this purpose called supplier preferencing (Figure 7.8).
support the sourcing strategy and to prioritise the areas that need attention in order to create competitive It is about the supplier's perspective, which is analysed as depending on two factors: the inherent
advantages and/or reduce losses. O'Brien suggests a simple three-step process for analysing the value attractiveness of the customer, and the value of the customer's business.
chain and network. • Development- the supplier would seek to develop the account and increase business in the future .
• Map the supply chain starting with the product or service and identifying all of the activities it • Core- accounts the supplier needs to maintain at all costs, with ongoing care and attention, keeping
contains in order to map a complete process flow. If you start at where the customer or end-user uses close to customers, filling gaps in requirements, and maintaining relationships.
the product or service and work back, then you will get a clearer picture. • Nuisance- not a good place to be as a buyer because the supplier does not really want to do business
• Identify the value added at each step; essentially, those features that you would pay more for as a with your organisation. As long as the buyer is tolerable, then the supplier will carry on, but if there
customer (eg processing, transport, innovation, assured supply, reliability, reduced risk). is a problem, then the supplier will drop the buyer. There may be deliberate attempts to lose the
• Identify opportunities for improvement or reducing waste in the flow of activities (eg eliminating account.
unnecessary or non-value-adding steps, adding new activities to reduce risk, combining activities to • Exploitable- this is not attractive to the supplier, but as long as you spend significant monies then
Category Management in Procurement and Supply Supply Market Factors l CHAPTER 7

business will be managed. It may not be obvious to you that you are low on the agenda and being
kept basically happy with no effort to improve conditions for you. 'Doing just enough' sums up the
supplier's attitude to your organisation.

Figure 7.8 Supplier prejerencing (Steele and Court}

High
Development Core
Attractiveness of
buying organisation
r
Low
Nuisance Exploitable

Low - - - - - - - - - - + H i g h
Value of buyer's business

7.5 O'Brien discusses the power of attractiveness and how it is good to get close to key suppliers.
Attractiveness is about spend, but is also about other issues that might make the supplier grow and
maintain the business such as the following.

• Purchases are high volume, or indeed high spend.

• Your brand is well-known and it would give kudos to the supplier to be able to name you as a
customer.

I
• Good payment terms and payment on time.
• Degree of profit margin.
Self-test questions
• Ease of servicing the account. Numbers in brackets refer to the paragraphs above where your answers can be checked.
• The fit of your type of business and the associated supply lines with the supplier's future strategy and
direction. 1 Explain the five competitive forces in Porter's model. (1.5)
• The fit of your operating locations with the supplier's future planned geographical supply footprint.
• A developed, good relationship with the supplier which they want to keep up. 2 Show how the five forces can be mapped onto an industry lifecycle. (Figure 7.2)

7.6 Relative spend on the account is about the proportion your organisation accounts for of your supplier's
3 What three factors in pricing decisions are identified by Baily eta/? (1.15)
total revenues. Values at or in excess of 30% are considered to fall on the right side of the diagram.
4 List steps involved in the financial analysis of a supplier. (2.10)
7.7 Having identified the positioning of each buyer on the preferencing matrix, the implications need to be
addressed. Again the question needs to be asked: what has this analysis told me? It may be that you need 5 List some key environmental factors identified by STEEPLE analysis. (Table 7.1)
to shift your position by working with the supplier to change their view of your organisation if you need
them, or change your supplier to a better supplier if there is an opportunity to so do. 6 In the context of the Boston matrix, explain what is meant by stars, cash cows, dogs and question marks.
(4.7)
7.8 This tool helps us to analyse why suppliers view our organisation as they do and to assess strategies
to change that preferencing. However, supplier preferencing tools need also to be tempered with an 7 According to CIPS, what four types of responsibility are encompassed by CSR? (5.3)
assessment of supplier behaviour and to explore why the behaviour is as it is. There may be a difference
between the preferencing that you feel the supplier ought to have for you based on your spend and the 8 Give reasons why organisations should pursue CSR. (5.6)
attractiveness of the account and how the relationship plays out in reality. This might be for a number of
9 What are the three elements in the triple bottom line? (5.17)
reasons, eg the personalities involved in the account on both sides. Thus the preferencing model needs to
be built on with context. 10 What are the four elements in VRIN analysis? (6.4)

11 What are the four categories in the supplier preferencing matrix? (7.4)

115
CHAPTER 8

Pre-Planning Preparation

Assessment criteria and indicative content

Create a sourcing plan including its priorities in the development of a strategic sourcing or category
management process

• Assessing switching costs and make versus buy criteria

• Assessing sourcing options such as the length of agreement and the numbers of suppliers under
single, dual or multiple sourcing options
• Assessing the procurement process to deliver planned changes
• Developing risk mitigation plans

Section headings
1 Make or buy decisions
2 Switching costs
3 Sourcing options
4 Delivering planned change
5 Risk planning and mitigation

Introduction
We begin this chapter having already looked at how to begin on a sourcing plan. We have pulled together
data and results from historical category spend, various analytical tools, market data, supplier data and
pricing models.

In the next chapter we will explore the implementation of our sourcing plan. There we will touch on
other important aspects that support options evaluation, including how to set evaluation criteria for that
implementation. However, first we need to finalise our assessment of the factors that will allow us to
complete the sourcing strategy itself, and place us in the best position to proceed to implementation.

Here are some key issues to keep in mind as you study this chapter.

• Our focus is on ensuring that the organisation is finally ready to create the appropriate sourcing
strategies and has considered whether it is in the right business.
• Throughout the development of the sourcing strategy there has been a recognition that the procurement
function has been only one of many functional areas with an influence. There has been mention of
different levels of strategy taking place in the organisation where change needs to be effected, and
stakeholders to be won over to adopt, implement and sponsor the changes needed to deliver the
advantages that can be gained through category management. It is opportune to reflect on that.
• We consider how able procurement is as a function to deliver the planned changes for the
organisation. It very much depends upon the positioning of procurement within the organisation as a
strategic function as to whether it can achieve these objectives and goals, and as to whether influence
through stakeholders can be leveraged.
• A critical component of risk mitigation is to develop alternative courses of action, workarounds, and
fallback positions, with a recommended course of action for each critical risk. The risk mitigation plan

117
 Category Management in Procurement and Supply Pre-Planning Preparation 1 CHAPTER 8

for a given risk (sometimes called a contingency plan) includes techniques and methods used to avoid, 1.4 Vertical integration is like diversification in that it increases the organisation's scope, albeit within the
reduce, and control the probability of occurrence of the risk, the extent of damage incurred should existing value chain. It is seen as a move to capture a greater share of the value added and profit within
the risk occur, or both. the chain. Horizontal integration is about creating synergies with different value networks, and is also
linked to diversification.
1 Make or buy decisions
1.5 Both these moves have profound effects on and connections with sourcing strategy. Frequently, the initial
1.1 Organisations design their activities to deliver their objectives and core goals. Over time, these change case made for an integration (ega merger or an integration) is that significant cost savings will result, ie
and develop such that the organisation grows, repurposes, and seeks more or different competitive that the integrated organisation will spend less or spend better than its two antecedents did separately. It
advantages. During this development and growth, the challenge for any organisation is to maintain the is incumbent on procurement, then, to be ready to devise the appropriate sourcing strategies.
effectiveness of its processes in addressing its markets. Therefore supply and value chain analysis are vital
in order to highlight the activities embedded within that delivery that mean the most to the organisation's Outsourcing
customers and to its success.
1.6 It may make sense to bring some activities under closer control. With other activities, it may make sense to
1.2 Part of this process is exploring whether the organisation is doing all of the right things; whether there loosen control and outsource or subcontract them to external third parties. Outsourcing is most commonly
are activities it should be more distant from and others that it would benefit from integrating into itself. A associated with support services. The organisation's value chain will comprise value-adding, transformative
sometimes neglected part of the sourcing decision is the most fundamental sourcing decision of all: should operations, but also those that enable the value-adding operations to happen- an instrument manufacturer
we make or should we buy? needs to be good at accounting and hygiene, but balanced books and clean laboratories do not sell its
telescopes. These support activities are prime candidates to be outsourced to specialists.
Integration
1.7 Tom Peters advises organisations to 'stick to the knitting', ie to concentrate on their threshold and core
1.3 The organisation can choose to integrate external activities with itself, that is, bring them under its direct activities. There is a cost in maintaining professional standards in non-core activities that the organisation
control. Figure 8.1 shows some options for this. Vertical integration describes situations where, according makes little gain from. The simple arithmetic of cost-benefit may make a case for buying these activities in
to Johnson, Scholes and Whittington, the organisation becomes its own supplier or customer. Thus it from others. If a third party can provide the activity or service more cost effectively than internal delivery,
involves operating at another stage of the value network. There are two options: then this should be the answer- outsource.

•
Backwards integration- into activities connected with inputs into the organisation's current activities,
upstream in the supply chain or value network.
Forwards integration- into activities connected with the outputs of the organisation's current
activities, downstream in the value network or supply chain.
1.8 There are outsourcing risks, however. These stem from a variety of sources such as loss of control,
accountability, communication with front-line staff, recruiting, security and confidentiality, organisational
culture mis-match. At the very least, the organisation has another (long-term) relationship to manage,
affected by the complexity and changing nature of the outsourced activity, investment in the relationship,
I
and issues surrounding reliance.
Figure 8.1 An organisation's integration options (Johnson, Scholes and Whittington)

The make or buy decision

Machinery Components Raw materials
manufacture manufacture production
1.9 Make or buy decisions apply to all potential procurements, whether they are products, services or raw
materials. These decisions have a deep impact on operations. The decision is influenced by a great many
BACKWARDS Components Raw materials Research and different factors. It necessitates reference to purchasing strategy; this and corporate strategy need to be
Machinery supply
INTEGRATION supply supply design aligned on certain values- eg quality, cost reduction and control, innovation, delivery- and make or buy
decisions need to be consistent with this higher-level framework.

Transport Finance 1.10 Many industries see a bias towards 'buy' options. Turning to buying has attractions.

• It allows downsizing- reductions in eg staffing, space, facilities, costs.

• It allows focused investments on people and other resources in core competencies.
Complementary Complementary
products capabilities • It leverages the specialist expertise, technologies, resources and economies of scale of suppliers, with the
HORIZONTAL potential to add more value at less cost than the organisation could achieve itself (for non-core activities).
INTEGRATION • It enables synergy through collaborative supply relationships.
Competitive
By-products
products 1.11 But there are also disadvantages.

---------------------------- -------------------- •
•
Costs of services and relationship/contract management
Loss of control and difficulties ensuring service standards
Distribution Repairs and
• Potential reputational damage if service or ethical issues arise
FORWARDS
Transport Marketing
INTEGRATION channels servicing • Loss of in-house knowledge and competencies (for future needs)
• Loss of control over confidential information and intellectual property
• Ethical and employee relations issues of downsizing

11R
Category Management in Procurement and Supply
Pn:>~P!annlng Preparation 1 CHAPTER 8

1.12 The strategic framework will provide a context for considering the principal influences on the decision. 1.14 Make or buy decisions may be prompted by a number of underlying factors, including the following (Baily
et al).
• The effects on total costs
• Profitability, risk and flexibility • Deterioration in an existing supplier's quality or performance
• The availability of in-house competencies and capacity; how readily they can be acquired or • Delivery failure or poor service from the existing source
expanded, and whether they will be consistently available in the future • Large price increases
• The availability of suitable external suppliers. A lack of suitable suppliers would push the organisation • Substantial volume changes
towards the 'make' option • Pressure to reduce costs
• The need to retain knowledge and skills in-house for future applications • Desire to concentrate internal resources on areas of special competence
• Human resource impacts- will a decision to buy lead to redundancies? Will a decision to make lead to • Need to design for secrecy
a need for training and/or recruitment? • Import substitution

1.13 Table 8.11ooks at these in more detail. 'Make-or-buy' decisions are taken at all decision-making levels • Over-reliance on third parties leading to the desire to change the terms of engagement
within the organisation, from front-line operations to the boardroom, and each should be taken at the 1.15 Baily et al suggest a methodical approach. Assess:
level that is appropriate to the implications of the decision and the speed with which the answer is
• How important the process is to the organisation
needed. Decisions taken at lower levels are operationally inspired rather than strategically crafted. Baily et
• How competitive the organisation is in relation to others undertaking the process
al suggest:
• How strongly the process impacts on the organisation's performance measures
• Internal sourcing (the make option) is excluded for any item which cannot be made on available • The extent to which the process affects other processes
equipment or using existing resources subject to capacity constraints. • Whether the process links to any strategic issues confronting the organisation.
• External sourcing (the buy option) should be excluded for items which can be made economically with
1.16 The various options are summarised in a simple matrix devised by Ray Carter of DPSS (Figure 8.2).
in-house capacity.
• Tactical decisions involve procuring equipment, personnel or other resources without changing the Figure 8.2 Determining strategic outsourcing suitability (Carter)
fundamental nature of the organisation's asset base.
• Strategic decisions take place on issues around the vertical integration we have just discussed wherein COMPETENCE OF CONTRACTORS
entire business units are acquired or outsourced. This results in either developing or closing down
High Low
part of the capabilities of the organisation, and involves the fundamental organisational questions of
Develop
mission, purpose, vision, strengths and advantages. Low Outsource/buy in contracting
CORE IMPORTANCE
High Collaboration In-house
Table 8.1 Issues involved in the make or buy decision (Baily, Farmer, Jessop and Janes)

2 Switching costs
2.1 We have explored competitive position and competitive advantage, and have discussed analytical tools
such as Porter's five forces, Kraljic's matrix and the Boston matrix that support our efforts to identify the
steps we should take to improve our organisation's standing in this regard. During this, we have identified
the issue of the relative power of suppliers and buyers. A key lever for the buyer is the ability to easily
move from one supplier to another. The disincentive of doing this, the penalty incurred, is termed the
switching cost. The ability to switch can be influenced by a number of factors.
• The complexity and/or specialist nature of the product or service
• The number of suppliers in the market
• Buying/selling power
• Flexibility
2.2 Clearly this is a factor in assessing the ability ofthe organisation to develop and change its sourcing
strategies, and is easily overlooked or under-estimated during internal audit and planning. The sources
of switching costs can entail a whole new level of analysis which may make the category management
exercise wider-reaching than was first imagined.
 Pre-P!anning Preparation I CHAPTER 8
Category Management in Procurement and Supply

Co-ordinated single-sourcing or parallel sourcing

3 Sourcing options
3.8 In parallel sourcing, the organisation enters into separate, parallel agreements with different suppliers for
3.1 Our discussions thus far have touched on our relationships with suppliers and how those relationships
different parts of the same supply. If we take an IT system as an example, it may be that Supplier A handles
are built and grown. Portfolio analysis enables us to consider the likely number of suppliers that we as a
data centre functions, Supplier B handles desktop functions, Supplier C handles network functions and so
business will deal with. Porter's five forces also give us an idea of the attractiveness of our business to the
on.
market, and so how many suppliers are likely to be interested in us.
3.9 Parallel sourcing has the following characteristics (Ford, Maughan and Stevenson).
3.2 This part of the chapter examines what number of suppliers secures the business deliverables best.
Organisations are pondering whether to work with more than one supplier on each of their requirements, • Choice and flexibility- it involves competition between suppliers, and avoids lock-in to a single
turning to parallel, dual, or multiple arrangements. When an organisation first outsources, it is typically supplier for a broad range of services for a long period of time. It allows the organisation to develop
seeking to achieve one or more of the following objectives. parts of its inputs without affecting the whole. Often, organisations deliberately arrange their various
contracts so that their durations overlap and expire in waves rather than all at once.
• Increased cost savings
• Responsibility- the organisation's operational risk is higher than in single-sourcing because it
• Value for money
delegates responsibility to several suppliers simultaneously. This can make it harder to strike the right
• Better service levels
deal and ensure that the separate contracts are properly implemented. The organisation is left as the
• Access to best practice
middleman coping with any gaps and cracks between the contracts. This can allow suppliers to exploit
• Greater innovation
weaknesses in the process, or simply not co-operate when it is not in their clear interests to adapt to
3.3 These are not necessarily all found in a single supply partner. changes outside the scopes of their individual arrangements. Similarly, there may be issues around the
hand over of work or responsibilities from supplier to supplier. There may be disagreement on quality,
Single sourcing reliability or timing. Difficulties with one supplier may affect others, and scheduled work may have to
be rescheduled to a much later date. All of these challenges increase risk and management costs. The
3.4 Ford, Maughan and Stevenson describe single sourcing as the arrangement where the organisation
causes of failure can become ambiguous, so action directed at overcoming failure may be misplaced
chooses a single supplier to provide the entirety of a given supply, and relies on that supplier to carry
or inappropriate, incurring further problems. Performance issues are harder to challenge as suppliers
responsibility for the supply throughout the contract term. Generally, the organisation will ask the supplier
point fingers at each other. Appropriate contractual clauses and co-operation agreements can mitigate
to manage all matters relating to the supply, treating them as a 'black box' (ie the organisation knows
these risks, but not eliminate them.
nothing of how the supplier supplies).
3.10 So, separate agreements are often inter-connected in delivery but not legally, thereby causing difficulties in
3.5 The supplier is solely responsible for meeting the obligations of the agreement. Depending on the execution of the business. This means that contractually these arrangements, for the provision of services
complexity of the requirements, it may be necessary for it to work with suppliers of its own. Because particularly, can be very complex. The organisation often assumes the role of an 'outsourcing integrator' of
the single-source supplier is a black box, its prices are harder to question and may include its own the various inputs (except in cases where one of the suppliers is tasked with this integration responsibility).
management costs, allowance for risk, and profits in respect of its own suppliers, as well as a premium for and cannot demand that suppliers co-operate with each other unless it builds this co-operation into their
the convenience. It may be that the cost of working with such a supplier outweighs the benefits, but the contracts. Contract forms are far more diverse than with single sourcing.
buyer may not find that out unless it tries. This element of risk keeps the buyer in its single-supplier state.
3.11 One further issue is that while an organisation can map out its processes perfectly, and conclude water-
Lock-in tight contracts for each section with a number of suppliers, some of those suppliers may not want or even
be able to work together, meaning that the organisation has to rearrange contracts before a single value-
3.6 Ford, Maughan and Stevenson describe lock-in. One of the most frequent problems with single-sourcing adding activity has occurred.
is that an organisation becomes 'locked-in' to its supplier. It then finds it difficult to create any sense of
competition or leverage when sourcing or when seeking to specify new requirements within existing Dual sourcing
arrangements. An existing supplier may have incumbency advantages that make them self-selecting,
erecting barriers to other potential suppliers. 3.12 The organisation may appreciate the benefits of consolidated sourcing, but consider single-sourcing to be
too risky. Dual sourcing is an option here. The organisation consolidates its spend to two suppliers. The
3.7 Organisations that are aware of lock-in problems have added incentive to select single-source suppliers two suppliers may be treated in the same way on an equal or major-minor split of the business, or they
on sound criteria; relationship matching is crucial. Suppliers that will support the development and may be treated quite differently.
creation of cost savings, value for money and innovation are desired. Sound contractual clauses to protect
organisations on single-source deals are also important (eg protection of intellectual property rights, rights 3.13 For example, one supplier might be used on that portion of projected supply which is known with (near)
in exit and transfer of knowledge and skills). Organisations need to build in benchmarking processes and certainty. The organisation is then free to contract with the supplier for bulk quantities a long way in
the contractual ability to assess competitiveness during the course of single-source deals as there is no advance, so enjoying scale-economy and early-booking prices. It may then use the other supplier for
realistic mechanism to test this in the market. Developments, change clauses and mechanisms to cost the volatility in its supply needs, placing numerous short-term orders of varying quantities as the need
these appropriately should also feature in governance structures for continuing innovation. arises. This would be a different sort of supply relationship and some suppliers would be better suited
to it, whereas others will be better suited to the more long-term, certain proposition. This kind of dual
supply arrangement suits fashion-influenced industries where demand in the shops can veer suddenly, and
response time and quality considerations mean that short-term buying of large lots is impossible.

1.2.3.
 Category Management in Procurement and Supply Pre-Planning Preparation I CHAPTER 8

3.14 The supplier dealing with the volatile part of the demand will typically quote higher prices than the • Business strategy determines how each organisational business unit (eg division, subsidiary) should
supplier dealing with the stable part of the demand. Why have two suppliers then? Generally, suppliers attempt to achieve its objectives in the context of the overall corporate strategy.
capable of dealing with large volumes will want to book their capacity in advance so that they are utilising • Functional strategy determines how individual functions, such as procurement, can best support
their machines, facilities, people and so on to full capacity- they will not want to leave unused capacity corporate and business strategies.
in reserve in case a buyer suddenly ups their order. They will be comparatively slow to deliver. Smaller
4.2 Through our analysis we have reviewed what the corporate objectives might be. Here are some
suppliers, incapable of handling larger orders, are more responsive -the orders they do have complete
possibilities.
more quickly, freeing their capacity sooner.
• Maintain/increase market share.
Multiple sourcing • Improve profits, cashflow and return on capital.
• Shorten time to market.
3.15 Multiple sourcing involves using multiple supply sources for the same product or service. This seems the • Eliminate non-core activities.
opposite of what category management is about, but it is a valid option. What category management • Introduce continuous improvement.
prevents is unplanned multiple sourcing scenarios, where multiple sourcing is not the best option. • Become 'world-class'.

3.16 Multiple sourcing is used to constructively intensify competition. This can be as simple as keeping 4.3 Procurement responds to these through its functional focus, aiming to for example:
switching barriers low. There is a limit to how far this can be pushed before suppliers are no longer • Provide supplies to match customer needs- eg assure quality, reduce delivery lead times, reduce cost.
interested in making a special effort towards you (supplier preferencing, Chapter 7), so multiple sourcing • Reduce stocks and improve reliability, eg through more frequent deliveries.
needs careful management. • Introduce early supplier involvement and simultaneous engineering.
• Develop effective make or buy policies, integrate purchasing and capacity planning.
3.17 Cousins eta/ suggest that the organisation should develop a range of suppliers to choose from, and
• Reduce the supplier base, adopt partnership and co-makership approaches, reduce product
carefully balance capacity constraints with individual supplier performance when placing its orders.
complexity, increase accuracy and reliability.
Organisations may use reverse auctions (Chapter 10) to play suppliers off each other and achieve
• Work with suppliers to establish world-class standards, improve flexibility of response to market
lower prices. This is considered adversarial so not in the general spirit of strategic sourcing or category
conditions, liaise with technology sources.
management, but used carefully it still has its place.

3.18 Organisations may favour this strategy for 'routine' or 'acquisition' items where there is a focus on price
rather than total cost. It maintains short-term continuity of supply while enabling the organisation to
achieve price reductions. However sometimes suppliers, seeing little gain in under-cutting each other, will
allow market prices to drift up.
4.4

4.5
Therefore there is a clear matching of the drivers between the functional and corporate strategy through
business delivery.

The goals and contribution of supply chain management as realised through procurement are as follows.

• Reducing non-value-adding (waste) activities throughout the supply chain

I
• Reducing cycle times- supporting innovation, faster and more precise delivery times
The length of the sourcing agreement and the nature of the sourcing relationship • Improving service quality and responsiveness to customer requirements- with a knock-on effect on
customer loyalty and sales revenue
3.19 Historically, single-sourcing contracts have been lengthy engagements, at times lasting as long as fifteen
• Enhancing quality
years. However, in recent years single-source deals have shortened in duration, with most falling within a
• Reducing total costs
range of three to seven years for the initial term. Typically, these contracts include renewal terms allowing
• Optimising the balance of service levels and costs by measuring them across the supply chain,
the buyer the discretion to extend the term for two or three one-year periods. Understandably, suppliers
avoiding sub-optimal conflicts and trade-offs
target long-term contracts because these give them more leverage to deliver cost savings and value for
• Improving supply chain communication
money over time to their customers. However, a long-term contract can be disadvantageous for the
customer if the supplier's performance is poor, the relationship between the customer and supplier is not 4.6 There are clear strategic themes at play for managing strategic change within procurement.
working, the expected innovation is not being delivered, or the cost savings and value for money do not
• The need to respond to changing environmental conditions, eg globalisation, increasing competition,
materialise.
shortening product lifecycles, public sector restructuring, green concerns, technological developments
• Movement towards a proactive role which emphasises the strategic importance of supply chain
4 Delivering planned change performance for organisations as a whole
• Strategies for supplier relationships
4.1 Throughout our development of the sourcing strategy we have recognised that procurement is only one
• Performance-oriented sourcing strategies that control the basic features of quality, delivery, cost and
of many power bases in the organisation to have an influence. We have discussed the different levels of
service
strategy and decision-making taking place in the organisation where change needs to be effected. We have
• Organisation of the supply function
seen that stakeholders must be won over to adopt, implement and sponsor the changes needed to deliver
• Application of information and communications technology to supply chain management activity
the advantages that can be gained through category management. It is opportune to recall that:
4.7 Integrating processes between organisational strategy and procurement implies the following
• Corporate-level strategy is concerned with what business or businesses the organisation is involved in, or requirements .
should be involved in, and the extent to which these businesses should be integrated with each other.
• A formal, long-term procurement plan as part of the corporate planning process (or as a component
of strategy).

