Category Management is DEAD - What Comes Next?
Category Management is DEAD: What Comes Next?" is a transformative guide for procurement professionals and leaders navigating the shift from traditional category management to innovative, strategic approaches in the age of AI and digital disruption.
CATEGORY MANAGEMENT
IS DEAD
WHAT COMES NEXT?
June
2024
Dr. Elouise Epstein explains, akirolabs is on a
trajectory to eliminate much of the category
management function as we know it today
Executive Summary
Traditional category management has reached a pivotal juncture in an era marked by rapid
technological advancements, shifting business priorities, and increasingly complex global
supply chains. "Category Management is DEAD: What Comes Next?" is a crucial guide for
procurement professionals and leaders navigating the transformation from outdated practices
to innovative, strategic approaches aligning with broader business goals.
This eBook opens with a compelling argument for why traditional category management is no
longer adequate. The increased complexity of supply chains, coupled with the heightened
emphasis on sustainability, innovation, and risk management, has rendered old models such
as Kraljic Matrix and power game-based approaches insufficient. The procurement landscape
has evolved, demanding a more holistic and integrated approach.
Central to this transformation is the introduction of Strategic Business Scenario Modelling
(SBSM). This forward-looking methodology allows procurement teams to anticipate future
market conditions and align their strategies with overarching business objectives. By
considering multiple dimensions such as cost, sustainability, resilience and many more, SBSM
provides a comprehensive framework for decision-making that goes beyond mere cost
savings.
Digital transformation plays a pivotal role in this new era of procurement. The eBook explores
how augmentation achieved through artificial intelligence, machine learning, and advanced
analytics revolutionize procurement processes. These technologies enable data-driven
decision-making, enhance efficiency, and foster innovation. The rationale behind why AI
automation can not be the driving force behind strategic procurement and category
management is also explained in detail while exploring why combining AI / Machine
Intelligence with human intelligence a.k.a Augmentation is the key to driving transformation
in this particular area of procurement.
Cross-functional collaboration also emerges as a critical theme. The eBook advocates for
early and active engagement with stakeholders across various departments. This collaborative
approach ensures that procurement decisions are aligned with the strategic goals of the
entire organization, breaking down silos and fostering a unified strategy.
Looking ahead, "Category Management is DEAD: What Comes Next?" envisions a future where
procurement functions as a strategic partner, fully integrated with business objectives and
capable of driving significant value. By adopting digital tools and innovative methodologies,
procurement professionals can ensure their practices remain relevant and pivotal to their
organization's success.
In conclusion, this eBook is an indispensable resource for those seeking to modernize their
procurement practices. It challenges the status quo, encourages innovation, and provides
practical strategies for navigating the future of procurement. Embrace this transformation,
and equip yourself with the knowledge and tools to drive your organization toward success in
the new era of procurement.
Introduction
This eBook aims to guide procurement
professionals through the transformation of
category management. We will explore why
the traditional model is no longer sufficient
and introduce innovative approaches that align
procurement with broader business objectives.
This eBook provides practical strategies and
tools for modernizing category management
by leveraging insights from leading experts and
real-world case studies.
We aim to equip you with the knowledge and
resources needed to drive value beyond cost
savings, enhance supplier relationships, and
contribute to your organization's overall
success. Whether you are just beginning your
procurement journey or looking to elevate
your existing practices, this eBook offers
valuable insights for navigating the future of
procurement.
We will delve into the decline of traditional
category management, examine the
challenges facing modern procurement, and
introduce new methodologies such as
Strategic Business Scenario Modelling (SBSM).
Additionally, we will explore the role of digital
transformation, the importance of aligning
procurement with business strategy, and future
trends that will shape the industry. Moreover,
we will discuss artificial intelligence's (AI)
pivotal role in transforming procurement and
category management.
As you read this E-book, we invite you to
challenge the status quo, embrace innovation,
and reimagine what category management
can achieve. The time for change is now, and
this eBook is your roadmap to success in the
new era of procurement.
The Purpose of This eBook
In the ever-evolving procurement
landscape, category management stands
at a critical juncture. Once hailed as a
revolutionary approach to streamline
procurement processes and maximize
value, category management is now facing
significant challenges. The rapid pace of
technological advancements, the
increasing complexity of global supply