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• Purchasing managers being involved in the corporate planning process. 5.4 A common feature of risk management is thresholds beyond which risk is considered to become
• Top (boardroom) management integrating the function with the organisation, providing guidance on unacceptable. These can be set in many different ways, eg days late, parts defective, lives endangered,
corporate strategy and direction. money lost and so on. When these thresholds are crossed, risk mitigation or contingency plans come into
• Strong interpersonal relations between supply chain managers and a supportive chief executive. These play. Risk levels are generally measured by looking at the chance of happening and the impact should the
may informally facilitate integration, as information is exchanged about objectives and environmental risk materialise. Risk is often poorly understood; explaining to stakeholders what risks mean will be a key
threats and opportunities. task. A categorisation system can be a useful broad-brush device through which to quickly communicate
risk and assign priorities.
4.8 Other integrating factors lie in the organisational context.

• Integration of materials-handling functions across an increasingly wide span of the value chain. 5.5 Someone needs to lead the risk process and own the assessment procedure. This might not be the
• Cost savings from consolidating or aggregating the purchasing requirements of business units through category manager. Risk management is a specialist skill- the category manager needs to be familiar with
a centralised procurement function; this places supply chain strategy a step closer to overall corporate it, but might not be familiar enough to conduct risk analysis as well as the organisation would like. The
strategy. organisation may also want some element of scepticism and independence in its risk assessments- things
• Strategic purchasing requirements, which are the basis of procurement strategies, informed with tools that the category manager cannot provide.
such as the Kraljic matrix.
• Purchasing and supply management increasingly embracing areas of corporate strategic concern (eg 5.6 The best risk strategy is to make the right small changes early, so that risks are always at least blunted and
CSR). ideally avoided.

4.9 There are strategic implications of supply chain management.

Contingency planning
• The role and positioning (or repositioning) of an organisation within the total supply and value chain
(eg through forwards or backwards integration) 5.7 Literally, contingency plans are plans for what the organisation will do should a risk materialise. They
• The configuration of the chain or network, and the competitive or collaborative nature of the cannot, by definition, reduce the chance of a risk as they come into play only once it has happened.
relationships within it Instead, they reduce its effects. Mitigation or avoidance is obviously far preferable. All the same cost-
• The selection of strategic supply chain partners benefit arguments apply: contingency planning eats up resources, and its upside must more than
• Internal and trans-organisational processes for materials and information flow- process structure, compensate for that. Contingency plans may be reserved for core-purpose, critical systems and activity, ie
production and distribution flows, planning and control systems, information systems and so on business continuity planning.
• Collaborative and integrative arrangements (eg joint planning and control systems, cross-training of
staff, relationship-specific technologies), where appropriate
Risk monitoring

4.10 Essentially what we seek is to ascertain how procurement, supply chain and organisational strategies fit 5.8 Some risks are accepted- the organisation considers planning against them to be more trouble than they
together, and supply chain management's role in the management of organisational change, such as the are worth. They may be trivial or, rarely, there may be no reasonable mitigation or contingency planning
introduction of category management or the development of sourcing plans. We want to assess how the that can be made. Risk acceptance is a decision that may have to be defended later; the justification for
procurement process should be placed to deliver planned changes. it should be evidenced and recorded. All other risks are monitored. Monitoring will include review- the
organisation will want to spot the early signs of a risk materialising, but also spot changes in its nature,
5 Risk planning and mitigation probability and severity.

5.1 We introduced the idea of risk management in Chapter 4, and will look at it again more thoroughly in
Chapter 16. For now, we will consider the need for risk planning and risk mitigation. It is important to
develop an effective risk strategy. Unfortunately, this is often deferred as it does not add any forward
momentum to the project. Consequently, when difficulties arise, and they will, there is no well-developed
plan to mitigate them, so even small difficulties can become crises.

Risk strategy

5.2 Risk management is not value-adding, but it prevents value being destroyed. In this sense it is very open
to cost-benefit decisions balancing potential loss against certain expense. Risk mitigation is the reduction
of the chance and/or effects of risk. There is another cost-benefit decision then, as different mitigation
plans will reduce risk by different amounts. Risk management and mitigation will be targeted against those
risks with the greatest effects; less important risks should receive prortionately less attention.

5.3 Risk assessment or analysis should take place as early as possible and should be an ongoing concern.
Category management institutionalises risk assessment by including a SWOT analysis, but risk
management procedures should be more thorough than this.

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CHAPTER 9

Planning the Process

Assessment criteria and indicative content

Analyse the use of plans for the implementation of strategic sourcing or category management process

• Involving stakeholders in the sourcing decision

• Creating evaluation criteria
• Finalising specifications and contractual agreements
Self-test questions • The use of confidentiality agreements

Numbers in brackets refer to the paragraphs above where your answers can be checked. Section headings
1 Explain backwards integration and forward integration. (1.3) 1 Involving stakeholders in the sourcing decision
2 Creating evaluation criteria
2 List advantages and disadvantages of buying in rather than making internally. (1.10, 1.11) 3 Finalising specifications and contractual agreements
4 The use of confidentiality agreements
3 Suggest reasons why a make or buy decision may come to the fore. (1.14)
Introduction
4 List factors affecting an organisation's ability to switch suppliers. (2.1)
Here are some key issues to keep in mind as you study this chapter.
5 In the context of single sourcing, what is meant by 'lock-in'? (3.6)
• Category management is the collation of organisational spends and focused procurement upon
6 Why might a category manager adopt a policy of multiple sourcing? (3.16, 3.17) discrete products and services aligning to the functionality of those goods and services. This is
usually undertaken by the buying organisation for the primary purpose of securing gains to be had
7 How can procurement assist in achieving overall corporate objectives? (4.3, 4.5) from the way specific supply markets organise in response to sales and demand. In other words, the
organisation shapes the market through the manner in which it chooses to participate.
8 What is risk mitigation? (5.2)
• Category management is a strategic approach concerned not only with the procurement of third-party
products and services, but also with making long-term changes to the entire organisation's processes
and behaviour. It therefore needs to engage the organisation at all levels in a co-ordinated manner.
• Category management planning needs to connect both with corporate business goals and to day-to-
day procurement activity as a disconnect can develop between the two, so much so that the huge
potential to gain value is lost.
• Organisations and their existing contractual commitments may be structured in such a way that to
begin with they are not very compatible with the category approach. There may be institutionalised
barriers to identifying specific category spends, getting key stakeholders involved, and determining
appropriate governance. The organisation may have to rethink and transform itself in order to gain
from category management.
• The implementation of direct and indirect category strategies will differ in terms of control, scale, and
planning within organisations.
• Category management is reputed to deliver dramatic value-added, to reduce costs and reduce risk.
However it can often fail to fulfil its potential because it has not been appropriately planned for or
deployed, and more importantly the ethos has not been adopted across the entire organisation and
its people.

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1 Involving stakeholders in the sourcing decision organisations (increasingly) rely on third parties to supply products and services to and for them, and
these third parties therefore become involved in the value chain too. Their behaviour and performance
1.1 The sourcing strategy is one of key pillars of category management. It sets direction and scope for the should not be overlooked.
procurement of specified products and services over the long term. A key goal for the organisation in
developing its strategic sourcing decisions is to realise high levels of value. Organisations operate in an Figure 9.2 Porter's value network
ever-more competitive landscape, and expectations are placed upon procurement personnel that they will
find ways of reducing costs across the organisation's entire end-to-end operation, from input to production Channel Customer
to delivery to the customer. value chains

1.2 In this sort of environment, the procurement function becomes a primary value generator and must
Competitor
intervene across the entire organisation to achieve its value-generation goals. Procurement must explain value chains
the point of its sourcing decisions to create a shared understanding amongst key stakeholders, and to
nurture supportive 'category user behaviours' from stakeholders that will help it to deliver value gains and
retain them. Stakeholder mapping

1.3 The organisation must seek out every possible source of value and co-ordinate them to the best overall 1.7 Stakeholder mapping is the key strategic tool required to commence formal stakeholder engagement. We
effect. Value gains do not just arise from favourable price movements, but also from innovative practices, looked at some mapping methods earlier, and there are many more approaches, some of which you may
different product utility, whole life cost management and differing buying methodologies, all of which have seen as part of your studies for other CIPS units. There is no mapping method that is the best in all
require lateral thinking encompassing all of the organisation's functions and user communities. Making the circumstances; each is more or Jess useful according to the needs of the situation. Category management
optimal sourcing strategy decision is critical, and needs to involve organisation-wide business elements is a substantial process and you will have seen several mapping tools by the end of the unit. These will
and stakeholder requirements. Stakeholder engagement and buy-in is critical to success. not necessarily be the only ones you find useful on real-world sourcing projects, but they are useful
nonetheless and illustrate the points we need to make.
Value in the supply chain
1.8 Whichever method you use, your mapping needs to be broad, not narrow, in the stakeholders that you
1.4 Before we reach out to stakeholders and try to develop sourcing plans, we need to understand value include. Other supply chains, services and environmental factors may be impacted by or may influence the
generation in the category supply chains we are examining. This will help us determine where and with product or service delivery with which you are concerned on a given project; a wider net of stakeholders
whom we should focus our attention. Porter provides a couple of useful models. may hold influence. Therefore it is not only the named or known stakeholders that must be planned for
in terms of involvement or engagement, but any stakeholder who is a 'touch point' with the product or
1.5 Porter describes a value chain (Figure 9.1). This identifies the categories of activities at and around an service.
organisation that are co-ordinated to create a product or a service. This model can be used to distinguish
those activities and functions that add value and are therefore needed from those that do not and 1.9 A study of the value chain will identify the touch points and their impacts, and will provide clues as to how
therefore are not. His model exposes the areas where improvement efforts are worthwhile or where to interact with them. This unit is concerned with involving stakeholders in strategic sourcing decisions, so
costs might be driven out. It is worth mentioning that the model dates from the 1980s and reflects we need to understand how and what their involvement is with the product or service to determine:
contemporary ideas on organisational activity -logistics may look very different now for, say, a music
• Who best to involve.
retailer selling songs as downloads.
• How to effect the best decision.
Figure 9.1 Porter's value chain 1.10 These issues must be understood in developing strategic sourcing decisions. O'Brien suggests that a
typical stakeholder map would begin with a RACI analysis (which divides stakeholders by their level of
engagement, from those most involved to those least involved), and would provide an analysis showing an
assessment of the identified participants.
SUPPORT
ACTIVITIES • Responsible- the most active level of involvement, these stakeholders are responsible for doing the
work or achieving the outcomes in question.
• Accountable- stakeholders accountable for what happens, they are the ultimate, approving
authorities for the actions taken by 'responsible' stakeholders.
PRIMARY
• Consult- those stakeholders whose opinions need to be sought and with whom we have a two-way
ACTIVITIES
discussion over the issues.
• Inform- those stakeholders least actively involved, they simply need to be kept up to date with
events, intentions and progress.

1.11 O'Brien identifies four types of relationship with stakeholders. There are those who:
1.6 If an organisation can be seen as a value chain, then a supply chain is a chain of value chains or, in Porter's
terms, a value network or value system (Figure 9.2). It is the infrastructure of inter-organisational links • Are against it happening- resistance to change is the single biggest cause of sourcing project failure.
and relationships that is necessary to create a product or a service from raw materials. In a value network, If we ignore it, we leave an open goal to the project's opponents. We must understand where and why

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- Category Management in Procurement and Supply Planning the Process ! CHAPTER 9

resistance arises. Anticipation of failure, competition for status or resources, inertia are all typical root In expectations-setting there will need to be a narrative scene set that these people can easily grasp of
causes. Each will have its own, specific solution. the category, the organisation, and what is being achieved through the categorisation of the product or
• Let it happen- people with nothing to gain or lose, who need to be negotiated into positive service bought. Some thought should be given to a formal communications plan to convey the relevant
enthusiasm so that they make a contribution, but more importantly so that events do not draw them information to start the specific activity of planning and developing the sourcing decision-making.
on to the side of the resistance.
• Help it happen- stakeholders who are generally supportive and believe in the project. Their support 1.19 Stakeholders should be included from the outset, and primed with basic information.
needs to be consolidated and built upon. • What the spend is in the category
• Make it happen- stakeholders who are supportive, but can also enable the project. The project leader • The value or importance of the category
needs to establish and maintain close relationships with these. • How the category is currently managed
1.12 Each stakeholder will interact with the category manager in a different way, and will probably perceive • What potential there is for improvement in the category
different benefits from the proposed changes that a category sourcing plan might bring. These benefits will 1.20 This is a good point at which to make a connection with the data gathering processes we looked at earlier.
need to be at least recorded if they are not ultimately significant enough to be factored into the sourcing Part of data gathering is looking ahead to data use. In this situation, your earlier activities should have
decision. primed you to be able to discuss the following issues with stakeholders.

1.13 To summarise, the procurement function will need to understand its stakeholder base and how to operate • Their definition or specification of the category and the items procured within it
within the organisation to influence it to the best effect when using a category management approach. • Their forecast needs within the category and the sourcing projects planned or underway to address
Traditional functional management and engagement will not support category management. them
• Their fundamental business needs in the category over (a) the next year; (b) the next three years; (c)
Different categories have different stakeholders, who do not stay the same the next five years (ie however short, medium and long term are defined)
• What is particularly important to the organisation as they see it
1.14 Remember that stakeholder mapping is not a one-off activity. It needs to be done afresh as you approach • How their needs can be better met
each new category, and revisited as you reconsider existing category sourcing plans. Each category will • Problems or issues they have in the category
have its own mix of stakeholders depending upon the nature of the product or service and the extent of • The changes they anticipate in the future
the product or service's strategic impact upon the organisation. These will change over time. • The breakthroughs they seek

Stakeholder actions and reactions in respect of strategic sourcing decisions 2 Creating evaluation criteria
1.15 O'Brien remarks that if we keep the procurement function supplier-facing, we will reinforce the idea that
it is the function 'that buys things'. However, if we develop a procurement function that works across the
entire end-to-end value chain, collaborating with customer-facing functions, then we will begin to connect
supply chain possibilities with end-customer needs and desires. If we have the right relationship with our
2.1 An organisation will probably have a number of strategic options open to it, shaped by various factors.
These options may appear to be obvious or straightforward at first glance, but become less so when
tempered with environmental or cost factors. The organisation cannot choose to do everything; often its
options are incompatible. It must choose between them.
I
suppliers, we will know what they are working on and will be able to realise the value in their innovations
for our customers first and so contribute to the organisation's strategic advantage and positioning. 2.2 Whatever evaluation criteria are set, these should be transparently and logically arrived at from a
justifiable understanding of the organisation's current state, operating environment, stakeholder
1.16 This perspective raises the bar for the function's potential to realise the high value we look for. However, influences, and the ways in which it may be beneficial for it to move forward. All interested parties should
operating in such a procurement function brings with it a different style of collaboration and teamworking agree that they comprise valid hurdles against which to measure the various strategic options that the
across the different disciplines and functions within the organisation, and across stakeholder groups. This organisation may develop.
may require a more 'matrix structure' approach to working in teams to ensure stakeholder engagement
in category planning implementation and in the entire process. It may necessitate different management 2.3 All criteria must relate to what is to be achieved, which usually amounts to meeting business needs and
approaches and techniques. generating significant benefit for the organisation or a part of it. Evaluation criteria should be founded
on the organisation's goals and objectives for the categorisation. These will be set by the category
1.17 Stakeholder involvement is an ongoing activity throughout O'Brien's category management process and management team from their internal and external analyses, as interpreted through stakeholder factors.
any other similar process we might examine. Defined roles are set for key players to ensure category
management outcomes are met. However, expectations also need to be set with stakeholders at the 2.4 The organisation may have to choose on limited information which, as it grows and develops, begins
outset of the process, in terms of activity, commitment (ie finance, time) and governance structures. to point in a different direction. The organisation therefore needs a flexible response to developing its
Category sourcing decisions, at their planning and pre-implementation stages, may require the options- to avoid getting too committed too early.
introduction of fundamental changes within the organisation or in its dealings with other organisations.
These will probably bring with them new operating models and policies which mandate or change rules 2.5 Sourcing strategy options reflect the circumstances in which they were made. It is important to retain
and behaviour. detail on how they were determined, on why their recommendations were the most important course
of action the organisation could take at that time, and precisely how, in a step-by-step fashion, they were
1.18 Many stakeholders may be blissfully unaware of the concept of category management and many, too, intended to be achieved. Without this information, an organisation cannot meaningfully apply evaluation
of procurement in general, but may still have a major influence upon the organisation and its success. criteria.

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2.6 The organisation needs to end up at the point where all parties start with the same view of history and 3 Finalising specifications and contractual agreements
the possible future paths open for the category in respect of the organisation. This will have required a full
survey of what current contracts exist, what they deliver, to whom, at what cost, when they expire and the 3.1 Once the strategic option is chosen, it is good to secure a clearer picture of what is actually required and
implications of this. affirm and agree it. Defining and redefining the business requirements is key to progressing category
management sourcing decisions. Basic analysis centred on Pareto-type breakdowns of spend will focus
Applying evaluation criteria to sourcing options attention on the right items and categories in the first instance, but these should not be under-estimated
as tools for further analysis. They can be utilised in any approach to the market or re-alignment of the
2.7 O'Brien sets out an approach for generating sourcing options (Table 9.1). It develops and evolves ideas organisation's demand in a category.
with evaluation criteria rather than jumping straight in with complete options. Evaluation criteria divide
into two fundamental types: Business requirements
• Business requirements- evaluated either on the basis of a no-compromise decision, ie pass or fail,
or as the result of a weighted or scorecard approach depending on the importance of the desire to
3.2 Business requirements contain a structured description of what the organisation needs and wants from a
category in order to satisfy its objectives. They should contain a specification, delivery details, and target
achieve the business requirement.
costs or prices, though this last element is debatable. Business requirements should be built up initially
• Implementation- on the basis eg of ease of implementation, value of benefits, cost, risk. There is an
from the stakeholders' positions on what the organisation is trying to achieve and what actions will
internal and an external dimension to these criteria in so far as it may be easy to implement an option
achieve these outcomes. However this cannot be limited to specific products or services or specifications
internally, but less so externally through the supply chain, rendering the sourcing decision a no-go on
as to how these needs have traditionally been delivered, since this limits innovation and option
that basis.
development for future supply.
Table 9.1 Generating strategic options (O'Brien)
3.3 At this point in making strategic sourcing decisions, engaged stakeholders need to:

• Have access to corporate strategy, policies, objectives, business plans and the intended future
direction of the organisation.
• Have access to category historical data and other relevant commercial landscape information, eg
spend, usage, performance, supply data, market news.
• Have access to the business requirements and goals, and what influenced their development.
• Understand the RAQSCI model (see Chapter 5) and how it applies to the category and supports the

I
build of the requirement.
• Understand value levers as a checklist of opportunities to investigate and pursue (see Chapter 5).
3.4 By re-examining the category requirements against the value levers, stakeholders can collectively uncover
Using evaluation criteria in sourcing decisions possibilities for added value and highlight potential other areas for exploration or deeper investigation.
'Why does it need to be this way?' is a key question stakeholders are expected to ask when conducting this
2.8 O'Brien suggests that a scorecard or matrix is developed early on in the process, before the strategic
activity. Stakeholders should be the conservative check and balance on the radical, zero-base approach
options are drawn up, and then utilised once the options are identified to score the options more
that sourcing and category teams are obliged to take. There needs to be a meeting of mind-sets that finds
objectively and evaluate and de-select/select ones for closer analysis. The key thing to remember at this
the appropriate balance between the two. A suitable outline process may be as follows.
stage is the organisation's fundamental goals and desired outcomes.
• Gather relevant data.
Building the chosen option • Consult and review with stakeholders using this data.
• Understand the external factors impacting upon the category.
2.9 Stakeholders must agree on the chosen strategic option, and then move to define it more clearly. The • Review the business requirements and amend accordingly.
category team should be familiar with the option, having developed it, been with it through evaluation, • Communicate back to stakeholders to update them, secure buy-in, refine and optimise options, and
and having thought through its implications. A sourcing strategy statement will now need to be developed; develop plans.
this should include the following elements.
Sourcing plan sign-off
• Definition of the strategic option, explaining what it is and what it means for the organisation.
• Features and benefits, setting out what can be gained from the approach. 3.5 It is at this stage that the sourcing plan can be presented for sign off. The recommendations are complete
• Specific short-term activities to be conducted by team members and other stakeholders to get the as to the strategic direction for the category, and the requirements or specification brief is prepared ready
strategic option adopted and the project underway. for the organisation to go to market. Sponsors and key stakeholders need to sign this off formally. The
• Long-term activities and goals. degree of buy-in that has been brokered through the process to date will impact upon this activity. Only on
• Immediate next steps, which might include eg gathering more data to validate the information already completion of this phase is it advisable to proceed to the implementation phases.
held or further stakeholder engagement.
,..,. -

Category Management in Procurement and Supply Plannlng the Process 1 CHAPTER 9

Contractual planning information covered by the agreement, and make themselves subject to legal sanctions should they break
it.
3.6 Once the strategic approach is determined and the requirements statement agreed, some thought and
planning must be given to the preparation of the contractual side of the project. This work is a precursor 4.3 Such agreements are usually signed by organisations that are considering doing business with each other.
to market activity, and sets out what will go into any contract with regard to terms and conditions and the Restrictions placed by one organisation onto another form internal controls within the organisations
related documentation. What will be included will depend upon the chosen approach to market. Here are involved; they can be binding on their employees. Similarly, temporary employees and agency staff may
some of the issues to consider. be asked to sign such agreements. An agreement cannot protect information that is already considered
public, or that will become public through some unconnected means.
• A written contract is always advisable and indeed necessary to ensure that there is a formal definition
of what each party will be agreeing to do, and what action to take when changes are made. 4.4 Here are some ofthe common issues addressed in confidentiality agreements.
• A formal document will need to be prepared setting out how the external provider should make
proposals for the business of the category to be delivered. This documentation content and form will • The parties to the agreement
depend upon how the market is to be approached. This takes the form initially of a quotation or an • A definition of what information is considered confidential
invitation to tender or negotiate. However there are significant legal positions held by parties issuing • The period (term) during which information may not be disclosed
documents to the market and those responding to those documents from the market which affect the • Any exclusions from what must be kept confidential
rights of the parties involved. Such activity and indeed progression through the market activity and • Provisions restricting the transfer of data in violation of national security
buying process create clear legal obligations on all parties involved which need to be understood. • The term over which the agreement is binding

• Contractual difficulty between parties can arise as to when a contract is actually formed, so care must • Obligations of recipients regarding confidential information
be taken when engaging with the market or when members of the organisation are interacting with • Permissible disclosures
suppliers, especially in the early stages of engagement on category changes or approaches to the • Law and jurisdiction governing the parties and the agreement

market. 4.5 Where stakeholders frequently interact with suppliers or the market, or are external to the organisation,
• Procurement personnel are not necessarily legal experts and need to refer to contract specialists. or when discussions and negotiations are beginning with suppliers in respect of category strategy
However, they need to understand basic contract and business law to work in procurement and implementation, it may be valuable to determine the extent of information share that is acceptable and
category management. to formalise this with an appropriate agreement. It may also be necessary to restrict or limit stakeholder
• Significant study should be undertaken on contract law separately. However, these basic terms should access to suppliers during certain stages of market engagement to protect the integrity of the competitive
be understood for category management. process and/or market interaction.
- Offer and acceptance and consideration
- Invitation to treat, invitation to tender/quotation
- Intent to form a contract
- Contracts and purchase orders
- Battle of the forms
Everything needs to be planned

4.6 If category management is deployed effectively, it can maximise profitability through critical targeting of
one type of product or service used in the organisation. However, this can only be achieved if category
management is adopted as a philosophy and practised throughout all of the relevant functions of the
I
- Terms and conditions
- Contractual clauses- exclusion, termination and remedies organisation as determined in a strategic plan agreed by all of its stakeholders.
- Implied terms- sale and supply of goods and services
4.7 High levels of investment in time and commitment are needed to ensure that this philosophy is adopted
- Framework agreements and call-offs
throughout the organisation. Delivering a category approach within the organisation may require a
- Letters of intent
considerable shift in organisational mind-set, functional structure, and culture. Organisations, in so doing,
- Memorandums of understanding
must consider the fundamental aspects of their business, such as how they engage internal and external
• Formal contract documents should contain a traditional contract, specifications, commercial details
stakeholders to co-operatively contribute to the exploration, development, planning and ongoing delivery
(including prices, fees, costs), relationship management details, performance reviews, account
of category management.
planning, and terms and conditions.
4.8 Another key area to consider is the optimisation of legal and business relationships with suppliers, and
4 The use of confidentiality agreements perhaps other parts of the organisation, to best advance the outcomes procurement seeks in applying
category management.
4.1 An organisation may want to consider using confidentiality agreements or non-disclosure agreements
(NDA) in discussions with suppliers if it believes it will be disclosing commercially valuable information. 4.9 Further, to maintain value benefits downstream and to optimise procurement activity within categories
Confidentiality is usually associated with intellectual property and trade secrets, but can relate to any and supply chains, the organisation needs to reconsider its needs as embodied in its specifications
information that is considered important and needing to be protected against free circulation and and what, exactly, its short, medium and long-term needs are prior to implementation planning. The
exchange (eg it may affect share price). organisation must be mapped and a shared understanding developed of the strategic implications of
these requirements for the organisation. Such analysis and re-thinking can determine how best to engage
4.2 A confidentiality agreement (or non-disclosure agreement) is a contract between at least two parties that
with the market to secure the products and services needed and tore-inform the category strategy going
outlines confidential material, knowledge or information that the parties wish to share with one another
forward.
for certain purposes, but wish to keep secret from all other parties. The parties agree not to disclose the

1.37
 Planning the Process 1 CHAPTER 9
Category Management in Procurement and Supply

4.10 This will set up the approach to the market for the organisation's requirements that we explore in the next
chapter. It also sets internal behaviours and attitudes in the organisation that must be maintained if the
benefits gained through adopting category management are to be kept beyond the end of the sourcing
project. Organisations need to be in a state of 'sourcing readiness' to begin implementing category
management. This state is where the organisation is aware of what they are trying to achieve overall. They
need to be acutely engaged in supply markets and knowledgeable of suppliers' behaviours, offers and
pricing structures. They need to be fully aware of their own commercial landscape, and within that of their
existing contractual arrangements (for specific categories) and how to exit them, what current and future
requirements need to be met, how they intend them to be satisfied, for whom, over how long, by when
and where, and that all stakeholders, organisational entities and resources are lined up to proceed with
the planned sourcing plans to begin. They also need to be fully aware of the legal implications of doing
business and entering into contracts, some of which has been highlighted here.

4.11 All of these features play a huge part in effectively managing the planning process for the implementation
of category management across the entire organisation. They also determine the delivery of the category
management approach in the organisation, which we will look at in the next chapter. Self-test questions
Numbers in brackets refer to the paragraphs above where your answers can be checked.

1 List the primary activities and support activities in Porter's value chain. (Figure 9.1)

2 Explain the acronym 'RACI'. (1.10)

3 What basic information should be provided to stakeholders at the beginning of a category management
exercise? (1.19)

4 Criteria for evaluating strategic sourcing options can be divided into two types. What are they? (2.7)

5 List elements typically included in a sourcing strategy statement. (2.9)

6 List issues to be considered in contractual planning for a category management project. (3.6)

7 List issues commonly addressed in confidentiality agreements. (4.4)

CHAPTER 10

Routes to the Supply Market

Assessment criteria and indicative content

Critically compare routes to market for the implementation of a strategic sourcing or category
management process

• The use of competition or direct negotiation to source suppliers

• Devising invitations to tender, quotation and requests for proposals
• The use of reverse auctions
• The use of joint proposition improvement

Section headings
1 Competition and negotiation
2 Invitations and requests
3 Supplier selection
4 Reverse auctions
5 Joint proposition improvement

Introduction
Sourcing strategies predominantly involve some sort of buy option rather than make, so it is important to
have the skills, knowledge, systems and methods necessary to be able to approach the market successfully.
This chapter examines the modes of contact with the market that the organisation can undertake to secure
its requirements after the appropriate sourcing strategy has been determined for each category of spend.

The nature of the organisation, its legal limitations and environmental boundaries are very influential on
the choice of mode, and which is most suitable for what buying circumstance. It is always necessary to
ensure that the organisation provides sufficient detail to the market place to enable suppliers to make
useful responses to the organisation's requirements without stifling the market's opportunity to innovate
a solution. In this chapter we discuss competition as a means of levering the best results from the market,
and also the role of negotiation in dealing with suppliers.

141
Category Management in Procurement and supply Routes to the Supply Market l CHAPTER 10

1 Competition and negotiation • Examine capability within the team and stakeholder group- insufficient capability can add cost and
time.
The EU and public sector competition • Sourcing readiness- know what you want and plan how to get it. Decide before you start, not as you
go along.
1.1 This section of the syllabus is concerned with two different approaches to identifying suitable suppliers. • Know and manage rate-limiting steps that will hold up progress .
competition essentially means the use of tendering procedures- advertising the requirement widely and • Measure progress and put in place robust assurance processes to maintain schedules .
inviting suppliers to tender for the business. Negotiation means identifying a small number of suppliers
and dealing directly with them to agree contractual details. Negotiation

1.2 In the EU, procurement directives impose competition rules upon public sector bodies (including central 1.7 Competition is in theory an open, one-to-many process and the fittest competitor prevails with both
government, health authorities, the education sector and local authorities). These rules ensure that public supplier and buyer benefitting. Negotiation is a closed, one-to-one process that can be adversarial (with a
sector bodies approach the market in a manner that enables fair and open competition among suppliers win-lose outcome) or collaborative (aiming for win-win). This is simplistic, but competition and negotiation
and service providers within the EU. In other words, for EU public sector bodies the normal approach to can be thought of as opposites, and this view is helpful in characterising them. It is not a view that values
supplier selection is competition rather than negotiation. one above the other; both approaches contain advantages for the supplier and the buyer.

1.3 The directives are under constant review and development: directives are introduced, consolidated, 1.8 Even in the most rule-bound, contract-based processes, there will still be points at which negotiation is
revised, expanded, simplified and so forth on an ongoing basis. You will have come across the EU directives needed. Even where competitive tendering has obtained best value or best price, negotiation may still
earlier in your studies, but there are a few features that it is worth being reminded of. come into play post-tender or during contract management situations. Negotiations can be difficult,
Common procurement vocabulary- an EU-wide coding system for categories of products and however, where both parties are trying to achieve objectives with little information on the practices, mind-
• sets and objectives of the other party.
services that might be procured. This obviously has relevance for us.
Competitive dialogue- a procedure that may be used for complex contracts. Requirements are
• Some key issues in category management and negotiation
defined in output terms. Purchasers may seek initial proposals from suppliers and then have dialogues
with some or all of them in successive stages, prior to requesting final bids from those that can meet
1.9 The category management skill-set encompasses a methodical approach, knowledge-gathering, insight-
the output specification. The capacity for dialogue enables changes to initial proposals not allowed
forming and innovation, which are all equally good for successful negotiation. A planned strategy will be
under open or restricted procedures. important, too, to ensure delivery of the desired outcomes. This means answering some fundamental
Framework agreement- following a competitive process, an organisation may conclude a framework
• questions about context, aims, challenges and concessions .
agreement with suppliers against which it awards specific subsequent contracts.
1.10 Context- negotiations always take place within a context. This includes the following elements.
Setting a schedule to achieve competition
• Supply market- competition, growth, geography, power.
1.4 competition takes time to achieve: time to advertise a need, gain interest, allow suppliers to understand
the requirements and prepare a bid. This is particularly important to public sector buyers, who operate
under stricter regulations. It is considered important that suppliers have a fair and reasonable turnaround
time for their bidding processes.
1.11
•
•
Procurement decision- risk, complexity.
Relationship between the parties- history, timeline.

Aims- focus on objectives so as to maintain control of the negotiation. Clear, realistic, achievable
objectives provide the basis for an appropriate negotiation strategy, and from this a negotiation plan can
I
be set out.
1.5 It obviously makes sense to ensure that there is reasonable time for bidders in all procurement processes.
However, in all cases there is also pressure from within the organisation to deliver the products and 1.12 Challenges- consider negotiation variables such as the following.
services. Category management is a time-consuming process and a costly one, but organisational
pressures must be resisted and impatient stakeholders and colleagues helped to understand that the • Power- relationship power, expert power, influence .
necessary time is an investment that will realise dividends later on through improvements that would not • Time- negotiation is mostly thought of as an event, which implies a start and finish within a fixed
otherwise be possible. At the same time, category teams must be realistic: the organisation cannot be timeframe. It is actually a process that starts before formal contact. During contact, time management
asked to wait a damaging length of time (eg one that causes loss of customers, goodwill and reputation). is key; good negotiation outcomes come in tight timescales.
• Information- the heart of negotiation is gathering data and preparation. However during the early
1.6 The focus should be on developing the optimum timescale for a competitive procurement process. Here stages, negotiators can conceal their true interests and priorities. The chances of obtaining true
are some key aspects to concentrate upon in reducing the time impact. information from an experienced negotiator in an adversarial negotiation are slim.

Ensure the correct procurement route is chosen- is full competition necessary? Should direct 1.13 Concessions- what does the other party want? There are always at least two sides in negotiation, so
•
negotiation be considered? Poor selection of procurement route can add unnecessary cost. be aware of what the other parties want. Put yourself in their position to anticipate which way they will
Streamline the process as far as possible- use appropriate pre-planning and manage the procurement move. Always prepare your BATNA (best alternative to a negotiated agreement). If you have an alternative,
•
activity. Do not be overly risk-averse; this adds time and waste to the process. this gives you the power to say 'no' and take another way through if you are unsuccessful in achieving
Examine the existing approach to determine whether there is a leaner approach that could save time . what you need. One oft he main reasons for entering into a negotiation is to achieve better results than
•
Serial activity adds cost; parallel working can speed matters up. If possible, standardise procurement would be possible without negotiating. The stronger your BATNA, the greater the range of alternative
management tools. courses of action open to you, the greater your ability to walk away from an unsatisfactory negotiation.
Category Management in Procurement and Supply
Routes to the Supply Market I CHAPTER 10

BATNA is essential to counter-balance your commitment to the negotiation; without it you may become on a different basis. The supplier can accept or reject this. It is unlikely that the organisation will develop a
too committed to a result and conclude a poor deal. new invitation or request, but instead will formally communicate proposed amendments or changes to the
supplier.
1.14 Business requirements should always be used to drive a negotiation and form the basis of the outcomes
that the organisation targets. 2.3 There needs to be complete clarity during this process to avoid either party accepting an offer they
had not intended to. This is potentially a high-risk situation. The status of the invitation or quotation is
1.15 Table 10.1 compares the two extremes of competition and negotiation. There is no intrinsic best or worst important as there are implications in respect of when a contract is being made, on what basis, and on
answer in choosing between the two. You may decide that a particular situation should involve elements whose terms. Is there clarity in what has been agreed to? Given the pace at which offers can change
of both. The individual circumstances will indicate the best path forwards. during competitive processes, even a request for clarification of information can prove complex in terms of
contractual obligations and formulation of contracts. Extreme care must be taken in the matter.
Table 10.1 Comparison of competition and direct negotiation approaches
2.4 It is clear that contracts are best made in writing, but the process takes place before there is a contract.
MARKET APPROACH THROUGH ... Moreover, a contract can be made by actions and through conversations, and not just in writing, so it can
COMPETITION DIRECT NEGOTIATION be difficult to assess where organisations are in that contract-making process when things go wrong.

Requests

2.5 Finding a supplier can be difficult enough in a competitive arena, so putting forward the best information
to attract them is key to success. It is assumed that an organisation will want the best supplier with the
most appropriate products or solutions, the most competitive pricing, the best CSR record, who can meet
all of the business requirements.

2.6 Increasingly difficult questions are asked of increasingly few suppliers as the organisation progresses from
RFI to RFP to RFQ (sometimes collectively referred to as RFx).

2.7 These processes are commonly implemented through the internet now. Computer-based platforms allow
suppliers to log in to an e-sourcing tool to access the necessary bid activity and respond in kind rather than
phoning or writing letters.

Requests for information

2.8 Requests for information (RFI) from suppliers can form part of the data-gathering process or source
planning activity. This is a solicitation tool sent to multiple suppliers to gain information about products,
capabilities, organisation set-up, facilities etc. RFI activity is not necessarily considered part of a
competitive process, however it is best to assume that it will be so that the information gathered is
compatible with later stages should it be needed for them. The organisation should be careful to close
off potential accusations of breaches of confidentiality and surreptitious copying of suppliers' distinctive
practices by running a transparent, consensual process.

Requests for proposal

2.9 Requests for proposal (RFP) are sent to limited numbers of suppliers who are asked to provide a proposal
on how they would meet stipulated requirements. This is a high-level approach to the market, focusing
2 Invitations and requests more on the outcomes than on specific detail. These documents are designed to draw out the expertise of
the supplier and to provide a wider picture of how the requirement might be met by the provider. An RFP
2.1 An organisation issuing an invitation or request is merely expressing its interest in receiving offers (not
its intention to buy) from the marketplace. This is known as an invitation to treat. The organisation may performs the following functions.
accept any satisfactory correctly submitted tender or quotation that it receives. However, it is not under • It invites the supplier to bid for business.
any obligation to accept any of them; it has only expressed an interest. • It seeks a solution to a problem or need.
• It conveys key business requirements.
2.2 An offer cannot change once it is fixed. Once a tender is received by the organisation, then it stands as • It is focused on the supplier's experience, qualifications and proposals.
the offer from that supplier. If the organisation wants to negotiate on that offer its position changes to a
prospective buyer making an offer of their own- they have rejected the original offer received in the form
of the tender or quotation and are effectively now making a new offer to the supplier to buy their supply

14S
 Category Management in Procurement and Supply Routes to the Supply Market I CHAPTER 10

Requests for quotation 3 Supplier selection

2.10 Requests for quotation (RFQ) are again a solicitation tool used with few suppliers, either on their own 3.1 O'Brien provides a walk-through of the supplier selection process. With category management, this sits
relatively low-value and commonly supplied items on a specific proposal and pricing basis, or as a follow- within the sourcing phase, as sourcing plans are being implemented with approaches to the market.
up to the RFP process to further refine the requirement and allow a yet smaller number of bidders to Usually some form of competitive process has taken place before supplier selection. This may be split over
respond more precisely. This time suppliers are asked to provide bids against firm, specified requirements. several stages depending on the type of competitive process undertaken. The process may allow many or
O'Brien suggests that RFQs: a restricted number of suppliers to put themselves forwards for selection. They are judged against pre-set
• Request pricing and availability for specific products or services criteria that narrow the participants down to a final number of usually one or two. Criteria fall into specific
• Have a clear specification and definition of needs categories and are scored against the needs of the organisation's business requirements.
• Are highly competitive in approach.
3.2 Here are the main steps.
Invitations to tender • Initial qualification or pre-selection
• The RFP/RFQ tender- either RFQ follows RFP or the two are combined
2.11 Depending on the circumstances and the organisations involved, the RFP or RFQ process may be known as
• Analysis of proposals and quotations
an invitation to tender (ITT). The three are functionally equivalent (see Table 10.2)- all require a supplier
• Shortlist of suppliers
to provide information in greater or lesser depth and take time to submit in whatever format they are
• Final evaluations
developed. For this reason it is important to develop invitations and requests that capture only absolutely
• Supplier is chosen
necessary information and ask the following questions.
3.3 Depending upon the nature of the approach to market and the economic sector involved, there may
• Why do I need to know this?
be preferences, limitations or prescriptions on the approach to market. For example, within the public
• How is the supplier likely to respond to this?
sector there may be a requirement either to approach the market on an open competitive basis (inviting
• What format will 1 need the information from that question to be in in order to evaluate it?
all suppliers to bid irrespective of their capability), or to use restricted procedures which permit the
organisation to reduce the number of potential suppliers to a manageable number (eg between five and
Table 10.2 Sections that an RFP or RFQ might contain {O'Brien)
twenty) that still preserves sufficient competition to return an optimal result from the process.

Pre-qualification

3.4 Supplier selection needs to build in various points at which the organisation reduces bidder numbers in a
consistent, fair and open manner. There are various points at which this can be achieved, the first being
pre-qualification. This initial stage permits a 'weeding out' of suppliers who will not be at all suitable to
fulfil the requirements on any grounds; they usually cannot meet even the fundamental criteria.

First evaluation

3.5 Assuming that more than one supplier has passed pre-qualification, then some suppliers will go through
to next-stage evaluation. If only one supplier has passed, no further selection criteria are needed, but the
remaining supplier still needs to be evaluated for capability, suitability, price and so on.

3.6 At this stage suppliers receive tender documentation of some kind, ie RFP and possibly RFQ.

3.7 In category management evaluation is a team effort. Each stakeholder will need to be led through the
process and the expectations placed upon them, and provided with the necessary materials to undertake
the work. Selection criteria (including quantitative information) should be provided in advance. Individual
assessments of the bids will be collated and scores based on averages will be utilised to finalise the
evaluation for selection. All assessment needs to be fair, transparent and auditable. As teams are involved
and the category strategy may involve change to suppliers, products and services for the organisation, it is
necessary to ensure that there is a regulated process and that the agreed criteria are those used to make
the final decisions.

Second evaluation

3.8 Depending upon the nature of the requirement, there may be a need to meet prospective suppliers and
have presentations from them on how they would approach the work offered. It may not be possible

1.dh 147
 ·r·,.
J

Category Management in Procurement and Supply

Routes to the Supply Market I CHAPTER 10

to gain a sufficient picture of how they will perform or what they are offering unless they come in front 4.7 An e-auction is really a non-face-to-face negotiation mechanism. It will suit some types of purchase more
of you. The supplier would be expected to cover how their bid meets your requirements, the attributes than others. E-auctions can offer shorter times to completion, and are most useful where there are many
of their offer, implementation plan, savings, costs and so on. In some circumstances this may be the capable suppliers in the market for products or services that are generic or standardised. They do not suit
beginning of supplier conditioning for negotiation unless there are some prohibitions upon negotiation in complex requirements of a strategic nature where there are few capable suppliers.
this early stage (as can be the case in the public sector).
4.8 O'Brien suggests some factors that must be considered if the organisation is to succeed.

Third evaluation • Lot strategy- how requirements are broken down into discrete packages of work that can be bid
against.
3.9 This may be held once the final selection has been made to undertake a final validation of the supplier(s)
• Specification- a clear, defined specification is a must as price becomes the only focus. What you
if necessary. It is concerned primarily with due diligence audit checks around people, systems, operations, specify is what you get. All decision-making factors are incorporated into thee-auction.
facilities, accreditations, and financials. Contract award is then the next step if all is satisfactory.
• Price awareness- before entering into an auction buyers should know the market for the category
and have a clear baseline (historical reference price). This helps establish whether a good deal is on
4 Reverse auctions offer.
• Inviting the right suppliers- ie pre-qualified suppliers passing the minimum technical and commercial
4.1 A reverse auction literally reverses a conventional auction. Ordinarily, in forward auctions, buyers
criteria needed for the supply. An RFI might be appropriate before thee-auction takes place to set
compete for a product or service with increasingly higher bids. In a reverse auction, sellers compete to sell,
up the right supplier base for the event. The number of participating suppliers is also important. All
offering increasingly lower prices. The term has a wide circulation, and can be applied inaccurately to sales
invited suppliers must receive the same level of information.
processes that are not actually auctions.
• Selection criteria- the winning bid may meet the needs set out at the outset at the lowest price, but it
should still be subject to validation before any contracting takes place.
4.2 There are parallels with competitive bidding processes such as tendering in that sellers will offer prices and
the buyer then chooses what is effectively the lowest price or the best value for money. Reverse auctions do • Resources, training ond communications- e-auctions are simple in theory, but they involve
not need to keep the same confidentiality over the sizes of bids, however, nor restrict sellers to one offer. information systems with their own technical requirements, support staff needs, operating rules, legal
documents to study and so on. Potential suppliers should have a familiarisation period prior to the
E-auctions and reverse auctions e-auction, and organisational resources should be put in place to support thee-auction.
• Post-auction- all participants should be informed of the results in a transparent and complete
4.3 E-auctions are, simply, auctions that take place electronically; they allow an organisation both to sell manner.
(forward auction) and buy (reverse auction). They have the legal status of an invitation to treat. Generally,
e-auctions are reverse auctions. They happen in real time over a limited, scheduled period. During the 5 Joint proposition improvement
auction, suppliers (sellers) will make bids and counter-bids, each time lowering the price. At the end of the
auction the best offer- ie the lowest price- wins. 5.1 Joint proposition improvement is an approach whereby a buyer and supplier work together under
their contract to jointly improve performance or to develop the contract to their mutual gain. Generally,
4.4 O'Brien cautions against over-enthusiasm and recommends e-auctions should be incorporated into orderly this would form part of the category management strategy for an existing provision that requires an
category management and procurement processes to be effective. Best practice states that an e-auction upgrade in terms of the service that can be expected under the boundaries and limitations of the existing
should be preceded by spend analysis and one or more rounds of RFx so that supplier filtering based on arrangements. The buyer and supplier should take legal advice to determine the extent of negotiation and
price and non-price factors can be conducted beforehand. change that can be made to the existing contract without infringing competition rules. It is an attractive
option if it can be made to work since, mostly, an incumbent supplier will have experience, knowledge and
4.5 He lists different forms of e-auction. insight concerning the supply; perhaps enough for significant re-engineering opportunities.
• Standard reverse auction based on a single need to be satisfied at a pre-determined time where
5.2 The best approach is for the buyer and supplier to jointly develop a plan for the activity within the
suppliers will offer to supply what is required for the lowest price.
• Cherry-picked auctions with multiple needs advertised where suppliers can choose which needs they category or contract to move from its present steady state to the desired improved state over a planned,
specified time. The necessary stakeholders should be engaged in the process throughout and controls
are interested in meeting and bid solely on those.
• Bundled auctions where multiple needs are bundled together and suppliers must bid for the entire placed upon the actions of all involved to ensure they act in a transparent, fair, professional and ethical
manner.
lot.
• Dutch auction- the auction closes upon receipt of the first bid.
5.3 There are many potential risks with this approach.
• Cherry Dutch auction- a multiple-lot auction that closes upon receipt of the first bid for that lot.
• Japanese auction- the auction starts at a pre-defined price point that is reduced in steps. Each • Working with the embedded supplier may result in an over-informal, under-documented, insufficiently
supplier must accept each price step or they must leave the auction. thorough process.

There are problems in buying like this as clearly the emphasis is on price and not cost. The specification
• Relationships may be impacted .
4.6
and requirements need to be clear and understood prior to the auction so that there can be no ambiguity
• Exit and switching can be made problematic .

over what is expected and then delivered. There is a danger that the winning supplier will have chased the
business so hard (perhaps for not entirely rational reasons) that they cannot in the end deliver, and either
hide this fact or default.

149
rp-
Category Management ln Procurement and Supply

CHAPTER 11

Implementing the Process

Assessment criteria and indicative content

Develop decision criteria that can be applied for the implementation of a strategic sourcing or category
management process

• Define relationship management and governance structures

• Confirm segmentation approach and relationship profiles
• Confirm transaction process
• Using staged gate reviews

Self-test questions Section headings

1 Governance structures
Numbers in brackets refer to the paragraphs above where your answers can be checked.
2 Deciding on a sourcing transaction approach
3 Relationship management in supply chains
1 What is meant by 'competitive dialogue'? (1.3)

2 What is a BATNA and why is it important in negotiation? (1.13) Introduction

3 What is meant by RFx? (2.6) This chapter looks at interaction and relationships with the supplier once contract award has taken place
and the organisation begins to realise the benefits of its category sourcing strategy. Up to this point,
4 List possible sections that an RFP or RFQ might contain. (Table 10.2) we have concentrated on building accurate procurement requirements, category process systems, and
contracting. This chapter looks more at the people involved- how they work and relate to each other in
5 List the main steps involved in a supplier selection process. (3.2) the business context, and the relationships that need to be established and formalised to produce the
desired outputs for all parties concerned.
6 Distinguish between an open competitive basis for supplier selection, and restricted procedures. (3.3)
Here are some key issues to keep in mind as you study this chapter.
7 How does a reverse auction work? (4.1, 4.5)
• Category management strategies only happen because people do things; strategies require
8 List factors that a buyer should consider before implementing a reverse auction. (4.8) organisation, and this involves structure and systems. If the organisation does not support the
strategy, then even the cleverest strategy will fail because of poor implementation.
9 What are the potential risks of joint proposition improvement? (5.3) • An organisation is a complex system which can be said to comprise at least four mutually-interacting,
independent elements- organisational objectives, organisational structure, technology, and people-
in whatever form is needed to deliver business requirements.
• Governance, in this context, is the key success factor in how an organisation is planned, controlled,
managed, measured and structured on a day-to-day basis to deliver the category management
strategy.
• Continuous improvement is the main goal in the delivery of the category management strategy.

151
Category Management in Procurement and Supply Implementing the Process ! CHAPTER 11

1 Governance structures Tracking benefits

1.1 Governance is the manner in which an organisation determines its activities and steers its affairs: whether 1.5 The benefits to be realised within a category as identified in the strategy need to be measured, validated
it is transparent, accountable, methodical, 'by the book'. In this context, it is the manner in which the and reported. High expectations come with all sourcing projects. The necessary wait before delivering
organisation executes category management. This involves planning, management and day-to-day category management gains can dishearten or even antagonise those stakeholders with such expectations.
progress measurement until category management objectives have been achieved. Frequently costs rise, reducing the anticipated gains and causing more dissatisfaction. Actual, realised
benefits must continually be mapped to ensure morale, motivation and expectations are well-managed
1.2 An organisation will have some form of governance structure (Figure 11.1) that binds its people, systems, and that the programme is kept on target for achieving all the anticipated gains.
policies and strategies together. There will be key activities that this structure needs to enable, and a
steering group at the heart charged with leading the entire programme effectively, Its responsibilities will 1.6 Benefits will not suddenly appear, however. They will have been planned for right from the start, and
typically include the following. their progress through successive stages of certainty will have been tracked constantly until finally they
are realised. As we will see when we look at performance measurement, such benefit tracking is a key
• Assuming overall responsibility for the category implementation programme
part of evaluating the success of category management, but also of keeping the process on track. This
• Defining objectives, targets and timing can be tricky as benefits come in a variety of different forms, not all of which are quantifiable as money
• Ensuring a planned and managed approach throughout; co-ordinating each category
equivalents (see the examples in Table 11.1).
• Monitoring the programme and reporting on progress against plans
• Ensuring the right capabilities and resources are in place to deliver category management Table 11.1 Applicable types of benefit and qualifying factors (O'Brien)
• Initiating and managing communications organisation-wide
• Reporting progress to the executive team

Figure 11.1 Typical governance structure for category management (O'Brien)

Executive team

I :{Programme communications I
I People development
I Programme steering group
{including chairman and
l programme manager) J
I Benefits tracking
I' 'I
Programme plan
I
~ T ~ ~

I Category team 1 l\ Category team 2 I I Category team 3 II Category team 4 II Category team 5
I
Category teams include a category manager/team leader

Programme planning and stage-gate reviews

1.3 Nobody can judge whether category management has been implemented well if nobody knows what is
Programme reporting
I
meant to happen. It follows that the programme plan, outlining the categories included in the initiative,
1.7 The steering group needs oversight of what is happening across the implementation of the category
will be a driving influence behind governance. One of the plan's features will be a timeline of events,
management plan. Progress against plan needs to be mapped such that it is easy to determine whether
targets and milestones. These should be tracked individually, and key ones may be gathered together in a
the programme is on track, and to put in place remedies to correct matters if it is not. Reporting is
'dashboard', but there should also be formal, wide-ranging reviews as the programme moves between its
fundamental to the governance structure and must be maintained regularly to keep the plan on track, but
key phases.
also to audit the proceedings.

1.4 These stage-gate reviews ensure that there is a clear understanding of where the project is in terms of
Developing capability
delivery, and act to maintain the timing and pace of that delivery. The benefit of using this approach is
great as all parties are able to reflect, understand the work undertaken to date, and intercept any issues 1.8 Every category management programme and implementation will be different and will require different
as they arise at the end of each phase. Gateways are designed as formal hurdles in programmes that have levels of different skills and different types of individuals. Certainly, the right skills and resources must
to be overcome with demonstrable evidence of stage achievement. If performance at a particular stage is
be found in the right quantities when they are needed to achieve the level of output required against
not achieved, then the next stage cannot be started. The gateway then becomes a stop on the programme the plan. Some training and development will be needed to support and develop the people joining the
until all issues are rectified and progression can be made. Often gateway points are linked with funding for
various teams.
that reason.
 Category Management in Procurement and Supply

1.9 O'Brien outlines the steps needed to ensure that there are the right capabilities in each team.
T
2.3
Implementing the Process

So, where Kraljic has Strategic, Leverage, Critical and Acquisition, the Handfield and Straight equivalents
I CHAPTER 11

are Strategic, Leverage, Acquisition and Multiple, respectively (be careful not to confuse the two
• Defining the competencies needed for category management and for running an effective
Acquisitions).
implementation
• Assessing the existing competency levels 2.4 In the diagram, each box describes the strategies and business requirements it best suits. As shown,
• Targeted education, training and development to address any gaps found these are associated with five different sourcing solutions that are appropriate to those needs. Table 11.2
• Mento ring, coaching and support, especially in the first phases of category management describes the selection criteria.
• Review and assessment of ongoing needs
Table 11.2 Factors ta consider in choosing the sourcing approach (Handfield and Straight)
1.10 There may be ways of cascading training and learning across the organisation into other areas and
for specific stakeholders. The costs of such training and how these may be factored in a matrix-style
STRATEGIC REVERSE EXCHANGE SPOT BUY INTEGRATOR
management approach should be considered unless there is a central fund to sponsor this need.

Programme communications

1.11 Some communication is programme-based, centred around programme management, and concerns the
sharing of progress and information on how everything is going in a planned and structured way amongst
the team. Certainly, the aims of the programme should be understood across the organisation by the time
the implementation stage has been reached, but there is also a need to communicate in different ways
across the organisation, especially as the implementation gets underway. There will be a need for direction
and motivation, not just explanation, consultation and reassurance.

2 Deciding on a sourcing transaction approach

2.1 We now have a great deal of insight into sourcing and the wide range of factors that impact our sourcing
decisions. Without making the process simplistic and prescriptive, because each situation should be dealt
with on its merits, we could benefit from a framework that will help to integrate these disparate lines of
thought and point the way forward.

2.2 Handfield and Straight provide a portfolio matrix that has some similarities with the Kraljic matrix (Figure
11.2). Where Kraljic has 'Market difficulty', Handfield and Straight use 'Number of suppliers'; where Kraljic
has 'Profit impact', Handfield and Straight use 'Value to buyer'. There are few new lines of inquiry in
sourcing analysis; insight mainly comes from using the right ones in the right way for a specific reason.

Figure 11.2 Choosing the appropriate sourcing process (Handfield and Straight) Reverse auctions
High 2.5 We discussed reverse auctions in the last chapter. Handfield and Straight especially caution that total
Strategic Leverage
Value related to quality and price
cost, a key interest of ours in category management, is not something that is well accounted for in reverse
Value related to quality, price
and cycle time Focused commodity families auctions. Organisations should steer away from them where the purchase is likely to involve significant
Critical unique items
limited number of capable suppliers
Greater number of capable suppliers
Strategy: combine volumes;
l..Iii.• 8.
ti.•.
non-price components.

Strategy: joint ventures or evaluate for efficiencies Exchanges

partnerships; long-term
agreements 2.6 Exchanges automate supply by connecting suppliers and buyers electronically. They also connect buyers
VALUE TO
BUYER
for group buying purposes, ie buyers form a purchasing consortium for the duration of a single purchase
Acquisition Multiple
so that they can leverage their combined spend and each share in the cost savings that result. Where
Value related to possessing goods Value related to price
there is no rush for a given purchase, prospective buyers can wait until sufficient other organisations are
Low priority items Low priority items
ready to buy, and then they can all pool together their buying power. Exchanges can be public (open to any
Limited number of capable suppliers Greater number of capable suppliers
supplier), or private (with screened, pre-qualified suppliers).
Strategy: automated ordering; Strategy: market test periodically;
standardise and streamline short-term contracts
2.7 Exchanges enable more suppliers to reach more buyers, but they do require administration, which is
a cost, and collaboration, which some buyers may find difficult given the casual nature of the alliances
Low formed.
Low High
NUMBER OF CAPABLE SUPPLIERS

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 Category Management in Procurement and Supply Implementing the Process 1 CHAPTER 11

Spot buys organisation's and the supplier's needs. These form the basis of goal-setting, contracts, and performance
tracking. Performance particularly is a mutual issue: not only the profit impact of the supplier on the
2.8 Spot buys are the antithesis of strategic sourcing and category management. They are unplanned, organisation, but also the organisation on the profitability of the supplier.
needlessly urgent, one-off, needlessly time-consuming, subject to market conditions, oriented towards
price rather than cost, and make poor use of the organisation's leverage. 3.6 Lambert notes that for complex relationships it may be necessary to co-ordinate many business units
spread across many countries. Cross-functional teams from both the organisation and the supplier should
Integrators meet regularly to develop projects that will add value for both sides.

2.9 Integrators are third parties to whom the organisation outsources specific procurement and sourcing Supplier relationship management as a supply chain management process
activities. In this unit's context, the organisation's procurement specialists would contract a consultant to
work with them on an unfamiliar category in which the consultant was an expert. The consultant would 3.7 Lambert describes how the supplier relationship management process has both strategic and operational
then manage the activity relating to that category. The responsibilities of such a consultant might include elements that connect across seven process interfaces. In the strategic process the organisation
the following. establishes and strategically manages the process and integrates its key suppliers into its systems. In the
operational process, it deals with the relationship as a working, day-to-day activity.
• Translating performance specifications into design specifications
• Selecting and evaluating suppliers Relationship types
• Negotiating with suppliers
• Tracking performance and resolving difficulties 3.8 Mcivor notes three potential generic relationship strategies: non-specific contracting; recurrent
2.10 Integrators allow organisations to concentrate their resources on strategic sourcing, and in theory bring contracting; and relational contracting. He suggests that the choice between them will be influenced
high levels of expertise to all parts of their sourcing efforts, even the low-priority ones. primarily by the potential for opportunism in the relationship. Opportunism in turn is affected by, for
example:

3 Relationship management in supply chains • Complex process interdependencies

• Performance measurement difficulties
3.1 According to O'Brien, the organisation's agenda in category management is as follows. • Uncertainty in requirements
• To continue the search for value using the value levers concept • High supplier dependency.
• To refine and optimise the business requirements 3.9 Non-specific contracting relates to those situations where the supply market is easy and full of suppliers
• To communicate and engage with suppliers and competition. Buyers' needs are not particularly differentiated. This type of arrangement is driven
• To innovate in line with what the market can offer and the changing needs of the organisation primarily by the transaction that a buyer makes with the supplier (transaction cost economics).
• To drive effectiveness by aligning and adapting supplier relationships Relationships are relatively short-term, based on bargaining relationships between independent buyers
3.2 The management of suppliers is critical to the organisation in general, and especially to category and suppliers. Since the principal goal for the buyer is cost reduction, their needs are considered 'non-
management. In adopting the category approach, our first goal is to align to the market and how it specific', which enables many suppliers to compete to meet them.
supplies products and services within our categories. In developing a clear picture of what our usage of the
3.10 The buyer's needs can be quite specific, in which case recurrent contracting is appropriate. This involves

I
various products and services are, we should then be able to determine what suppliers currently supply to
repeated interaction and moderate investment in the relationship. They buyer does have capable
the entire organisation (or at least a significant portion of it). In focusing on categories, there is a danger
alternatives for their needs, so will hedge against their current supplier failing or a new one presenting
that we miss the organisational dimension of procurement and supplier delivery unless there is a separate
itself that could be more value-adding with escape clauses in its contracts. The reasonable possibility
activity focused upon suppliers and the relationships that we need with them.
of switching suppliers means that although the buyer invests in order to co-ordinate complex and non-
3.3 It has often been discovered in organisations that one supplier is providing the same supply to different standard processes with the current supplier, this is not allowed to lead to over-dependence on that
divisions at different prices. It may also be the case that the same supplier is providing supplies across supplier. Relationship-related assets are, as far as is possible, transferable to a new supplier.
more than one category. We need to be aware of this if we are to 'segment' (classify) a supplier correctly,
3.11 Relational contracting means developing a longer-term, collaborative relationship. This is the type of
and establish the most appropriate relationship with them. We need to correctly understand the
importance of each supplier to the organisation. relationship we have stressed in this unit and is appropriate for critical, competitive advantage building
processes. The potential for opportunism is high: there are few potential suppliers; the transaction cannot
Supplier relationship management be fully specified or its elements controlled. The buyer and supplier build value with each other. They
invest in assets that create a high level of mutual dependency. Because they are bound in to each other,
3.4 Lambert explains that supplier relationship management is the process that frames and directs the they resolve difficulties through softer, more social means.
development and maintenance of relationships with suppliers. It is part of strategic sourcing and category
management. It supports the development of close, cross-functional relationships with key suppliers, Embedding the category management approach with a supplier
while at the same time accommodating arm's-length relationships with others.
3.12 The category management process should result in new relationships and in old relationships being
3.5 With this approach, category managers, sourcing specialists or supplier relationship managers work re-established on new terms. There may be an unfamiliar degree of closeness to the new relationship
with the key suppliers to develop individual product and service agreements (PSAs) to meet both the arrangements. These will need to be embedded into the organisation and into suppliers.

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3.13 This is a familiar idea in any change management process: unless a change is wired into the organisation,
some people and systems will slip back to where they were before, and the result is a mess, with some
parts of the organisation wanting to work one way and others in another, and tension between the two.
The organisation needs to consider what mechanisms it will set up to embed its new arrangements. These
can include:

• Training
• Accreditation
• Organisational tools that are specific to the new working methods (and the withdrawal of old tools
that symbolise the past)
• Benchmarking, both against others to keep facing forwards and allowing others to benchmark against
the organisation's new state to keep from slipping back.

The segmentation approach

3.14 Segmentation is about dividing suppliers into tiers of importance in respect of what they provide to the Self-test questions
organisation. This permits an assessment of how you should manage them within the tiering. A reflection
on what products and services a supplier provides and how these fit your business is a good place to start. Numbers in brackets refer to the paragraphs above where your answers can be checked.
O'Brien's Day One analysis can be helpful here (Chapter 5).
1 What are the typical responsibilities of a steering group in a category management project? (1.2)
3.15 It is best to use a Pareto approach (Chapter 2) to segment suppliers in terms of the resources that should
2 What is a stage-gate review? (1.3, 1.4)
be committed to managing them (Table 11.3). Only the top tier justifies a fully-developed key supplier
relationship management approach of the sort we have been discussing.
3 List the steps needed to ensure that the right capabilities are available in a category management team.
(1.9)
Table 11.3 Segmentation of suppliers (O'Brien)
4 Sketch the Handfield and Straight matrix for selecting a sourcing process. (Figure 11.2)

5 In the context of category management, what is meant by an integrator? (2.9)

6 Describe the use of product and service agreements. (3.5)

7 What is meant by relational contracting? (3.11)

8 Distinguish between strategic suppliers, preferred suppliers, and regulated suppliers (O'Brien). (Table 11.3)

3.16 Awareness of the wider issues (eg overall spend with a supplier, degree of risk, criticality, difficulty,
and the potential benefits to future business opportunities) is useful. Also, as we know from looking at
preferencing, no matter how important you think the supplier is to you, the supplier may not feel the
same about your business in respect of how important you are to them. Always look at both sides of the
equation before finalising the segmentation and supplier management approach.

Driving supplier improvements

3.17 The main purpose in managing a relationship with a supplier is to secure improvements. Improvements
are best achieved collaboratively. There needs to be joint intent to work together for continuous
improvement and added value. Once the segmentation exercise has been done, there may be an
awareness of what improvements need to take place.
CHAPTER 12

Working with Stakeholders

Assessment criteria and indicative content

II Develop an implementation plan for a strategic sourcing or category management process that could be
presented to stakeholders

• Gaining stakeholder buy-in to sourcing and category strategy

• Creating presentations on strategy plans

Section headings
1 Stakeholder buy-in
2 Stakeholder communications
3 Presenting strategic sourcing plans to stakeholders

Introduction
The previous chapter looked at mainly external relationships, and at processes for managing suppliers
through the implementation process to gear up for delivery. The next chapter will be about the execution
of this strategy and the performance improvements gained.

This chapter again has us engaging with our internal stakeholders and using the vehicle of the sourcing
plan as a mechanism to pull together all of the planning data and information, sourcing strategies and
decisions into one place for implementation.

Here are some key issues to keep in mind as you study this chapter.

• Category management strategies bring change and there will be resistance to change. Inability to
overcome this resistance may affect the realisation of benefits and must be addressed.
• Stakeholder buy-in is key to category management success. It is important to seek it from the earliest
possible point in the process.
• The sourcing plan is the key document to implementation and must be shared. However it is unlikely
that all participants will need or be able to digest its full content.
• Presenting the sourcing strategy to stakeholders in the most effective way will aid communication and
buy-in and, fundamentally, implementation.

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 Category Management in Procurement and Supply Working with Stakeholders I CHAPTER 12

1 Stakeholder buy-in People are only too quick to point out weaknesses or failures if they do not own them in whatever small
way, or have not been invited to commit to the change from early on.
Getting the entire organisation to respond
1.9 Earlier chapters discussed stakeholder engagement in terms of how some stakeholders participate in the
1.1 The Supply Management Guide to Strategic Sourcing explains how the trends in most organisations are sourcing project process (eg through workshops) to develop business requirements for sourcing decisions
towards increasingly well defined organisational units with increasingly deep expertise in increasingly and to evaluate the sourcing options produced by the category team. Other stakeholders and customers
narrow areas of responsibility. This runs against the spirit of strategic sourcing and category management, may become important in the stage-gate review processes highlighted by O'Brien's model that will arise
which by contrast is cross-functional and 'big picture' in nature. on the path through the execution of a project. This is all input-based engagement. Stakeholders may have
output effects, too, on organisational policies, contracts, agreements or post-implementation activities.
1.2 For many organisations this can make strategic sourcing and category management counter-intuitive.
For this reason, sourcing and category project sponsors and leaders often have a substantial change 1.10 It is necessary to examine some output-based interaction with the stakeholders and the category
management element to their work, involving parts of the organisation that they know little of and which management teams. Communication rather than coercion is the main means to reaching and involving
want to know little of them. stakeholders, but we also need their buy-in. Stakeholders can become involved without feeling convinced
and committed. We need to use that same communication for knowledge sharing, to promote and
1.3 One implication is that the entire project team needs to be able to operate well at a strategic level. It publicise benefits, to involve customers and stakeholders through more proactive decision participation
needs: and emotional engagement with the sourcing strategies.
• A thorough understanding of the organisation
1.11 At the implementation stage it is all about turning sourcing plans into reality and making gains. Driving
• To be aligned with the organisation's vision and longer-term objectives
change is the more difficult element of success. The risk to stakeholders and customers is at its highest;
• A deep understanding of what stakeholder and customer needs actually are and will be (not what the
similarly, there is a risk to the category management project of loss of interest in the implementation if it
organisation believes or wishes them to be).
has taken very long to get to this point. Continual progress reports, updates on developments, and keeping
1.4 The Guide describes ideality- that people will switch to better (more ideal) versions of what they already customers informed and- crucially- interested as to the expected and realised benefits are essential.
have. The natural next step then is to get and keep stakeholders and customers focused on outcomes and Demonstrating early success through quick wins in smaller changes that can be made from the initial data
not on solutions. For example, dual sourcing is a solution. New and improved dual sourcing will still be dual processing stages will give visibility to success and build confidence in customers and stakeholders that
sourcing. What outcomes were we trying to secure with dual sourcing? That is where our attention should there are real benefits to be had.
be.
1.12 O'Brien suggests formal implementation workshops that:
1.5 All solutions should be considered temporary. If we can demonstrate that our new sourcing approach is
returning better results on outcomes, getting our colleagues and other stakeholders to accept it and the
• Communicate as far and wide as possible. There should be sufficient good news of the work to date,
projected gains, and why the change is necessary and beneficial to be able to counter remaining
solutions it suggests should be easier. It widens out the range of sourcing strategies we can contemplate
dissenters who are still fuelling resistance. Sourcing plans are a key feature of this communication.
and prepares us for options which, though not yet practical, may soon be. Breakthrough solutions are
• Celebrate- success should be rewarded and team efforts thus far recognised as great work that must
rarely breakthroughs, they simply reach the point where their realisable benefits become greater than
not be squandered by not following through on implementation.
their cost.
Getting stakeholders to accept change
How to get stakeholder buy-in
1.13 It is worth reviewing some change management ideas because creating change is central to the strategic
1.6 Though we have discussed stakeholders and their involvement in strategic sourcing decisions, we have
sourcing and category management processes. Change does not sell itself. It makes stakeholders anxious,
not dwelt particularly on how stakeholders fit into the organisation, nor their relationships to the category
and has to be sold to them. They anticipate expense, disruption, uncertainty and mistakes that may
improvements sought. O'Brien highlights the usefulness of identifying which of the stakeholders are
make their organisation worse off. Wary stakeholders do not appreciate that many of the most successful
customers. This is a gateway to accessing a vast library of ideas, including those around 'customer focus',
organisations hardly seem to change because they do it on a continuous basis. They don't wait until it
which means understanding who customers are and engaging with them to understand and respond to
needs to be a big, noisy project.
their needs and desires.
1.14 Change can go wrong, and most often goes wrong when people are not used to it, and do not possess the
1.7 Stakeholders are not necessarily reliable or capable of being satisfied. Our engagement with them strives
skillset it requires. When an organisation needs to implement change, it must ensure that its people are
to draw out as much as possible about their needs and desires, but what they tell us may be beyond our
prepared. Kotter and Schlesinger itemise six key techniques for managing change.
ability to give, may be counter-productive, value-destroying, or may conflict with other stakeholders. The
actual process of being engaged with may make them suspicious or encourage them to be opportunistic: • Education and commitment- people need to understand and value the proposed change.
a given sourcing strategy may mean, for example, losing an unwanted supplier, gaining new technology, • Participation and involvement- make everyone part of the team.
having to rewrite a specification. Stakeholders will react. • Facilitation and support- be flexible where you can to defuse conflicts .
• Negotiation and agreement- if someone loses out in one way, they should gain (if that is reasonable)
1.8 Stakeholder engagement or customer involvement is necessary to stem any antagonism towards the in another.
change. Hence we must aim to get customers and stakeholders on-side and ensure that we achieve our • Manipulation and co-optation- sometimes you need to buy the change from an opportunistic
end-game smoothly. It is more likely that people will react against change if they have not been consulted. stakeholder.

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 Category Management in Procurement and Supply Working with Stakeholders l CHAPTER 12

• Implicit and explicit coercion -least happily of all, sometimes the change just has to be forced Table 12.1 Communication modes
through.

1.15 Stakeholders will be more or less open to change. There is a parallel with risk-taking: however well-
planned, change involves the unknown and therefore risk. A given stakeholder might be:

• Change-loving- biased towards the potential benefits.

• Change-neutral- perfectly rational in their judgements.
• Change-averse- biased towards potential costs.

1.16 Benefits and costs include the stakeholder's emotional reaction to the change. Many people understand
the reason for change, but cannot accept it at an emotional level. They need encouragement to 'learn to
forget' their commitment to the way things currently are, or even to ignore where the change is coming
from. Egan suggests categorising stakeholders according to their relationship to you (as the change
sponsor or leader) as much as the change itself. In this way, stakeholders might be:

• Partners- supporters of your change.

• Allies- supporters, if given encouragement.
• Fellow travellers- it suits their purposes to go along with you.
• Fence-sitters- who are not clear on what they want to do.
• Loose cannons- who may obstruct you at random, despite having no interest in the change.
• Opponents- who oppose the change, but not you.
• Adversaries- who oppose both you and your change.
• Bedfellows- support the change, but do not trust you.
• Voiceless- who cannot influence anything however they feel.

1.17 This analysis suggests the help, resistance, bargaining and so on you can expect during the change process, Articulating a message
and the different, individual tactics you will need with each stakeholder. You can add extra depth by cross-
2.3 Part of dealing with stakeholders is the process of explaining the planned changes to them so that they
referencing with a RACI analysis (Chapter 9).
can come back to you from an informed position, knowing what is realistic and, more importantly, what is
helpful and value-building.
2 Stakeholder communications
2.4 A stakeholder communications programme has four lines of approach (Table 12.2). Stakeholder awareness
2.1 Each type of stakeholder should have their own communications plan. Simple, bite-sized statements
of the issues is a prerequisite, but any programme also needs to address purpose, goals, benefits, and
may work well for those in more senior levels of the organisation, but greater detail may be needed for
how stakeholders personally may be affected. There needs to be a facility for interaction at every point of
others, especially where they perceive they might have to change what they do. The overall plan should
communication to draw in feedback from the stakeholders.
demonstrate that each stakeholder and all organisational levels have been considered appropriately.
Table 12.2 Stakeholder communications programme (Sharma)
Communication formats

2.2 Circumstances (eg geographical distance, cultural factors, relative seniority and authority, pre-existing
relationships) will dictate the formality and methods (eg meetings, letters, phone calls, social media)
you use with each individual stakeholder. It is not our job here to review each one for its strengths and
weaknesses. Your communication will probably fall into one of five modes, based on the importance of the
individual stakeholder, as shown in Table 12.1.

2.5 'Information overload' can be a factor, so the frequency and size of 'information packages' is important.
Positive reinforcement is useful, as is the facility where stakeholders can form communities in which they
can help each other internalise information (and perhaps feedback to the organisation on how information

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 Category Management in Procurement and Supply Working w1th Stakeholders I CHAPTER 12

provision could be improved). Be careful about the compoition of stakeholder communities, though. • It also provides documentary evidence of the journey through the category that can serve as an
Unhelpful attitudes can spread easily if unchallenged. audit, support future change in the management of the category (and others), and provide a baseline
against which to track the programme and the benefits it has realised.
Making reports and presentations to stakeholders • It should include all of the information we have itemised in one document, although it will have begun
as many documents with individual purposes right from the start ofthe process.
2.6 There will be occasions when formal presentations and reports must be made to stakeholders. Some • It will provide an excellent communication vehicle to stakeholders and customers across the
stakeholders will be influential enough to demand them and high-status enough to expect them. organisation.
Presentations and reports are most useful when they are timely, accurate, and complete. • Making the sourcing plan available on the organisation's intra net is a good way to present it to
• A record of actions and results, ie what the organisation did and what then happened stakeholders across the organisation.
• Tangible evidence of results • Sign-off of the category management sourcing plan is critical to the entire process; the plan should be
the most professional and powerful document you have ever produced.
2.7 It is important that reporting is inclusive and consistent. This promotes trust and confidence. There should
be a physical, written report, with production values that reinforce its importance to the organisation. It Figure 12.1 Determining how to pitch the plan to stakeholders (O'Brien)
may be supplemented with:
Many/varied
• Personal meetings and conversations Focus on why the change Detailed source plan, focus on
• Follow-up phone briefings is necessary securing widescale buy~in

• Stakeholder events Typically medium-length document Typically lengthy document

• Web-based additional information. NUMBER AND

VARIETY OF
2.8 Reports may go through draft stages where the organisation: Simple source plan to secure Focus on how the change will be
STAKEHOLDERS
go~ahead implemented
• Seeks feedback from the stakeholders
Typically short document, maybe Typically medium~length document
• Keeps a record of any issues raised and how they were addressed in later drafts of the report only a few pages
• Communicates the revisions process to promote transparency and trust. Few
Simple Complex
DEGREE OF CHANGE
3 Presenting strategic sourcing plans to stakeholders
3.1 A central part of stakeholder communication and involvement will be the formal presentation of the
3.4 The sourcing plan lies at the heart of the implementation, but there is no point in handing it to others and
category strategic sourcing plan. It should contain the following sections. expecting them to work to understand its complexity and the intricacies of what is to be achieved. These
• Current situation should be made apparent by you. This is especially so if stakeholders are not familiar with the topic of
• Business requirements category management or the background to buying products and services. It is then necessary to produce
• Strategic analysis and insight the best means of communication for the planned timetable and activity surrounding the implementation .
• Options for change This is likely to include:
• Recommended sourcing option • Microsoft Project for the programme planning tool for the detail of the events and activities.
• Risk and contingency plan • PowerPoint to capture the best and most relevant points of the bigger sourcing strategy.
• High-level implementation plan
3.5 A 'brown paper plan' may also be helpful in drawing together the data from stakeholders and to record the
• Cost-benefit analysis
critical paths of activity for the project. We will say more about this technique in the next chapter.
• Next steps
• Appendices (as needed)
3.2 The presentation of the sourcing plan at the implementation meeting will do the most to secure buy-in
and allow for the process to be mapped for the implementation of the strategy discussed in Chapter 11.

3.3 O'Brien provides some interesting and pertinent pointers about the plan in the context of its
implementation and its presentation to stakeholders.

• It must go only to internal stakeholders because of its content.

• It will vary in depth and complexity depending upon the nature of the improvement exercise and the
category change programme. O'Brien visualises these factors as a matrix to help decide how the plan
should be pitched (Figure 12.1). Getting the general approach and tone right greatly improves the
chances of buy-in.
• Its purpose is to get organisational and stakeholder sign-off, and ultimate agreement to the
recommended course of action.

,c.,c..
Category Management ln Procurement and Supply

T
i

CHAPTER 13

Mobilisation, Start-up
and Transition

Assessment criteria and indicative content

Self-test questions
Ill Explain arrangements for the mobilisation, start-up and transition to achieve performance improvement
through the execution of strategic sourcing or category management processes
Numbers in brackets refer to the paragraphs above where your answers can be checked.
• Engaging users for initiating contract arrangements
Explain how modern organisational trends may make the idea of category management counter-intuitive. • Planning for the effective start-up of category plans
1
• Contract transition arrangements
(1.1, 1.2)

2 list the six techniques for managing change identified by Kotter and Schlesinger. 1.14) Section headings
1 Performance improvement
3 list Egan's nine categories of stakeholders. (1.16)
2 Planning for the effective start-up of category plans
Describe five modes of communicating with stakeholders. (Table 12.1) 3 Mobilising start-up and transition
4
4 Transition arrangements
5 Describe four lines of approach to a stakeholder communications programme. (Table 12.2)
Introduction
6 list typical sections contained in a strategic sourcing plan. (3.1)
This chapter turns our focus from determining what should be done in terms of implementing the
sourcing strategy to executing it and managing the performance expected from that strategy throughout
the organisation. Implementation is about turning strategy into reality and driving change through the
organisation. This will evidence itself through the establishment of new supply arrangements and different
supply conditions that will need to be adopted into the organisation's practices.

Implementation and output delivery are the concluding stages of the category management project.
Stakeholder involvement will again be needed to secure success. Key to this is keeping them involved all
through the process and ensuring they are and remain clear on their involvement at all stages.

The last chapter completed our approach to the market, the selection of a supplier, and preparation for
the award of a contract that will deliver the benefits outlined in the category plan and sourcing strategy.
This chapter takes us forward by making arrangements for contract initiation and engaging users in those
contracts. Thus finalising contracts and determining what needs to be done and by whom are critical here.
lfthere are contract provider changes to be made, this means we will need to manage transitions between
contracts, providers and all manner of systems and service arrangements.

It is likely that there will have been some change- eg to cost drivers or competitive advantages- since
the project was first conceived, and this will need to be managed and accounted for. This chapter is also
therefore about project planning and the co-ordination of the organisation across all functions, teams and
users involved to ensure managed delivery of the objectives.
 Category Management in Procw·ement and Supply Mobilisation, Start-up and Transition 1 CHAPTER 13

1 Performance improvement • Contract users- make sure all internal personnel are using the installed contracts; identify and
address off-contract spend:
1.1 By now it should be clear what performance goals we are looking for; we have discussed the benefits at - Inform users of the contract's existence and its associated benefits.
length. These include: - Remedy process issues which prevent contract use.
- Highlight lost benefits to line management.
• A longer-term, strategic view on the organisation's supply needs
• A hand in shaping those needs such that they can be fulfilled in a more value-adding way
Supplier management
• The organisation of supply needs into categories that can be managed with the same strategy
• Developing the most appropriate relationship with each of the organisation's suppliers 1.7 The category manager is responsible for establishing and maintaining the supplier relationship. There are a
• Enabling the organisation's systems and processes to be more efficient, effective and economical- number of aspects to this that can be used as the bases for performance management.
that is, delivering greater value for money.
• Issues tracking and resolution- incidents can be tracked by volume, source, seriousness and speed to
1.2 It is that last bullet point that will provide the performance metrics that reveal whether we have been resolve. It is a continuous learning process. Day-to-day, operational issues should be resolved between
successful with the others. Every individual organisation will define success in its own way (eg costs, contract users and the supplier's account representative. Anything broader in nature involves the
timescales, reliability, waste, opportunities taken or missed). Our interest in this chapter lies more in how category manager, and then senior management if resolution is intractable.
we set our organisation up to track the realisation of benefits. The lead on this will be provided by the • Supplier workshops- meetings where suppliers and contract users can freely discuss the contracts
category manager. Monash University considers the objective of category management to be 'to ensure they are engaged in, promote understanding of each other's views, progress continuous improvement
that all benefits from the awarded contracts are realised and continuously improved'. opportunities, benchmark between different category groups.
• Supplier reviews- regular, formal audits of:
1.3 This means the category manager needs to:
- Contract performance.
• Ensure that contracts are implemented according to the agreed terms - Continuous improvement opportunities.
• Ensure all users keep to established agreements - Issues arising.
• Act as the main point of contact with suppliers and internal stakeholders
• Resolve operational issues raised by contract users and suppliers Continuous improvement
• Communicate operational procedures to contract users and stakeholders
• Report on supplier performance, transaction data, savings and continuous improvement initiatives to 1.8 We are growing used to the idea of the category manager as a hub for continuous improvement activity in
stakeholders the organisation. He or she must ensure opportunities are identified and progressed throughout the life of
• Ensure all goods and /or services are provided in accordance with the contractual requirements every contract.
• Progress the continuous improvement opportunities identified during strategic sourcing • Specification improvement- that is, to keep track of changes, identify refinements, and communicate
• Maximise opportunities to improve the corporate social responsibility of the organisation and its and implement these as necessary, including reviews of needs and the supply markets, trend tracking,
suppliers. options for substitution and aggregation, CSR developments.
1.4 The category manager will therefore have some clear performance management related duties. These are • Process improvement- eliminate non-value-adding processes through modifications to current
outlined in the remainder of this section. processes and systems, facilitating best practice amongst contract users and suppliers, supplier forums
and workshops, focusing high value-adding suppliers.
Performance monitoring • Knowledge sharing- with procurement in general and other category managers in particular.

1.5 The category manager needs to monitor the performance of the organisation's contracts. 2 Planning for the effective start-up of category plans
• Service delivery- use the key performance indicators (KPis) defined in the contract (typically in the
2.1 The Supply Management Guide to Strategic Sourcing suggests that organisations can be somewhat
form of a service level agreement, SLA) to monitor and remedy non-performance against the agreed
backwards-facing in implementing and embedding strategic sourcing and category management. They
outcomes.
take their lead from their key strategic supplier relationships, key stakeholders, existing strategic business
• Benefits tracking- measure, monitor and achieve the benefits identified in the sourcing plan. These
requirements- all facets of previous experiences, whereas the point is to move away from tried, tested
include price, improvements to processes and systems, and environmental and social aspects.
but not necessarily true methods.
Compliance monitoring 2.2 The Guide describes how organisations idea lise Deming's cycle of Plan-Do-Check-Act (PDCA), but that in
1.6 The category manager is responsible for taking corrective action when suppliers fail to comply with their reality they follow a 'pDF cycle', with pitifully little planning, which leads to misdirected Doing (because we
contracts. This includes: need to be seen to be doing something as quickly as possible- which is a performance culture issue), that
means we spend the rest of our time Firefighting instead of learning and improving.
• Price monitoring- making sure invoiced prices match with contract prices, and that any discrepancies
are justifiable. 2.3 The biggest hurdle for an organisation may be to learn to think and plan before it acts; to front-load our
• CSR and sustainability monitoring- are suppliers complying with the organisation's policies? If not, is efforts in sourcing, and not save them until later in the process.
the organisation protected from eg reputational risk and can it move on to alternative suppliers?

17(\
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Category Management in Procurement and Supply Mobilisation, Start-up and Transition ! CHAPTER 13

Figure 13.1 The brown paper plan format (O'Brien)

Project planning

2.4 Category management is a project that needs to be planned. To begin with the organisation spends its
time looking around, trying to establish where it is. It will analyse what it finds and decide where instead it
Supplier
wants to be. It will then need to connect these two states with a map or a plan. selection Negotiation

2.5 O'Brien stresses simplicity and ease of comprehension over exhaustive and rigid detail. Complex plans with
many detailed activities developed in sophisticated software packages are ineffective. It is much better to
have something that:

• Is quick to grasp
• Enables the widest set of stakeholders to use it
• Enables collaborative planning
• Enables communication and discussion
• Can be easily changed and updated.

2.6 He suggests using a Gantt chart format that makes it clear what is being done when by whom, the steps
that lead into and spring from each activity, and the key milestones and events. He gets to the Gantt chart
through a 'brown paper' process.

'Brown poper' planning

2.7 Most of the people involved in category management need a map and not a guidebook. They have
neither the time nor the need to spend hours with the plan working out what is expected of them- they
want clear, unambiguous, concise instructions. This is not to say that sophisticated plans are completely
unnecessary, but that most of the people involved need something more direct.

2.8 O'Brien describes a brainstorming-style process called brown paper planning. The category team gets
together with large quantities of paper and post-it notes and jointly brainstorms an end-to-end process
Initial conditions
that can then be operationalised as, for example, more sophisticated software-based representations.

• Divide the sheets of paper into horizontal swim lanes, each one corresponding to a principal area of 2.9 In a sense, there may need to be plans before the plan. The category team may need to plan how they
activity or goal. Figure 13.1 shows four swim lanes that work with category management projects. are going to get the initial conditions for the category management project in place. The category project
• Put a time line across the paper. There is rarely any need to go beyond 18 months because plans may be conceived on the assumption that certain other appropriate structures and resources are in place.
should change as the project progresses, and preconceptions of what events will happen in what O'Brien highlights:
order in the longer term are constraining and unhelpful. The longer term is a vision, not a blueprint. • Executive endorsement
• Colour-code the swim lanes; later use matching post-its so that it is clear what relates to what. An • Governance structure
additional layer of detail can be added by using differently-shaped post-its- have some scissors handy. • Performance measurement and tracking mechanisms
• Brainstorm activities onto individual post-its and position, reposition, rewrite, split, merge, reorder • Reporting structures
or discard them until the team agrees on the plan. You should anticipate lots of changes of mind • Communications structures
as individual activities are debated and rethought. Shorter and longer duration activities can be • Information technology infrastructure.

I
represented as appropriate by differently-sized post-its or bunches of post-its.
• Connect the post-its with arrows showing which steps precede and follow which other steps. Programme plan
• Stick everything down and record the result with a photograph. This is symbolic ('we have agreed a
plan') and practical (the plan is actually a fragile object and bits may fall off or slip). 2.10 The category management project will be a collection of plans- each category will have its own plan and
• Transfer to a Gantt chart and any other suitable tool that the team plans to use. Do not, however, these category plans will need to be co-ordinated with a programme project plan. This outlines which
let the format overtake the plan- the important aspect is the flexibility, inclusiveness and cohesion categories are being worked on when and why. It directs resources as appropriate, so it may be politic to
of the planning, not the beauty of the diagram. The 'home-made' aspect of brown paper planning prioritise those categories where although the wins are not substantial, they will be quick, high-profile and
emphasises this. garner or reinforce support for the process as a whole.

2.11 O'Brien says that it is typical for organisations to work on about five categories at any one time, and
to structure their category management programmes into 'waves' of activity (Figure 13.2). He sorts
categories into waves with the opportunity analysis tool, but takes into account the availability of key
individuals. Ultimately, there are limitless ways in which to plan and numerous types of plans which may
be made- the important thing is to actually create a plan in the first place and then to use and develop it.
r Category Management in Procurement and Supply
Mobilisation, St:art~up and Transition I CHAPTER 13

Figure 13.2 Waves of activity within the overall plan (O'Brien) • Cautious management culture- when organisations pursue much the same objectives in much the
same way over any period of time they become conservative, targeting incremental improvement and
avoiding mistakes. Category management can seem too big and too different. The disruption and risk
(all change is risky) may seem too much. The organisation must confront and assess its reality honestly
and commit to a bold path forward.
• Business-as-usual management processes- the organisation is already a functioning, operating entity
with a full schedule of activity to get through. The category management project is a demand on
already utilised people and resources. The answer to this is to create a category management project
that will rip at high speed through its agenda. It will not try to create a fully-formed and perfect
process, but will run in parallel with the rest of the organisation transferring de live rabies as they arise
and accepting that every deliverable is a work in progress to be refined and perfected through use.
• Initiative gridlock- many people will have pinned their reputations, status and personal capital on
' . getting the category management project under way. When aspects of it start going wrong, they find
it difficult to discard their 'Plan A' for a 'Plan B', so instead start propping up Plan A with initiative after
1234Events 5 ~
initiative so as not to lose any face. All of this furious activity within the organisation attracts attention,
so other senior managers in other functions will also devise their own change programmes. In the
end, the original intent becomes lost under a mass of change initiatives. The organisation ends up
going nowhere because it cannot react confidently, critically and collegiately to a mis-framed plan.
• Recalcitrant executives- not everyone will be behind the change. The organisation will want to avoid
conflict, so will tolerate dissent. In tolerating dissent, however, it allows enthusiasm and energy to
Implementation planning be drained from the process, and keeps in stakeholders who will keep focusing on failure and sap
the support of first equivocal stakeholders and finally actual supporters. Recalcitrant stakeholders
2.12 Once a sourcing strategy is approved, its implementation must be planned. Here is a situation where
have to be dealt with as early as possible, and this may mean launching the process in a deliberately
detailed planning is needed, and the level of detail should be deep enough to enable all necessary
provocative manner in order to highlight where dissent will originate.
management, monitoring and control processes.
• Disengaged employees- top managers can plan, but it is front-line people who implement .
Everyone needs to be involved in the process and to move at the speed of the process. The category
2.13 One frequently overlooked part of implementation planning is accounting for the real world. The plan you
management team is prone to living in its own bubble, carrying forward a high-level process of
build will be predicated on the assumption that, even if some parts are completed more or less quickly
analysis, strategy-making, contracting and so forth, but unless front-line staff are helped to keep up,
than anticipated, the plan will roll itself out step by step.
then whatever the category team comes up with is destined for failure- they are like roofers laying a
2.14 We have seen this is not necessarily true. Our efforts will be resisted by some stakeholders, and not roof for a building which is not actually there.
necessarily in any even manner such that some steps flow easily and others haltingly, so distorting the • Lass of focus during execution- planning exists in the ideal world. At some point we move from the
realisation of our plans. This can be a problem in resource allocation, with people booked to work on ideal to the real world of doing. As we said before, if the planning is inadequate, we are doomed to
specific activities that cannot start because earlier steps have been held up or delivered less well than they firefighting. The problem is that planning is always inadequate; no planning process can anticipate
should have been. every eventuality, and as we encounter problems we will reach for the old-system answers that we
know work, and every time this happens our new intentions are diluted and we lose focus on category
2.15 O'Brien cautions to look out for: management. We have to surround execution with features that will keep us on track and using our
new methods. Especially, we must avoid punishing people for failing to meet targets if that failure is
• Inadequate resources
rooted in trying to do things 'the right way'.
• Lack offocus
• Settling for minor results
• Pulling back when people resist
• Loss of nerve
• Initiative jealousy- those who do not own the initiative become jealous of its success.

Good starts and performance

2.16 Robert H Miles discusses six 'speed brakes' or reactive forces in organisations that hamper change. In
ordinary circumstances these brakes have no significant effect on performance, but during the turbulent,
transformative change that category management brings about, they resist the bold and rapid change
required. They prevent the process performing well.

2.17 If category management is to get off to a good start, then, it must find ways to loosen these brakes. The
brakes need to be released in a particular sequence for best effect.

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 Mobilisation, Start··up and Transition j CHAPTER 1.3
Category Management in Procurement and Supply

3 Mobilising start-up and transition 4 Transition arrangements

3.1 Mobilisation means making ready to implement the category management approach. All mobilisation 4.1 The Australian National Audit Office (ANAO) describe transition as the changeover from one supplier to
begins with a review of where the category management project is (in practical terms), and the stages another, from one contractual arrangement to another, or the continuation of an existing arrangement
of the process yet to be completed. There are elements of organisation, motivation and leadership to on a different basis. Transition will probably follow either a competition-based approach to market or a
this, and procurement will be expected to provide all of these. There will be two key tasks that may be negotiation with an existing supplier that results in substantial operational differences.
overlooked: finalising contracts, and ensuring continuous improvement.
4.2 The management of the transition should have been set out in the initial contract agreement in the form
of exit clauses and arrangements that oblige the outgoing supplier to prepare a strategy for exiting. Where
Finalising contracts
the exit is forced rather than planned, arrangements must be managed accordingly. The exit strategy
3.2 In order to ensure appropriate probity, contractual control, and specific delivery, it is important to finalise should cover transfer of records, information and equipment as appropriate. Exit may also be co-ordinated
the actual contractual arrangements that have resulted from the tendering or approach to market and with the incoming supplier, who may overlap with the outgoing supplier as the changeover occurs.
selection phase discussed earlier.
Engaging stakeholders in contractual arrangements
3.3 The details concerned here will include not only the contractual terms and conditions upon which the
business will be based, but also the agreed specification(s), timescale(s), installation or commencement 4.3 ANAO suggests that the procurement function should make a process map of all organisational
of service arrangements, transition plans, pricing terms- ie all the operational aspects. Given the likely stakeholders who impact on or are impacted by the supply concerned so as to facilitate efforts to keep
strategic nature of the business, there would also be some elements of relationship management and user and stakeholder experiences in line with their expectations. Once there is a map, the new contract
improvement management, and plans to advance them. There would be specific requirements to deliver introduction process can be designed.
benefits and performance improvements in the contract, and thus these would be key features of contract
4.4 Transition must be considered in developing a new contract so that all the necessary processes are in
delivery in the specification and terms.
place before the existing contract ends. This is crucial and is often forgotten. If transition is not mapped
3.4 O'Brien examines this subject more formally, suggesting that the following areas are particularly appropriately, and communicated well in advance, there may be a tendency for users to procure off-
significant. contract, resulting in lower-quality procurement and diluting the intended benefits ofthe category
process. There will also be confusion; stakeholders will not know what to expect or do, and this will result
• Agreed arrangements for the supply- eg details of the products and services, specification, service
in poor performance.
level and so on. Business requirements documentation will form the basis of the contract structure.
• The required relationship- account management provisions, eg reporting, performance reviews, Handovers
obligations placed upon the supplier in fulfilling the contractual bargain. This goes beyond the
specification into how the parties might work together in practice during the contract period, 4.5 ANAO caution that the handover from the outgoing to the incoming supplier can be a high-risk period
and beyond it either into a renewal or an exit. Contractual obligations will include: exit provision; that, if mis-managed, can result in poorer service levels and worsened relationships with both suppliers.
commercial aspects (including price, fee, payment terms); and provision for eventualities expressed in The suppliers may incur off-contract costs that are attributable to the organisation that they then seek to
the terms and conditions. Clearly not all eventualities can be foreseen at the beginning, so there must recoup.
be a contingent basis for change and a process for making any necessary changes and incorporating
them into the contract. 4.6 Just as the outgoing supplier should have an exit strategy, so too the incoming supplier should have an
'entry' strategy, and it is up to the organisation to agree these with the suppliers concerned and co-
Ensuring continuous improvement ordinate the two so that they interlock.

3.5 Depending upon the prevailing constraints on contract extension (which vary with context, eg public 4.7 Ideally, there should be an agreed period of overlap where the two suppliers work alongside each other.
versus private sector), there needs to be a suitable approach to continuous improvement in the contract. The incoming supplier should use this period to learn all they can about the realities of the supply process

I
Earlier in this unit (Chapter 9), we discussed how driving change is a foundation of category management. and to transfer appropriate assets to the appropriate facilities and process owners in accordance with their
It enables breakthroughs to take place- to be conceived, developed and incorporated into category new responsibilities. On the organisation's part, it should now have the access it needs to complete its due
management implementation. diligence processes without being trapped into the supplier- the outgoing supplier is still there to provide
a service in the short term.
3.6 O'Brien suggests that continuous improvement should be targeted in value, quality, performance, price,
process, efficiency, innovation- indeed any factor that we have already seen to flow from the business Managing risk
requirements and value levers. Continuous improvement is embedded in the latter or last stages of
all strategic sourcing and category management processes. Within category management, continuou·s· 4.8 The exit strategy preparation and handover periods should be long enough for an orderly, well thought
improvement is based on continually evaluating and analysing market position, identifying opportumties through, co-operative transition to take place. It is good practice for the exit strategy to be prepared early
for improvement, and designing and implementing appropriate changes in response. This implies that after in the contract as an exit may be forced before the contract end date. This can leave the exit strategy
the initial category management revolution, there is a default steady sate of incremental improvements or exposed to subsequent events, so it should be reviev•ed and if necessary revised on a regular basis.
protections from losses in performance.

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Category Management ln Procurement and Supply Mobilisation, Start-up and Transition ! CHAPTER 13

4.9 Timing the overlap is difficult: the longer it is, the higher the cost to the organisation as it is paying for two
suppliers on the same supply; the shorter it is, the more risk something will go wrong. Each organisation
has its own view on cost-benefit in each individual transition.

4.10 All conversations in the process should be three-way: the outgoing supplier can feel reassured they are
not being misrepresented; the incoming supplier can feel reassured they are not walking into a mess; the
organisation can feel reassured that all the elements of transition are happening to its satisfaction.

4.11 Where an overlap is not realistic or possible (eg in an abrupt, forced exit), the organisation should take
steps to maximise information and knowledge transfer to the incoming supplier. This includes:

• Organising formal and informal discussions between the suppliers

• Providing the incoming supplier with access to guidance and processes prepared and used by the
outgoing supplier
• Facilitating transfer of contract-related assets to the incoming supplier
• Arranging discussions between the incoming supplier and stakeholders, particularly with senior
managers and with end-users so the supplier can gain insight on requirements and expectations.

4.12 Some exits are antagonistic and forced; acrimonious (litigious) transitions must be managed carefully.
Self-test questions
Numbers in brackets refer to the paragraphs above where your answers can be checked.

1 List benefits of the category management approach. (1.1)

2 Give examples of the actions required under the heading of 'compliance monitoring'. (1.6)

3 List elements involved in continuous improvement, in the context of category management. (1.8)

4 Describe the process of 'brown paper planning'. (2.8)

5 Describe the six 'speed brakes' identified by Robert H Miles. (2.17)

6 List areas where buyers should target continuous improvement. (3.6)

7 What steps can a buyer take to maximise information and knowledge transfer to an incoming supplier?
(4.11)

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CHAPTER 14

Managing Contracts and Suppliers

Assessment criteria and indicative content

Propose arrangements for contract management and supplier relationship management to achieve
performance improvement through the execution of strategic sourcing or category management processes

• Responsibilities for contract management

• Operational performance and strategic levels of contract and supplier management
• Obtaining feedback from stakeholders
• Benchmarking performance
• Creating performance improvement

Section headings
1 Responsibilities for contract management
2 Operational performance
3 Obtaining feedback from stakeholders
4 Benchmarking performance
5 Creating performance improvements

Introduction
This chapter looks at some of the organisational management responsibilities involved in strategic sourcing
and the category management process. We consider formal responsibilities and the relationship aspect of
managing the work between the contracted parties as they deliver improved performance in the course of
the business at hand.

The supplier and the organisation work together to determine how their relationship starts, what
arrangements there are to develop it, and how to handle a hand over to a new arrangement once the
current one has run its course, ie the lifecycle of the supply arrangement. This will include the mechanics
for ensuring performance, and ongoing enhancements in that performance. Responsibilities for contract
management delivery and the management of the supplier are team efforts for the organisation, which is
explored in this chapter.

Here are some key issues to keep in mind as you study this chapter.

• Contract management is a corporate, organisational responsibility operationally, although the 'official'

responsibility rests with procurement, often legally through the signing of contracts.
• Having agreed a contract with a supplier on the basis of securing improvements- as is the intention
with the category management, strategic sourcing plans, and implementation processes discussed in
this unit- there needs to be a keen examination of performance to ensure that the anticipated and
desired performance and benefits are achieved.
• Supplier relationship management and performance improvement goals need to align with both the
supplier's and the organisation's corporate goals and strategy.
• Tracking category management benefits is a collaborative approach, where the finance function
supports the methods used to track benefits, and measure the performance improvements attributed
to suppliers and to the implementation of category management.

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Category Management in Procurement and Supply Managing Contracts and Suppliers 1 CHAPTER 14

1 Responsibilities for contract management Planning

1.1 Ultimate responsibility for contract management should lie with the procurement function. It is here that 1.5 Plans, policies and procedures are an integral part of the specification. The organisation cannot procure
the signature for the contract responsibilities sits for the organisation, and it is here that changes to the a research laboratory service, for example, without some idea of how that service is going to plug into
contract are sanctioned, controlled and made. its needs and systems, both technical (does it and the R&D function have compatible practices?) and
operational (how will it fit in with the organisation's quality requirements?).
1.2 However, depending on the nature of the organisation and the management and financial delegations for
expenditure, there may be different attitudes and freedoms in existence within the organisation. Strategic 1.6 Contract administration likewise must be part of the specification, eg management of contract
contracts and those of high value are likely to be held in procurement's control in terms of the law, but amendments, advance co-ordination and scheduling of resources to support contract administration
in terms of everyday management there will be in practice processes aligned through the organisation processes. Planning for contract administration requires the contract manager to know, for example:
that permit actions by operational resources and users to utilise services and goods from the contracts • Expected outcome measures- eg deliverables, milestones. These are tied to the payment schedule.
or frameworks deployed across the organisation. Such processes must be known and communicated to • Costs- that is total costs.
ensure financial probity, contract compliance, and benefits realisation across the organisation. • Contract performance- when, where, how and so on deliverables are expected.
• Acceptance and rejection terms and rights.
The role of a contract manager • Contract dates- including effective date, completion date, renewal terms.
• Complete addresses- for correspondence, payment, complaint and so on.
1.3 It is worthwhile pausing to consider what we should expect of a contract manager and what a contract
manager should be enabled to do. A contract manager's primary responsibilities are as follows.
Post-award discussions
• Participating, as necessary, in developing the specification and approach to the supply market.
Contract administration must be considered during this process. 1.7 The contract manager leads and arranges discussions between the contract team at the organisation and
• Monitoring the supplier's progress and performance to ensure provision conforms to the contract the corresponding team at the supplier to fill out and finalise operational detail and ensure all parties are
requirements. clear and aligned on how the contract will play out. This is not negotiation over substantive aspects.
• Managing any organisational resources used in contract performance.
1.8 The scale of the discussions will depend on:
• Authorising payments consistent with the contract terms.
• Exercising remedies, as appropriate, where a supplier's performance is deficient. • The type of contract
• Resolving disputes in a timely manner. • The level of risk associated with the contract
• Documenting significant events. • Contract value and complexity
• Maintaining appropriate records. • Length of contract, period of performance and/or delivery requirements
• Procurement history of the supplies or services required and the supplier's expertise
1.4 The number of people involved in managing a given contract will depend on its size, level of risk and
• Urgency of delivery schedule
complexity. The people making up the management team should have been identified early on in the
• Organisation's prior experience with the supplier
procurement process. There should be one contract manager in charge and others to assist him. Roles and
• Any special or unusual contract requirements
responsibilities must be clear, including the following.
• Any special or unusual payment requirements.
• Determining the sequence of activities, dependencies, required or desired outcomes, and acceptable
1.9 The contract manager should set an agenda that may comprise the following elements.
performance levels.
• Developing a timetable and start and end date for each performance component. Include milestones • Scope- ie what exactly the organisation is buying.
with accompanying timeframes, and monitoring and reporting requirements. • Terms- full contract terms and conditions.
• Monitoring supplier activity on a specified schedule to identify problem areas. • Requirements- technical and reporting requirements under the contract. Technical requirements can
• Meeting with the supplier on a regular basis to review progress, discuss problems and consider be discussed as part of the Scope. It is vital that the supplier and organisation are fully agreed.
necessary changes. • Administration- applicable contract administration procedures, including monitoring and progress
• Providing access to organisational facilities, equipment, data, staff, materials and information. measurement.
• Contacting other staff as necessary to provide equipment and data. • Rights- rights and obligations of both parties and the supplier performance evaluation procedures
• Establishing scope of authority, clear lines of communication and reporting, and specific individuals should be clear, both for this contract and the implications for potential future contracts.
who will interact directly with the supplier. • Potential problems- and potential solutions and contingency plans.
• Establishing control of correspondence, data and reports. • Payment- invoicing requirements and payment procedures.
• Identifying potential problems and solutions. • Authority- members of the contract team should explain the limits of their authority and obtain the
• Defining terms or conditions of default. same information regarding supplier personnel.
• Establishing a procedure, identifying a responsible person and establishing a timeframe for handling
non-compliance.
• Establishing a procedure, identifying a responsible person and establishing a timeline for making
necessary contract decisions or modifications.

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------ Category Management 1n Procurement and Supply Managing Contracts and Suppliers 1 CHAPTER 14

2 Operational performance Setting performance targets

2.1 Once contract and sourcing arrangements are in place and operational, there must be a keen examination 2.9 Performance expectations and targets should be clearly defined, specific, and measurable, and
of performance to ensure that desired benefits are achieved and the performance envisaged from should include a timeline. As we have discussed, the choice of measures should directly relate to the
suppliers is met. There is a risk that once a contract is won, work on the sourcing project will be non- organisation's corporate approach, its specific strategic goals and objectives, and the operational targets it
compliant or slow, or may even stop, so appropriate systems and governance must be in place to ensure is trying to meet. Everything should align.
the delivery of the contract.
2.10 There is a wide variety of areas of supplier performance that may potentially be measured. It is important
2.2 Glenn Wheaton says that all organisations must quantify and manage their risks effectively in order to be to select the ones that are most important for the organisation. Measures can be at strategic, tactical and
successful over time. When dealing with suppliers, there are substantial risks and potentia I for disaster in operational levels. Those metrics that are of critical importance to the organisation should be developed
the form of bankruptcy, environmental problems, delivery failure, lack of materials, poor performance, into key performance indicators (KPis).
or product defects. Most organisations recognise that these risks exist, but do not take sufficient steps
to manage them effectively. By measuring and monitoring supplier performance on an ongoing basis, 2.11 It is important to work with the suppliers involved when developing these measures so as to determine
organisations can realise some significant benefits. whether they will be measurable and the most valid for the purpose sought. This suggests a more
collaborative approach with suppliers, and ensures that suppliers know what is expected of them.
2.3 In setting out to measure suppliers and manage relationships, there must be a clear set of objectives and Suppliers are then themselves enabled to make their own business plans, and collaborate on joint plans
limits and boundaries around the process, involvement of stakeholders and time spent, and so on. This for improvements to be built in to the contract and service performance.
can be very time-consuming and may become costly. The process of management itself becomes almost
an industry within the organisation unless it is well-managed and clear as to what it is trying to achieve, 2.12 There is also here then a mechanism to ensure that steps are taken to meet the goals and objectives
and actually does show those achievements. Objectives should be recorded and there should be no doubt that were set for the supplier and for the organisation. In such cases the suppliers are also then aware
within the organisation as to what they and the key measurements that define success are. constantly during the measurement cycle whether they have performed well or have performed poorly,
and can intelligently deploy targeted improvement plans to remedy or improve performance.
2.4 The supplier relationship management programme should designate the key stakeholders who will be
involved in determining suppliers' performance levels and assessing improvements, and should specify Activities involved in managing contracts, suppliers and performance
the resources and processes required to do this. These things will be required to obtain buy-in and senior
management support. 2.13 There will be a number of tasks that the organisation and its suppliers can undertake, and tools that they
can develop, to facilitate performance tracking.
2.5 If suppliers are required to comply with documentation and contract provisions, and co-operate
on improvement plans during the organisation's supplier management initiatives, then their early 2.14 Information infrastructure- information must be collected, processed, made more useful, made
participation is a good idea- they can contribute their ideas and adapt more effectively. Such supplier accessible and kept secure. Some of the processes and features of this organisational asset may be:
relationship management approaches can be costly to manage and engage in for all concerned, but there • Compliance tracking
are compensating benefits. • Contracts databases
• Dashboards
2.6 Wheaton suggests that the goals set for supplier relationship management and the measurement • Decision support
undertaken to support performance improvements must be aligned between a supplier and the goals and • Portals
strategy of the organisation. Unless this is done, the supplier relationship programme will be at best less • Procurement intelligence
effective, and may result in wasted resources. • Reports
• Spend analysis
2.7 Clearly, there is a need to assess where supplier relationship management efforts should be placed. We
have already considered Pareto analysis and portfolio analysis as tools to assess where the strategic
• Sourcing databases

suppliers and key spends are. We already acknowledge these should receive more attention and focus.
• Supplier and contract lifecycle tracking

2.15 Programme management- beyond the basic administrative and operational necessities (documentation,
2.8 Suppliers and the organisation not only need to examine risk mitigation but also, as we have discussed, scheduling and so on), the organisation will be interested in accountability, authorisation, capacity,
performance improvements. Relationships between organisations depend on the nature and extent of compliance, control, issues resolution, productivity, resource allocation, risk, savings, security, sustainability.
the business they conduct and attitudes they bring to it. Closer co-operation, once contracted, in some
respects allows better understanding of the provision required, improved efficiencies and effectiveness, 2.16 Supplier lifecycle management- this takes the form both of following suppliers through a sequence
and also enhanced understanding of the parties' objectives. Caution must be adopted in this regard, of types of engagement with the organisation (qualification, classification, operation, disengagement,
however, as there are always contractual boundaries and conflicted interests between contractual parties, retirement), and of the issues that may arise in different ways during that sequence (compliance,
however collaborative their relationship, development, evaluation, innovation, risk, supply chain assurance, synergy).

2.17 Contract management- there will be key areas that must be got right (beyond those such as risk and
productivity that are part of any process), eg flexibility in delivering promises, maintaining a common
understanding of the contract contents and position, obligations monitoring, visibility and transparency.
Category Management in Procurement and Supply Managing Contracts and Suppliers ! CHAPTER 14

3 Obtaining feedback from stakeholders Stakeholders are not necessarily objective

3.1 Stakeholder feedback must be captured and used as an evaluation mechanism to be fed into the supplier 3.7 Stakeholders' first loyalties and reflexes are to their own perspectives, understandings and relationships.
relationship management process and through the measurement indices. Stakeholder input will often Often they can be encouraged and coached into greater objectivity, but even if they can, when it comes
have a place in the category team reports mentioned in Chapter 11. to sourcing, it is up to the professionals to provide evidence-based decision making and analysis and to
ensure that it is heard.
3.2 Stakeholders must understand the role that they have in providing input into both benefits realisation and
performance assessment (it needs to be explained to them). A reporting mechanism is important to show 3.8 Category managers and sourcing specialists will gather information for the purpose of evaluating and
how and when feedback is expected, much in the same way as any project deliverable. measuring supplier performance through any or all of the following mechanisms.

Stakeholder consultation • Site visits

• Supplier questionnaires
3.3 Circumstances (such as geographical distance, cultural factors, relative seniority and authority, pre-existing • Organising existing data
relationships) will dictate the formality and methods you use with each individual stakeholder. Here are • Internal questionnaires
some of the possibilities. • External certifications
• Own certifications
• Letters
• Third-party reviews
• Phone calls
• Conversations with suppliers
• Social media
• Independent ratings
• Surveys
• Contact with other customers
• Focus groups
3.9 Wheaton also mentions the potential costs involved in constant measurement and in obtaining feedback
• Meetings with selected stakeholders
from stakeholders. He suggests that organisations must decide how and when it benefits them to use
• Public meetings
these methods.
• Workshops
• Online feedback mechanisms
3.10 It is important that some of the least costly methods are done frequently in order to obtain updated
• Advisory committees
risk assessments and scorecards. If done correctly, this will also help the organisation stay appraised of
• Multi-stakeholder forums
important developments before they become a problem. Some of the more costly methods (such as
• Advisory panels
site visits) should be done less frequently. However, for important, high-risk suppliers, site visits are an
3.4 Stakeholder satisfaction must be fed back to the organisation continually so that it can understand how its important tool and make it easier to accurately assess the supplier's ability to perform.
actions are being received. There are three purposes in this.

• Prediction and control- feedback is used to understand the links between cause and effect, making it
The structure of supplier evaluation
easier to predict and control events.
3.11 Wheaton also provides guidance for managing the supplier performance aspect of the supplier
• Mutual understanding- feedback enhances people's mutual understanding of each other and a
relationship and performance improvement programme, saying that the actual supplier evaluation must
situation, what they expect, what they experience, and what it means to them.
be structured in such a way that it produces information and data that can actually be used to make a
• Critical reflection- feedback enables people to reflect on situations and challenge the goals pursued.
decision. If the information the organisation receives from supplier assessments is vague or ambiguous,
3.5 Without feedback mechanisms, stakeholders of any type, and indeed the organisation itself, will not then management cannot make any informed decisions based on this information, and the effort was
be able to feed back any complaints, concerns or problems. The organisation will not be a learning effectively wasted.
organisation, and will continue to make the same mistakes over and over again. Therefore it is important
that clear feedback loops are set in place. These can include: 3.12 It is important to include all relevant information in the supplier assessment that is important to internal
and external stakeholders. KPis should be tracked consistently in supplier responses. The questions used
• Complaints processes
should be easily understood. Suppliers must be clear on what is wanted from them and must be able to
• Communication responses
give it. Information requirements should come with a deadline for submission.
• Service standards

3.6
•
•

•
Questionnaires and standard response forms
Formal and informal feedback opportunities.

These imply certain performance measures.

Monitoring the numbers and types of complaint.

I
• Monitoring feedback- frequency, type, nature.
• Service standard conformance.
• Recording informal feedback, eg recording details from ad hoc emails, phone calls, tweets, blog posts,
and letters.

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4 Benchmarking performance 5 Creating performance improvements

4.1 A benchmark is a standard against which something is compared. There are many definitions of 5.1 Hammer and Champy relate a number of useful insights in relation to benchmarking.
benchmarking in business, but they all involve making comparisons with other organisations, then
learning the lessons those comparisons provide. 'The first step is ta map the process, because you can't improve anything if you can't define it.'

4.2 Lysons and Farrington follow the APQC 2008 Glossary when they define a benchmark as 'a measured "best 'You set objectives, establish milestones, then measure yourself against those milestones. It is no different
in class" achievement- a reference or measurement standard for comparison that is recognised as the from bringing a product to market, and it must be taken just as seriously.'
standard of excellence for a specific business process'.
'Once you make the step forward, if you don't have earlier measurements, you can't do a comparison.
4.3 The purpose of benchmarking is to highlight differences in specific parameters examined between your Having some kind of scorecard as we went along might have accelerated succeeding projects.'
organisation and others that you have chosen to aspire to or compete with in the market place to allow
5.2 Tim A Minahan and Mark W Vigoroso stress that commonly shared and consistent measurements can help
improvements in performance to be made for competitive advantage to be gained.
organisations focus their resources, identify performance problems, develop strategies for supply chain
4.4 Just as we have examined operational, tactical and strategic performance measures of suppliers on improvements, and determine the total cost of ownership involved in given supply relationships, products,
contracts the same approach can be taken in benchmarking against the external supply market and other even entire supply chains.
suppliers' performances.
5.3 Sherry Gordon suggests that four key strategies are found to be common to the organisations achieving
4.5 There must be a coherent methodology practised over time to ensure consistency of measurement. It can the greatest return from their supplier performance measurement initiatives.
be difficult to establish the 'right measures' and the right approach to this to gain data to measure (Table • Tracking the performance of a broader portion of the supply base
14.1). Operational measures with input and output data or those pertaining to financial information will • Standardising supplier performance measurement procedures across the organisation
be easier to compile and assess, but will also reveal less interesting information about the overall direction • Collaborating with suppliers on performance metrics, reporting, and improvements
and performance of the organisation. Less factual and more subjective data is useful, but less tangible and • Automating key supplier performance measurement activities
may relate to the impressions of customers, which is after all what brings and sustains business over time.
5.4 Every organisation knows it should assess supplier performance, and thereby identify opportunities for
Table 14.1 Some metrics groups used in benchmarking (Cameron Hawes) creating improvements. Most deploy some sort of supplier performance measurement, whether it is a
couple of rudimentary key performance indicators or a more sophisticated data gathering and assessment
programme. Gordon proposes that the following seven steps comprise a process for developing and
deploying supplier assessment.

• Align supplier performance goals with organisational goals and objectives.

• Determine an evaluation approach.
• Develop a method to collect information about suppliers.
• Design and develop a robust assessment system.
• Deploy a supplier performance assessment system.
• Give feedback to suppliers on their performance.
• Produce results from measuring supplier performance.

5.5 Following the performance assessment it should be clear what actions are necessary to enhance or
improve performance. If performance has dropped over a period, then there is increased risk of loss
and bad outcomes for stakeholders. Suppliers must be communicated with on performance; there may
be circumstances surrounding performance results that explain the levels seen. There may be issues
that changed delivery arrangements or environmental conditions. There need not be a fault or blame to
attribute to any organisation, process or individual. Sometimes poor performance is out of our control.

5.6 Measures are also only as good as the input and output data, so beware of making snap judgements. More
analysis often still needs to be done when the first evidence of performance and supplier relationship
management is provided. There may also be good reasons to challenge a supplier on performance, and in
these cases developing improvement plans with the supplier in place and finding an alternative supplier
are polar opposites in handling the situation.

5.7 Wheaton sets out a process for supplier improvement.

• Contact the supplier and find out what went wrong and why. The results of the performance

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assessment should be provided to the supplier and can create a basis for discussion. The poor
performance could have been the result of something outside of the supplier's control. It could have
been a problem with process, personnel, a supplier, or something else. By communicating with the
supplier, the organisation can determine the cause(s) of the problem(s), and can try to work with the
supplier to make changes to bring the supplier's performance back into compliance with the contract
or with organisational policies. If the supplier does not have a good explanation or understanding of
why the problem occurred, this may be a sign of trouble.
• Once the causes of a problem, or set of problems, have been identified, the next step is to devise a
supplier improvement plan. The plan should be specific to the problem, should involve people from
both the organisation and the supplier, and should involve a time line for addressing the problem and
bringing performance into compliance. This should be a collaborative process, and should be aimed
at improving the overall supply chain. Even if a supplier's performance is acceptable, the organisation
may wish to invest time and resources in developing its suppliers and improving their performance.
• If the problem is too severe, cannot be fixed in a timely manner, or poses too much of a risk, the
organisation may wish to stop doing business altogether with the supplier. This means that it should
carefully find an alternative source of supply and, if possible, reduce its reliance on the supplier in
question. Self-test questions
Numbers in brackets refer to the paragraphs above where your answers can be checked.

1 List the primary responsibilities of a contract manager. (1.3)

2 What information does a contract manager need in order to carry out his role? (1.6)

3 Key performance indicators should be developed by the buyer alone and then imposed on the supplier.
True or false? (2.11)

4 List some of the activities involved in tracking supplier performance. (2.14-2.17)

5 List methods of communicating with stakeholders. (3.3}

6 List three purposes of feeding back stakeholder satisfaction to the buying organisation. (3.4)

7 List mechanisms for gathering information on supplier performance. (3.8)

8 Define a benchmark. (4.1, 4.2)

9 List four groups of metrics used in benchmarking. (Table 14.1)

10 List the seven steps in Sherry Gordon's process for developing and deploying supplier assessment. (5.4)

100 191
l

CHAPTER 15

Performance Measurement

Assessment criteria and indicative content

Develop performance measures that can be applied to achieve performance improvement through the
execution of strategic sourcing or category management processes

• Templates for gauging feedback on performance

• Creating performance measures to assess success of the category process
• Reviewing improvements to the category management and strategic sourcing process

Section headings
1 Capturing data
2 Creating performance measures
3 Dashboards
4 Reviewing improvements

Introduction
We examined some aspects of contracts and relationships in the last chapter; now we will consider
more practical support to equip us in the delivery of performance management, such as in managing the
collection of the feedback we require from stakeholders that we discussed earlier. Now it is important to
consider what success looks like in terms of performance from the strategic sourcing process, and how
this can be measured. Then, as all our systems mature and sourcing projects conclude, we need a review
process which will explore the improvements achieved through category management and consider what
to do next.

Here are some key issues to keep in mind as you study this chapter.

• Benefits measurement and tracking is critical so that benefits are reported.

• Supplier performance management is more than simply obtaining data on suppliers. It reflects the
organisation's strategy and is a comprehensive approach to managing its supply base.
• Effective supplier performance management is not easy to achieve and requires deep knowledge of
the organisation's goals, processes, structure, and supply base.

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1 Capturing data Benefits tracking

1.1 Data gathering and analysis are key processes in effective strategic sourcing and category management. 1.8 Effective, continuous, accrued and milestone benefits tracking ensures that intended outcomes are
They must be continuous. An effective monitoring, research and analysis function will track category prioritised, and so have the best chance of being achieved. It helps mitigate the risk that value may
developments (locally, nationally and globally) as well as individual contract performance to provide be leaking away unnoticed, as may happen with traditional contract management (or absence of
strategic insights and keep the organisation in touch with best practice. management). There are certain key actions required.

• Define the baseline(s) against which objectives and benefits will be measured.
1.2 Here are some of the key actions required.
• Review the progress of any continuous improvement opportunities taken, and report the results to
• Strategic review of consumption patterns, key performance indicators and contract performance the most critical stakeholders.
patterns • Review the objectives, key performance indicators and benefits identified in strategic planning and at
• Benchmarking reviews and research contract starts, and analyse their ongoing validity.
• Tracking improvement patterns
1.9 Key outputs will include the following
1.3 And here are some of the expected key outputs.
• Tracked spend and savings against expected outcomes and budgets
• Assessment of the success of implementing value for money and continuous improvement • A moving baseline (increased expectations) as price and non-price benefits are achieved
opportunities • Management information reports
• Revised strategic sourcing and category management strategies and objectives
1.10 Benefits should be tracked consistently, with consistent methods and definitions. Baselines may need to be
• Recommendations for future directions with given categories and suppliers (once current contracts
re-indexed.
expire)
1.11 All benefits should be tracked. Quantitative ones (eg prices, costs, response times) are straightforward and
Data analysis unambiguous, but qualitative benefits are open to interpretation, so some way of producing a trackable
consensus view should be explored (eg 25% of our panel of 80 representative experts thought the
1.4 All relevant data must be gathered. This will come from within the organisation (from client divisions,
development was a good thing).
functions, departments and other operational units), and from the suppliers themselves (as part of
stipulated performance and compliance monitoring). It is up to the category manager to specify what they
1.12 As a category manager, you may decide on something like the following example framework, though
need.
whatever you develop should, again, be sensitive to your organisation's context and needs.
• During the sourcing phase with the supplier.
• When internal systems are being designed and installed, then later in encouraging colleagues to 1.13 Specify the method by which benefits tracking will take place.
comply with them.
1.14 Communicate the baseline for price and non-price benefits and how incremental changes will be
1.5 Data gathering is pointless without analysis, however, and the organisation should aim to: measured.
• Develop insights as to how category sourcing plans and contracts can be enhanced by identifying • Specify how savings against the baseline will be calculated.
value for money and continuous improvement opportunities • Specify how incremental changes against the non-price baseline of benefits will be calculated.
• Identify whether plans and contracts are delivering the required performance by reviewing • Specify frequency of review.
organisational consumption behaviour, including off-plan and off-contract spend. • Define the responsibilities of stakeholders (ie category managers, supply user-managers, suppliers) in
1.6 The category manager should not be timid in the outcomes he is prepared to accept- as we have collecting and reporting data.
mentioned, category management entails step-changes. 1.15 Communicate with suppliers regarding the details of the benefits tracking process (this step should have
• Gap analysis is vital- the category manager should continually reference an ever-improving ideal been prepared for in supplier selection).
state, however good performance has become. • Finalise and specify the method by which savings against the pricing baseline will be calculated with
• Keep contract renegotiation or cancellation as a live option during delivery if goals are not met or if the supplier.
substantially better ones could be achieved in other ways (even after allowing for compensation to the • Finalise and specify the method by which incremental changes against the non-price baseline of
current supplier). benefits will be calculated with the supplier.
• Specify what data and format is necessary.
Research • Specify timing for reporting requirements.

1.7 Sourcing plans and contracts are built on an understanding of a given category at the time that they
were created. The organisation's needs and internal conditions change; external conditions and supply
markets change. The category manager therefore must continually undertake research that ensures the
information for decisions is as complete and up-to-date as possible. This will include supply market price
monitoring, benchmarking, industry best practice monitoring.
1.16

1.17

1.18
Collect data from supplier and departmental user-managers.

Verify data and conduct an analysis.

Report to stakeholders.
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Using templates to gauge feedback on performance • Are experienced and have progressed through many strategic sourcing cycles.
• Comply closely to policy, and are monitored often and corrected as necessary.
1.19 A vital part of data collection will be consistency. A key problem in data collection is the time that it • Participate in formal, category-specific external networking or benchmarking.
takes for data to be created and submitted. Both these problems can be addressed through the use • Outsource some elements of category management.
of templates. CIPS provide a couple of useful templates related to performance tracking that can be • Are proactive in influencing internal demand behaviours, and respond to external market shifts.
downloaded from their website. You will benefit from downloading these- they are called the supplier
2.8 This is reflected in the strategic way in which they frame the benefits they track.
performance evaluation datasheet, and the vendor appraisal form.
• Productivity- optimal tools, processes and information systems to develop category plans in a much
2 Creating performance measures shorter timeframe.
• Resiliency- tools, processes and information to accurately develop and manage categories as well as
2.1 O'Brien asserts that benefits measurement and tracking is critical so that benefits are reported. 'A benefit', model changes for ongoing improvement.
he states, 'is only real when it has been realised and is clearly visible on the bottom line.' • Precision- data integration, gathering and warehousing provide reliable, precise, real-time data to
• When a category management project is started, the benefits discussed are projected benefits and in category managers, who can then model real situations with real data.
• Responsibility- clear, objectively-judged ownership by individuals and functions through
reality little more than an estimate based on analysis and other factors known at the inception of the
work. unambiguous, trusted scorecards.
• Revenue and performance- the critical benefits on which the category management process is either
• As the sourcing strategy is generated, the benefits change status to become anticipated benefits.
• Then they become actual once negotiations have taken place, probably after appropriate market considered a success or failure. This focuses on:
approaches have been made, competitive or otherwise. - Cost reductions.
- Increased sales.
• A benefit can only finally be said to be real when it is complete, ie the cash is in the bank.
- Improved margins.
2.2 Tracking benefits requires the recognition of these four stages of benefits development and realisation. - Improved profits.
All too often the visibility of benefits is either not exposed, or worse still the anticipated benefits are lost - Increased market share.
through changes to the sourcing project along the way which sap any improvements that could have been - Improved consumer satisfaction.
made. - Improved in-stock conditions.
- Improved return on assets.
2.3 Tracking benefits is a collaborative approach where the finance function supports the method of tracking
and measuring the performance improvements attributed to suppliers and the implementation of category
management. Financial records are important in ensuring benefits are tracked, and that spend and
3 Dashboards
changes are known and aligned against these benefits as costs, so that assessment can be made as to the
3.1 Some organisations end up with a huge, diverse, undifferentiated group of benefits that they are trying to
wisdom of deviating from the chosen strategy to adopt different paths. track. It is in the nature of such unstructured approaches to be broad-based, giving equal time to benefits
from a variety of perspectives. This may over-state the importance of some and under-state others.
2.4 If changes are going to lessen the benefits, then they will not be worth it. Or if they are necessary, then
perhaps the information initially cited for the benefits was flawed, and adjustments need to be made on
3.2 One solution is to use a dashboard approach. Any complex machine has its key metrics consolidated into
the tracking and realisation of the benefits assessment.
a quickly and easily-understood dashboard to improve its operator's responsiveness and decision making.
There is no reason why sourcing plan or category management benefits cannot be tracked in the same
2.5 Chapter 11 suggested a range of measures that could be used to assess success in achieving the benefits
way.
anticipated in category management and strategic sourcing plans. These need to be viewed in terms of
timeframe over which given benefits are expected and need to be realised, and whether the benefits are
3.3 The Supply Management Guide to Strategic Sourcing notes that the strong visualisation of data is key to
one-offs or will realise results on a continuing regular or continuing irregular basis.
gaining insights, observing trends and creating information, and suggests that a dashboard approach can
accelerate effective decision-making.
Potential performance measures
Building a category management dashboard
2.6 Matthew Perfect stresses how strategic sourcing and category management are proactive activities. The
organisation takes control of its categories and engages proactively with stakeholders and supply markets.
3.4 The Supply Management Guide suggests starting with a spend dashboard. It claims this gives instant
Category strategies are 'road maps' to be followed and tested, providing a constant sense of direction
visibility, assists with a variety of business decisions, and supports sourcing plan creation. It suggests the
through all the tactical, day-to-day 'fire-fighting' issues that arise.
key areas are:

2.7 He notes that high-performing category managers and category management approaches:

•
•
Have a procurement structure that truly aligns to categories rather than functions or business units.
Have categories that are determined by risk and business impact rather than by size of spend or other
criteria.
•
•
•
•
•
Categorised spend
Contract compliance
Supplier concentration or supplier tail
Levels of process improvement
Interactive spend by business area.
I
• Spend the majority of their time on strategic activities as opposed to tactical ones.

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3.5 Spend analysis enables the organisation to consolidate spend information so that it can understand the shelf manner, and require no development by the organisation. Consequently, senior decision making is a
supply market behaviour. A useful system will allow users to expand top-level data through several layers product of the disjointed talents, education and experience of these people. The organisation as a result
of aggregation to drill down to the detail as they need to. clings to its rule books, has to resolve numerous petty misunderstandings, and never aligns its people
completely with its culture and strategy, nor takes them forwards into a new state of competence.
3.6 Take care over classification structures- ensure they are meaningful to delivering the outcomes that the
organisation requires, and not just appealing in a technical sense. For example, perhaps it is useful to align 4.6 Fully-deployed category strategies. Categories often have many existing contracts in force within them
classifications with particular products, sales territories, or supply markets. when they are first designed and implemented. As a consequence, the organisation is never able to act
cohesively, nor make the most of its aggregated spending power in its markets. What happens instead is
3.7 Opportunity analysis follows from spend analysis. Start with existing data, from as many sources as that it engages in a succession of small category exercises, none of which is as effective as managing the
possible. Classify and present it in a user-friendly way. category as a single entity.

3.8 A dashboard can be operationalised in a variety of ways, but must be optimised for usability. It should be 4.7 Fully-developed and deployed e-procurement. Many organisations are behind the times in exploiting
dense, with a consistent design. Information should be presented so that is easy to grasp and use (eg with the potential of internet technologies and techniques. They have yet to build up institutionalised
colours, graphics, words, numbers, charts, dials, alerts). A dashboard should group like metrics together. understanding and trust of even, in internet terms, established practices.
The information will be 'live'- it changes in as close to real time as possible- so the dashboard should
• E-auctions are inappropriately conducted.
'stamp' the information it provides with a time and date.
• Desktop systems and middleware are not capturing the level of data needed.
• Costs are considered prohibitive and the payback is unclear.
4 Reviewing improvements
• E-procurement implementations are not tied to sourcing or business strategies.
4.1 Once there is a mechanism in place to periodically collect performance data from suppliers, the next step 4.8 Management of indirect spend decision-making. Indirect spend, because it cuts across departmental
is to review the performance improvements. Ideally, the format that the data is in should lend itself to and functional responsibilities, is handled by people with the status and hierarchical authority to act
comparison and analysis. The data should also be in a format that can be quantified and scored. Many in that way, and not by procurement specialists who may lack the power to assert their expertise in
organisations use a supplier scorecard for this. Moreover, data from different types of assessments (eg these situations. Particularly powerful functional leaders may grab control of indirect spend decisions
internal surveys, external surveys, site visits) should be incorporated into the analysis. within their area, which then provides grounds for less powerful functional leaders to likewise resist the
procurement function's involvement. Functional leaders will usually accept strategic and policy direction
4.2 Since most large organisations have many strategic suppliers and lots of data, it is almost impossible to
from above, but are less enthusiastic about it coming from another function.
obtain, organise and review data and improvements systematically. When evaluating supplier performance
data, the two things to look for are as follows. 4.9 Contract compliance. Compliance is an issue of power, politics, trust, personal relationships and ego.
• By identifying trends, an organisation can make projections about where the performance data will be Once the supply chain management function has contracts in place, agreed at the corporate centre
in the future and can take action accordingly. Downward trends and deterioration in performance, or and intended to be used by the entire organisation, some people will still make avoidable off-contract
an abrupt change in performance, will signal further investigation. In this case it makes sense to obtain purchases.
more data from the supplier and to dig deeper to find the source of the problem. It may be a one-time
4.10 Properly developed market analysis. Many organisations produce narrow, incomplete market analyses.
anomaly or it could be something more.
They have the attitude that so long as some widely recognised tools have been applied, then everyone
• Monitoring supplier performance proactively can ensure that exceptions to policies are tracked and
will agree the job has been done. It is a 'contractual obligation' approach. The organisation needs to be
personnel and resources are assigned to address the problem quickly. Alerts and notifications can
thorough and inquisitive. It cannot stop at Porter's five forces just because everyone on the board studied
provide real-time information to people letting them know of changes in supplier performance.
it in their MBA and will therefore agree the job is done. Instead, all of the most powerful and appropriate
4.3 Wheaton states that supplier performance management is more than simply obtaining data on suppliers. It tools must be used- as many as will uncover new key intelligence on the market.
reflects the organisation's strategy and is a comprehensive approach to managing its supply base. It seeks
to identify and mitigate risks in an attempt to boost overall profitability. It often involves performance 4.11 Fully integrated cross-functional involvement. We have argued throughout this unit that sourcing is
assessments, supplier scorecards, periodic reviews of supplier data, and supplier development. It a strategic activity. It therefore follows that while responsibility for sourcing may devolve to sourcing
also includes a continuous improvement culture aimed at the performance of its supply base and at specialists, all parts and levels of the organisation are stakeholders in sourcing, and sourcing specialists
procurement outcomes. should be active in all parts and levels of the organisation aligning their activities with everyone's goals and
needs. The organisation needs to be fully joined up.
Potential weak points to target
4.12 Total cost. Few organisations genuinely assess end-to-end total costs. Total costs begin when an input
4.4 George L Harris identifies a number of barriers and areas of organisational low performance that prevent is first being considered- the cost of working with a market is a part of the cost of processing a given

4.5
organisations from fully realising the potential of their strategic sourcing and category management
initiatives. We will look at these in the remainder of this chapter.

Training and development. Training and development is piecemeal, and focused on crossing hurdles
and ticking boxes with lower-level staff. What people development programmes there are are largely
input- and spread out wide into forecast reliability, cross-border operations, performance management,
reputational and repeat customer purchase implications, before finally narrowing down again into
disposal. Benefits are not always properly assigned to costs, (eg sell-off and scrap income, halo effects,
strengthened partnerships). It is impossible to get a true total cost picture, but most organisations could
do a lot better.
I
disconnected from performance drivers. Senior staff are expected to arrive at organisations in an off-the-
 Category Management in Procurement and Supply
l Performance Measurement 1 CHAPTER 15

4.13 Market-integrated pricing. Organisations do not necessarily use all of the leverage available to them in
negotiating prices. 'Market' price reflects a wide variety of factors.

• Buyer volume
• Supplier capacity
• Buyer specification
• Changes in raw materials and direct labour
• Local, regional and global conditions
• Currency rates
• Supplier efficiency
• Supply chain costs
• Market timing
• Actions taken by other buyers and sellers
• Length of contract

Self-test questions
Numbers in brackets refer to the paragraphs above where your answers can be checked.

1 List key activities involved in capturing data for use in category management. (1.2)

2 List actions required for effective benefits tracking. (1.8)

3 List four stages in the development and realisation of benefits from a category management project. (2.1)

4 List characteristics of high-performing category managers and category management approaches. (2. 7)

5 What are the key areas to target in developing a dashboard for category management initiatives? (3.4)

6 What two areas should we look out for in particular when evaluating supplier performance data? (4.2)

7 List some of the barriers identified by George L Harris that prevent organisations from fully realising the
potential of category management. (4.4-4.13)

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CHAPTER 16

Risk, Volatility and Exits

Assessment criteria and indicative content

Identify exit arrangements that can be applied in the execution of strategic sourcing or category
management processes

• The use of disaster recovery plans

• Dealing with risks and supply chain volatility
• Creating exit arrangements

Section headings
1 Dealing with supply chain risk
2 Adjusting for volatility
3 Creating exit arrangements

Introduction
This is the final chapter in the unit It discusses the risk mitigation and exit arrangements that may be
necessary in the execution of the strategic sourcing plan or category management process. To some
degree, it reviews areas explored previously in terms of risk contingency, transition and exit management
However, there is a closer look at some of these issues in the context of applying them in execution of the
strategy.

Here are some key points to keep in mind as you study this chapter.

• A disaster recovery plan is a documented process or set of procedures to recover and protect an
organisation's operational infrastructure in the event of a disaster.
• A structured approach to risk management is required, and contingency planning for that risk is
important.
• The first step in determining what needs to be done in contract exit is to fully understand the existing
arrangements in place with the provider concerned.
Category Management in Procurement and Supply Rlsk, Volatillty and Exits ! CHAPTER 16

1 Dealing with supply chain risk Table 16.1 Risk perception analysis process

1.1 Risk management is important throughout the course of the category management process, as in any UNDERSTAND THE PRESENT IDENTIFY POSSIBLE FUTURES TAKE ACTIONS TO ADDRESS

procurement activity, especially in cases where there have been significant changes to providers or to the
business environment. We have already discussed the issue in terms of contract management and supplier
relationship performance management, and now take a broader look.

1.2 O'Brien recommends a structured approach to risk management that encompasses contingency planning,
whether this means allowing for uncertainty or preparing for disaster. Risk management in the category
management context is about highlighting, assessing and managing the likely risks and issues inherent in
the disruptive process of adopting strategic sourcing and category management approaches. We start with
Risk analysis
a few definitions.
1.9 Risk analysis should be as detailed as is worthwhile. Often organisations begin with a coarse or preliminary
risk analysis to establish a crude risk picture for relatively modest effort. The purpose of this will be to
Risk, vulnerability, resilience and robustness
filter risks into degrees of seriousness for further investigation. The risk analysis will deconstruct its subject
1.3 Risk and vulnerability are connected ideas. Vulnerability is the susceptibility to adverse events and trends; into all reasonable sub-elements.
risk is the characterisation of the likelihood and impact of those events and trends. An organisation is
1.10 Kit Sadgrove develops the risk mapping approach, using simple, qualitative categories for the severity
comparatively vulnerable where its resistance to a risk is low and where the risk would have a significant
of impact (Insignificant, Minor, Serious, Catastrophic) and the probability of occurrence (Very unlikely,
impact. This is not to say that the risk has a high chance of happening, however.
Improbable, Quite probable and Certain/Very probable). Risks can then be plotted on a simple grid:
1.4 Resilience in supply chains describes the ability and time needed to recover the supply chain's original Figure 16.1. The diagonal line represents the level at which risks may be considered broadly acceptable or
shape and level of performance (or perhaps even a better one) following a disruption. It implies a capacity unacceptable- or high priority (above the line) and low priority (below the line) for risk management.
to absorb and bend with impact, and to bounce back. There are connotations of flexibility and adaptability,
Figure 16.1 Qualitative risk matrix
which we will look at shortly. Robustness is often used interchangeably with resilience, which is not quite
correct. Christopher and Peck note that this is more the opposite of vulnerability in that it is the resistance
that the supply chain offers up in the face of risk so as to stay in its current shape. A robust supply chain
might not be resilient (once broken it stays broken), and vice versa.
Catastrophic e Major fire Product
/

_.- "'Terrorist
recall bomb

1.5 When we analyse risk, we want to prioritise our risk-response resources where it is likeliest they will do the
most good, so we look at both the likelihood of a risk happening and the scale of impact should it happen,
Serious e Raw material
unavailable /

/ / /Main customer
and balance the two. goes into

Risk perception
Minor Q liquidation

/ / / Employee
1.6 Organisations are always open to risk. Sound risk management procedures will identify the inherent risks
in their activities. These are the exposures arising from specific risks before any actions have been taken to
Insignificant 0 /
slips
/ --- -"Petty thieving
reduce them. Residual risk is the remaining exposure arising from a specific risk after all feasible action has
been taken to manage it.
0
Certain/ Quite probable Improbable Very unlikely
1.7 Although likelihood and impact are quantifiable, there is a misleading precision in their calculation. For very probable
many risks the likelihood will be dubious (there are not enough prior cases to safely establish it), and
impact will be educated guesswork (How far does impact go? How does one reckon, for example, the
damage caused to the organisation's reputation?) Risk scoring

1.8 The organisation will make its decisions based on subjective risk perception, the personal view or 1.11 Other risk matrix tools seek to quantify the risk. Karlof & Lovingsson (An A-Z of Management Concepts
opinion of the likelihood of a risk occurring and the impact it will have. People often misperceive the risk and Models), for example, suggest a simple risk matrix based on the probability x consequence formula.
associated with a particular event or trend because of a lack of information, or because the information Probability is expressed as a percentage and consequences are expressed as a number from 1 to 10 (1
does not exist, or is even incapable of existing (the risk is an 'unknown unknown'- we are not aware of it, being a negligible consequence and 10 being a catastrophic consequence). For example, in appraising
and even if we were, we could not assess it). This may lead to poor and outright bad decisions. You need to a contract to outsource the information technology function, some of the key elements of risk may be
bring your supply chain risk perceptions as close as you can to reality. Table 16.1 suggests one process. identified as follows.

I
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 Category Management in Procurement and Supply Risk, Voiatility and Exits ! CHAPTER 16

Element of risk Probability Consequence Risk level 1.14 The combined score (likelihood score x impact score) will range from 1 to 25.
Systems failure 20% 10 2.0 • A risk score of 6 or less (low level of risk) would not justify mitigating action- and any existing controls
Staff strike 80% 6 4.8 should be reviewed to ensure they are not disproportionate.
Teething problems 30% 4 1.2 • A risk score of 8-12 (medium level of risk) should trigger a review of existing controls, and may require
the implementation of additional controls: cost-benefit analysis should be used to assess the pay-off
between reduced risk and the cost of achieving it. The risk score should be reviewed annually, in case
1.12 This analysis may be used in several ways. of escalation.
• Staff strike carries the highest risk, so this may be a priority for management action (eg gaining • A risk score of 14-20 (high level of risk) should trigger a review of existing controls, and mitigation
assurances from the supplier on employee relations negotiations, conducting an employee planning: the issue may need to be escalated to a higher level or risk committee. The risk score should
communications and consultation campaign and so on) be reviewed at quarterly intervals.
• There may be set tolerance levels for consequence, however, so that (say) action must be taken on • A residual risk score of 21 or above (maximum risk) should be a priority for high-level mitigation or
all risks with a potential consequence of over 7: systems failure would therefore be the priority for avoidance planning, and should be continuously reviewed.
management action (eg ensuring that contingency plans and back-up systems are in place).
• The various elements of risk may be mapped on a graph: Figure 16.2. This enables decision guidelines Types of risk
to be set: no action required for 'acceptable' levels of risk; risk management required for 'moderate'
1.15 Christopher and Peck describe five types of risk grouped into three categories- internal to the
risk levels; and risk avoidance or elimination for 'unacceptable' levels.
organisation, external but still in its supply or value chain, and environmental.
Figure 16.2 Risk analysis matrix • Process risks- internal processes are in the sequence of value-adding activities undertaken by an
organisation. This includes the management processes and policies that drive the operation. Process
10 risk is the risk of disruption to these processes. The organisation can manage processes in-house,
System Una<:ceptable
failure or out-source or sub-contract them. The risk management processes will be different, but the risks
' '
'' remain the same. For example, mistakes in order processing are mistakes in order processing no
matter who makes them.
'
• Control risks- controls must be put in place to ensure that processes operate within The customer is
Consequence never forgiving when told it is the subcontractor's fault.defined and considered parameters. Controls
Action
'' are the assumptions, rules, systems and procedures that govern the workings of an organisation.
'' '
' ' Control risk is the risk arising from the application or misapplication of these rules. It is a broad
',~--~
Teething category of risk, and issues arising from it are usually internal failures of omission or commission.
problems Controls that are applied to the supply chain will cover relationship issues, capacity, inventory,
demand and logistics. Controls will be monitored by sound management supported by effective
0 measures, often in the form of key performance indicators (KPis).
0 Probability, % 100 • Supply risks- the risk associated with an organisation's suppliers being unable to supply, or making
supplies that do not meet specification. This risk expands upstream to include the supplier's suppliers
and beyond. Supply risk is generally perceived as coming from supplier weakness and supplier
1.13 Another risk scoring approach would be simply to allocate numerical scores for likelihood, from very low
selection processes, but that view is too simplistic. The causes can be outside of reasonable control.
(1) to very high (5), and impact from insignificant (1) to catastrophic (5), say. Mike Brooks (Accountancy,
Supply chains vary both within and across organisations. Some run lean, some are more flexible,
January 2007) suggests definitions for such scores: Table 16.2.
some are longer and some are global, but however the supply chain is configured, there is a need to
Table 16.2 Scoring likelihood and impact understand it and its strengths and weaknesses.
• Demand risks- unexpectedly high or unexpectedly low demand and the consequences that follow.
For example, stockouts arising from unexpectedly high demand damage the organisation's reputation
to deliver and create dissatisfaction.
• Environmental risks- these are often viewed as unmanageable or remote (eg terrorism, earthquakes,
the wholesale collapse of Western banking ... ), so hardly appear in risk assessments. This is a weakness
in risk monitoring rather than any inherent mystery of the risks involved. Some risks are wild cards,
emerging unpredictably at any time, but even the most quickly manifesting, unnoticed and surprising
wild card is not automatically unimaginable. Therefore it can be planned for. Neither will it be
completely sudden. It will be preceded by weak signals; the early warnings, disruptions, anomalies
and information which a manifesting risk generates. Once a weak signal begins to strengthen, the risk
generating it can be mapped, discussed and planned for.

206 /.07
Category Management ln Procurement and Supply
Rlsk, Volatility and Exits I CHAPTER 16

The risk management process 1.19 O'Brien provides an example of the sort of clear, unambiguous risk and contingency matrix that an
organisation should aim to produce (Table 16.3).
1.16 Risk management is designed to minimise losses and damage, both in the present and in the future, which
in the case of the supply chain function may stem from supply failure or disruption, lack of resources, Table 16.3 Common risks and contingency measures (O'Brien)
breakdowns in stakeholder relationships, or withdrawal of the organisation's licence to operate.

1.17 Often crises will arise from high-risk supply items, supply chains and suppliers, sustainability issues, and
performance gaps. This is an ongoing challenge for the supply chain profession because risks are highly
fluid, dynamic and complex. New risks are constantly emerging, and risks change their severity and
priority as circumstances change. Globalised, multi-tiered supply chains also create particular challenges in
monitoring and managing risk.

1.18 Risk management should not become risk aversion, however. A timid, risk-averse organisation will not
make the necessary breaks with established practice that lead to the development of innovation. If
organisations are to constantly improve, they need to build their capacities for managing risk, and so their
capacities to contemplate making innovations. The systematic management of risk, and the confidence it
provides, are crucial in enabling innovation.
2 Adjusting for volatility
• Risk identification is the process of asking 'what could go wrong?' This may be done through
environmental scanning and corporate appraisal (eg competition, STEEPLE and SWOT analyses); 2.1 Christopher and Holweg suggest that most supply chain management models reflect the stable
formal risk analysis exercises; monitoring risk events in benchmark organisations; critical incident environments in which they were developed, and that those environments are increasingly unlikely to
investigations and process audits; consulting with key stakeholders and industry experts; or employing persist. In other words, our habitual supply chain models are built for conditions that do not now exist,
third-party risk management consultants. It should be an ongoing process, as the organisation's risk and which have a diminishing chance of returning. In fact, they argue, the volatility and turbulence faced
profile may continually change, presenting new risks, turning slight risks into potential crises, or by supply chains will increase in the future.
making previously serious risks less harmful or likely. A comprehensive list of identified risks should be
compiled in a risk register. 2.2 Volatility is susceptibility to or predisposition for sudden, significant change. Christopher and Holweg say
• Risk assessment or evaluation is the appraisal of the probability and significance of identified potential that organisations have typically addressed supply chain volatility with dynamic flexibility. This comprises
risk events: ie 'how likely is it and how bad could it be?' The probability of occurrence depends on measures for promoting stability and piling on control, eg lean supply, six sigma, push-based production,
the nature of the risk and current risk management practices. The impact or consequence is the likely supplier-managed inventory. This, they argue, is rapid reaction to change with the underlying intention to
loss to the organisation or the likely level of impact on its ability to fulfil its objectives. Even if they return to a preferred, stable state. It is not true flexibility. If anything, it is extreme rigidity.
are assessed as improbable, high-impact events should still be analysed for contingency planning
purposes so that the organisation can respond quickly if those events occur. 2.3 Dynamic flexibility creates an efficient supply chain. It acts to return the supply chain quickly to its lowest
• Quantifying its risks allows an organisation to prioritise planning and resources to meet the most cost state. Christopher and Holweg suggest that organisations actually need to adopt structural flexibility-
severe ones, and to set defined risk thresholds at which action on an issue will be triggered. Risk the capability to quickly adapt to changing conditions (Figure 16.3).
management strategies ('what can we do about it?') are often classified as the Four Ts.
Figure 16.3 Two levels of supply chain flexibility (Christopher and Holweg)
- Tolerate (or accept) the risk- if the assessed likelihood or impact of the risk is negligible.
- Transfer or spread the risk- eg buy insurance (the insurance company then has your failures as its
High
risks, and you are compensated should your risks come to pass).
- Treat (or mitigate) the risk- take active steps to manage the risk so as to reduce or minimise
EFFICIENT ADAPTABLE
its likelihood, potential impact, or both, eg safety procedures, maintenance schedules, internal
SUPPLY CHAIN SUPPLY CHAIN
governance controls, supplier monitoring, codes of conduct, supplier sustainability, supplier
certification, critical incident reporting and analysis, stakeholder feedback gathering, and
DYNAMIC
contingency and recovery planning. FLEXIBILITY
- Terminate (or avoid) the risk- if the risk is too big and cannot be reduced, the activity that
provokes it is simply not undertaken.
TRADITIONAL
• In any case, the organisation will need to make contingency plans to counter high-impact risks: eg SUPPLY CHAIN
alternative courses of action, alternative sources of supply, workarounds and fall-back positions ('what
will we do if?').
Low
• Monitoring, reporting and review ('what happened and what can we learn?') is an important part
Low High
of risk management, in order to: establish whether the organisation's risk profile or exposure is STRUCTURAL FLEXIBILITY
changing, and identify newly emerging or escalating risks; give assurance that the organisation's risk
management processes are effective; indicate where risk management processes need improvement,
or where lessons can be learned from critical incidents. I
 Category Management in Procurement and Supply Risk, Volatility and Exits I CHAPTER 16

2.4 Structural flexibility anticipates rather than reacts to volatility. The organisation prioritises its supply - Diversified sourcing footprint.
chain's capacity to adapt to changes in its operating environment over its efficiency, which becomes a - Diversified plant layout.
secondary goal. The two approaches are contrasted in Table 16.4. • Product design:
- Modularity.
Table 16.4 The contrast between efficient and adoptable supply chains (Christopher and Holweg) - Postponement.

Decision analysis

2.7 Larry Lap ide cautions supply chain managers to allow for uncertainty in their decisions. He suggests that
the best-quality decision does not automatically lead to a good outcome, it just increases the chance that
the outcome will be good. A decision process is more capable of giving a useful result (ie leading to a good
outcome) if it does include uncertainty.

• Understand the uncertainties.

• Understand the implications.
• Decide what to do.

2.8 This process is called decision analysis and it is based on a pay-off matrix (Table 16.5). The rows in the
Creating structural flexibility
matrix represent alternative actions that can be taken, and the columns represent the quality of outcome
2.5 The inference is that managing for volatility is a truer supply chain perspective than managing for cost: the that may result. There can be as many rows and columns in any given situation's matrix as is useful. Each
entire point of a supply chain is to supply; seeking efficiencies that erode the surety of supply is counter- cell in the matrix (eg 2-ML) then represents a potential outcome and scenario for the organisation.
productive. Accounting-based measures are not necessarily the most appropriate gauges of performance.
Table 16.5 A simple generic pay-off matrix (Lapide)
Though structural flexibility looks the worse option in the short term, it may in the long term be far more
rewarding (Figure 16.4).
-----------ATTITUDE TOWARDS OUTCOME-----------
ALTERNATIVE ACTIONS PESSIMISTIC MOST LIKELY OPTIMISTIC
Figure 16.4 Structural flexibility may be better in the long run (Christopher and Holweg)

Return on
investment Flexible route

2.9 It is then up to the organisation to examine the implications of each scenario. It can try, for example, to
assign probabilities to each one. Its analysis will be affected by how it feels about risk and volatility in
the given situation. It can try to be rational and do a cost-benefit analysis on each one, or fall back on
experience and judgement in deciding which scenarios are truly feasible and which are not.

2.10 Ultimately though, the organisation has to remember that it is only using this tool because it faces an
Traditional route uncertain situation. The pay-off matrix is not a magic box that will realise the correct decisions; it is simply
Profit A.
a tool that helps organisations understand and rank the options that they face.
o~-=~~~==-=~
loss V
Disaster recovery plans

2.11 Geoffrey H Wold explains a disaster recovery plan (DRP) as a documented process or set of procedures to
Now Time recover and protect an organisation's operational infrastructure in the event of a disaster. Disasters can be
the result of deliberate attacks (eg cyber crime) or freak natural occurrences (eg extreme weather), or any
shade of targeting and premeditation in between.

2.6 Christopher and Holweg identify some examples of how structural flexibility can be achieved.
2.12 The plan is 'a comprehensive statement of consistent actions to be taken before, during and after a
• Supply chain execution: disaster'. Its purpose is to cover, as best as is possible, the organisation's need for continuity of service in
- Buffers. the event of an unplanned adverse occurrence. The organisation aims to minimise lost activity and down-
- Responsiveness and agility. time. The plan minimises the disruption of normal operations and long-term impacts, and ensures some
- Collaboration. level of organisational stability and an orderly recovery.
• Supply chain design:
- Diversified manufacturing footprint.

?10
 Category Management in Procurement and Supply Risk, Volatility and Exits I CHAPTER 16

2.13 A good, effective plan can enhance the organisation's reputation, and the confidence that is placed in it. It 2.20 You should examine at least the following assumptions in writing your recovery plan.
can also: • The organisation's main facility has been destroyed.
• Eliminate confusion and errors • Staff are available to perform the critical functions identified in the plan.
• Provide a basis for training and readiness exercises • Staff can be co-ordinated and can report to back-up site(s) for critical processing, recovery and
• Reduce the reliance on key individuals and functions. reconstruction activities.
• Off-site storage facilities and materials are unaffected.
Structure of a DRP • The recovery plan is up to date.
• The plan is modular- small-scale disruptions can be handled with sections of the main plan.
2.14 The disaster recovery plan must be logical and well-structured, and must include all of the organisation's • Alternate facilities are available.
operations that are likely to be impacted by disruptive events. It must be easily understood and must • Sufficient short-term supplies survive.
provide clear directions. It must be kept up to date. • Communications links are available.
• Transport is feasible.
2.15 Wold advises that all related documents should follow a standard format to provide consistency and
• Suppliers offer the maximum support that they can.
conformity throughout the plan. Different parts will typically be written by the different stakeholders
responsible for the different functions of the organisation. 2.21 Your assumptions often dictate the content of your plan, therefore you should carefully review them for
appropriateness.
2.16 The plan's content tends to divide between background information and instructions. Background
information might include the following. Organisation

• Purpose of the procedure 2.22 The organisation's staffing, structure and hierarchy following any disaster and during any recovery will
• Scope of the procedure (eg location, equipment, personnel, and time associated with what the possibly be specific to those turbulent conditions and last only until normal operation is restored. The
procedure encompasses) organisation may make extensive use of task teams, with precise and narrow responsibilities. Each team
• Reference materials (ie other manuals, information, or materials that should be consulted) should have a designated leader and deputy. These people provide the necessary leadership and direction
• Documentation describing the paperwork that must be used when performing the procedures in developing their team's section of the plan and in carrying out their responsibilities during a disaster.
• Authorisations listing the specific approvals required Each team should be resourced according to the criticality of the asset they safeguard.
• Particular policies applicable to the procedures

2.17 Instructions are essentially standing orders, so should contain issue and cross-referencing information 2.23 Potential teams include the following.
such as the following. • Management
• Subject category number and description • Business recovery
• Subject sub-category number and description • Functional recovery (as many as thought necessary)
• Page number • IT and communications recovery
• Original issue date • Damage assessment
• Revision number • Security
• Superseded date • Facilities
• Administration
Scope of a DRP • Logistics
• Customer/user support
2.18 Wold advises that the organisation's planning should have a broad scope if it is to effectively address • Human resources
the many disaster scenarios that could befall the organisation. Planning should begin at the 'worst case' • Publicity
scenario, and then pull back through progressively less serious scenarios on the basis that these more • Stakeholder and shareholder relations
moderate circumstances will only require (adapted) portions of the worst-case plan.

Assumptions in the DRP

2.19 Every plan is built on assumptions. These assumptions restrict the applicability of the plan, ie the scale and
nature of the disasters that a given recovery plan can address. Often, we are unaware of the assumptions
that we make. They may be uncovered by asking the following questions.

• Which assets are we protecting?

• What time periods are we prepared for?
• Which information and knowledge have we kept operational?
• What resources will be available following the disaster in terms of staff, equipment, communications,
transport, facilities and sites?

~ 11 213
 Category Management in Procurement and Supply Risk, Volatility and Exits l CHAPTER 16

3 Creating exit arrangements - Equipment.

- Ownership of intellectual properties.
3.1 We spent some time looking at exit arrangements in Chapter 15. We examined transition and discussed - TUPE.
the need for contracts to have exit arrangements and strategies. Contracts have pre-planned exits, or - Other retained rights.
at least they should. Not all exits will be planned, however. In this chapter we consider somewhat less - Costs.
organised circumstances where, for example, we need to create an exit and sever relationships with
existing providers of goods and/or services to our organisation in response to some unplanned and Termination notices
unforeseen event.
3.6 Organisations may be scared to contemplate an exit. They believe it to be so tricky that they avoid actively
3.2 The first step in determining what needs to be done is to fully understand the existing arrangements with managing and monitoring suppliers because they know that if they discover something that they need to
the provider with which we are closing our association. This may not be as straightforward as it sounds. act upon, then they will be duty-bound to act. For them, it is better not to know.
Our original contract with them may have been in place for many years, and there may have been many
3.7 Vitasek, Stevens and Kawamoto call this abdication- the organisation abdicates authority to its suppliers.
subsequent modifications to it. Some, hopefully all, will have been recorded formally, in writing, but some
This is poor governance, both of the organisation and of its supply chain. There is a danger that, in
may have been transacted through actions, norms, habits or agreed verbally. There may be a lot of work
stepping away, an organisation encourages its suppliers to act in ways that make an exit more rather than
that needs to be done to map the current arrangements.
less inevitable, and that when the exit comes it will be more rather than less messy.
3.3 Similarly, we need to understand the impact, both operational and legal, of severing our relationship with
3.8 They highlight the importance of the kind of exit arrangement planning we have just discussed, and
the provider. There may be strategic implications to the exit that must be managed effectively. There may
particularly emphasise the termination notice, the formal, contractual document that begins the process.
be serious issues around continuity of service that must be resolved; it is essential that there is no loss of
This should include the following elements.
performance while we are disentangling with one provider and bringing in a new one.
• A description of the exact services included in the termination (including processes, sites and
3.4 We need a clear understanding of exactly why we want to exit our arrangement with a provider as this territories)
will impact on the strategy and approach we take in managing the exit. For example, is it because of poor • A description of liabilities involved
performance? Cost reduction? lnsourcing? Or has the contract come to its natural end and a new provider • Details of transition arrangements
won the business? Each scenario will have a different impact on the outgoing provider, the incoming • A timetable with significant milestones
provider, and our organisation. • Details of the manager in charge ofthe exit programme and any other necessary contacts.
• Reporting requirements
3.5 These considerations all point to the need for a structured decision and planning process that will adapt
the organisation's exit management procedures to each fresh situation so as to create the most effective
and efficient result possible within the given timeframe and circumstances. An unplanned exit is not
automatically a crisis, but it can be made into one if it is mishandled.

• What governs the relationship between the parties? Usually a signed contract forms the base of
the arrangement, so the organisation needs to establish the terms and conditions surrounding the
business so that the full scope and impact of exiting this exact contractual arrangement with this exact
provider can be considered. The full commercial arrangements need to be exposed and agreed.
• The organisation needs a clear understanding of the termination rights. To a greater or lesser
extent this will be important depending on the reasons for exit, but nevertheless there may be legal
implications and rights for the parties in the exit that influence time, costs and other factors that have
to be addressed, eg notice periods and intellectual property rights.
• Tactical issues also play a part in the determination of the exit such as:
- Continuity of service leading to managed handover.
- The relationship between the parties before and during the exit, and how it will be managed (ie
will this be an acrimonious or hostile exit?)
- Is there a settlement due eg because of early exit?
- Are there any legal issues that need to be addressed, eg intellectual property or exclusivity clauses
or restrictions?
• There may need to be an actual, separate exit agreement and/or termination notice (see shortly).
This is a further development of the original contractual arrangement that stipulates exactly what
is involved and the rules of engagement. There may need to be negotiated clauses covering, for
example:
- Handover arrangements.

214 215
 Category Management in Procurement and Supply

Subject Index

4Ts of risk management .................................. 208 CSSB matrix (Massin) ..................................... 21

SPs, Mintzberg ........................................... 4 Current contracts, suppliers and terms....................... 76
7-step model. ........................................... 39
Dashboards ............................................ 197
ABC analysis ............................................ 18 Data analysis ................. , ......................... 194
Account management ..................................... 9 Day One analysis ......................................... 71
Analysing supplier perceptions ......................... , .. 113 Decision analysis ........................................ 211
Approved suppliers ....................................... 11 Delivering planned change ................................ 124
As-is analysis ............................................ 37 Demand forecasting ...................................... 72
AT Kearney 7-step model .................................. 39 Demand management ..................................... 6
Demand patterns for category groups ....................... 71
Self-test questions Backwards integration ................................... 118
Bartolini's scorecard ...................................... 24
Direct costs ............................................. 16
Disaster recovery plans .................................. 211
BATNA ................................................ 143 Dual sourcing .......................................... 123
Numbers in brackets refer to the paragraphs above where your answers can be checked. BCG matrix............................................. 104 Dynamic flexibility ...................................... 209
Behavioural skills ........................................ 61
1 Distinguish between resilience and robustness in supply chains. (1.4) Benchmarking performance .............................. 188 E-auctions ............................................. 148
Boston matrix .......................................... 104 Effective start-up of category plans ......................... 171
2 What is meant by 'residual risk'? (1.6) Breakthroughs .......................................... 102 Emotional intelligence .................................... 61
Brown paper plans .................................. 167, 172 Engaging users in contractual arrangements ................. 177
Business continuity planning .............................. 127 EU procurement directives ............................... 142
3 Outline the approach to risk scoring developed by Mike Brooks. (Table 16.2) Evaluating data .......................................... 69
Capturing data ......................................... 194 Evaluation criteria ....................................... 133
4 Explain why risk management should not be allowed to degenerate into risk aversion. (1.18) Categorising expenditures ................................. 15 Exchanges ........... , ................................. 155
Category hierarchies ...................................... 82 Executive sponsor ........................................ 89
5 Describe the Four Ts of risk management. (1.18) Category management. .................................... 8 Exit arrangements .......................... , ............ 214
Category sourcing ......................................... 8 Extended relational competence ............................ 28
Category sourcing scorecard ............................... 24
6 Outline Christopher and Holweg's distinction between an efficient supply chain and an adaptable supply
Change agent ........................................... 67 Feedback from stakeholders .............................. 186
chain. (Table 16.4) CIPS category management model .......................... 42 Finalising specifications and contractual agreements .......... 135
CIPS purchasing and supply model .......................... 28 Financial data on potential suppliers ....................... 101
7 What are the benefits of a good disaster recovery plan? (2.13) Collaborative relationships ................................ 65 Financial management ............. , ...................... 54
Common procurement vocabulary ......................... 142 Five forces model ........................................ 96
Communication skills ..................................... 61 Fixed costs .............................................. 16
8 List tactical issues that may affect a decision to exit from a supply relationship. (3.5)
Competencies .......................................... 111 Forecasting demand ...................................... 72
Competition and negotiation .............................. 142 Forwards integration .................................... 118
9 List items typically included in a termination notice. (3.8) Competitive cycles ....................................... 99 Four Ts of risk management ............................... 208
Competitive dialogue .................................... 142 Framework agreement ................................... 142
Competitiveness of an industry ............................. 96
Compliance monitoring .................................. 170 Governance structures ................................... 152
Confidentiality agreements ............................... 136 Group buying ........................................... 155
Conflict resolution ....................................... 65
Contingency planning .................................... 127 Historical and forecast data ................................ 71
Continuous improvement ............................ 171, 176 Horizontal integration ...... , ............................. 119
Contract management ................................... 182
Contract transition arrangements .......................... 177 Implementing category management ....................... 151
Conventional sourcing ..................................... 2 Indirect costs ................ , ........................... 16
Co-ordinated single sourcing .............................. 123 Industry dynamics........................................ 96
Corporate social responsibility ...................... · · .... 106 Industry lifecycles ........................................ 97
Cost analysis ......................................... 16, 55 Industry types ........................................... 97
Cost reduction benefits ....................... · .. · · · · · · · · · 83 Influencing skills ......................................... 62
Creating evaluation criteria .................... · · · · · · · · · · . 133 Initiating and preparing for category management ............. 81
Creating performance improvement ............ · · · · · · · · · · . 189 Integration of the supply chain ............................ 118
Creating performance measures ................ · · · · · · · · · · . 196 Integrators ...................... , ...................... 156
Cross-functional teams ........................ · · · · · · · · · 66, 89 Internal Consultancy ...................................... 58

216 217
Category Management in Procurement and Supply Subject Index

Invitation to tender ...................................... 146 Project leader ........................................... 90 Supplier behaviour ....................................... 87
Invitations and requests .................................. 144 Project planning ........................................ 172 Supplier management ................................. 7, 171
Isolating mechanisms ..................................... 32 Purchase price cost analysis ................................ 84 Supplier perceptions ..................................... 113
Purchasing cycle .......................................... 2 Supplier preferencing .................................... 113
Joint proposition improvement ............................ 149 Purchasing, definition of ................................... 2 Supplier relationship management ......................... 156
Supplier selection ....................................... 147
Key performance indicators ............................... 185 Qualitative and quantitative forecasting ...................... 74 Supplier status ratings ................................... 102
Kra!jic's matrix ........................................... 20 Supply base research ..................................... 57
RACI analysis .......•.........................•...•..... 131 Supply chain analysis ................................. 56, 110
labour costs ............................................ 17 Rapport ....•.......................•.................•. 63 Supply market factors ...............•..................... 95
legal aspects in supply chains .............................. 60 RAQSCI. .....................................•...•...... 74 Sustainabi!ity ......................................... 7, 107
Legislative requirements and standards ...................... 93 Reactive sourcing ......................................... 2 Sustainable development................................. 108
Lock~in ................................................ 122 Recurrent contracting .................................... 157 Switching costs ......................................... 121
Relational contracting ....... , ............................ 157 SWOT analysis .......................................... 105
Make or buy decisions ................................... 118 Relationship management .............................. 7, 156
Mapping stakeholders ...............•....•...•....... 88, 131 Request for information .............................. 102, 145 Tactical purchasing and strategic sourcing ..................... 5
Market positioning analysis ................................ 28 Request for proposal .................................... 145 Tactical sourcing .......................................... 3
Market segments ........................................ 99 Request for quotation ................................... 146 Team charter ............................................ 91
Market trends ........................................... 77 Requirements for preparing sourcing plans ................... 82 Team roles .............................................. 92
Massin's matrix .......................................... 21 Resilience in supply chains ................................ 204 Teamworking ............................................ 64
Materials costs .......................................... 17 Responsibilities for contract management ................... 182 Technical skills ........................................... 54
Mintzberg's 5Ps ........................................... 4 Reverse auctions ........................................ 148 Templates for gauging feedback ........................... 196
Mobilising start~up and transition .......................... 176 Reviewing existing relationships ............................ 77 Termination notices ..................................... 215
Models of category management ........................... 42 Reviewing improvements ................................. 198 Total cost models ........................................ 84
Models of strategic procurement ........................... 28 Risk analysis ........................................ 104, 205 Total cost of ownership ................................. 7, 56
Models of strategic sourcing ............................... 37 Risk in supply chains ..................................... 204 Tracking benefits ....................... ,, ........... 153, 195
Models, use of........................................... 27 Risk management .................................... 59, 208 Transactional purchasing to strategic sourcing ................ 10
Monopolies, oligopolies and perfect competition .............. 97 Risk planning and mitigation .............................. 126 Transition arrangements ................................. 177
Multiple sourcing ....................................... 124 Risk register ............................................ 208 Triple bottom line ....................................... 109
Risk scoring ............................................ 205 Trust in supply chains ..................................... 63
Negotiation in category management ................... 60, 143 Risk, volatility and exits .................................. 203
Networking ............................................. 66 ~~m~~w~~~ ................... u1 Value chain analysis ................................. 112, 130
Non-disclosure agreements ............................... 136 Value chain positioning ................................... 28
Non-specific contracting ................................. 157 SCOR model ............................................. 57 Variable costs ........................................... 16
Segmentation approach .................................. 158 Variance analysis ......................................... 55
O'Brien's category management model ...................... 47 Single sourcing ......................................... 122 Vertical integration ...................................... 118
OGC procurement process model ........................... 34 Situation, target, proposal tool ............................. 70 Volatility in supply chains ................................. 209
Operational performance ................................. 184 Skills for category management ............................ 51 VRIN analysis ........................................... 111
Opportunity analysis ..................................... 82 Sourcing gemstone ....................................... 40
Outsourcing ............................................ 119 Sourcing groups ......................................... 21 Waste and scrap ......................................... 17
Sourcing options ........................................ 122 White sheeting .......................................... 21
Parallel sourcing ........................................ 123 Sourcing strategies ........................................ 7 Whole life costing .............•.......................... 56
Pareto analysis .......................................... 18 Sourcing transaction approach ............................ 154
Pay~off matrix .......................................... 211 Sourcing tree ............................................ 23
Performance improvement ................... , ....... 170, 189 Sourcing, as part of procurement ............................ 4
Performance measurement ............................... 193 Specifications and contractual agreements .................. 135
Performance targets ..................................... 185 Speed brakes (Miles) ...............................•.... 174
Period costs ............................................. 16 Spot buys ....•..•...................................... 156
Persuasion .............................................. 64 Stage~gate reviews ...................................... 152
Planning for effective start~up ............................. 171 Stakeholder buy-in ........................•...•......... 162
Porter's five forces model ................................. 96 Stakeholder communications ............................. 164
Porter's value chain ..................................... 130 Stakeholder consultation ................................. 186
Portfolio tools in category management ..................... 85 Stakeholder mapping .....................•.•..•...... 88, 131
Power positioning ........................................ 86 Stakeholder needs analysis .... , ........................... 87
Preferred suppliers ....................................... 11 Stakeholders in the sourcing decision ....................... 130
Pre~planning preparation ................................. 117 Standard costing ......................................... 55
Pre~qualification of suppliers .......................... 103, 147 STEEPLE analysis ........................................ 103
Presentations on strategy plans ........................... 166 Steering group.......................................... 152
Price mechanism ........................................ 100 Step costs .............................................. 16
Pricing behaviour ....................................... 100 Strategic acquisition processes ............................. 27
Prime cost of production .................................. 16 Strategic drift............................................ 97
Procurement directives .................................. 142 Strategic procurement ................................... 3, 5
Procurement, definition of.................................. 3 Strategic sourcing ......................................... 6
Product costs ............................................ 16 Strategy and tactics ....................................... 4
Programme communications .............................. 154 Structural flexibility ...................................... 209
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Advanced diploma in procurement and supply

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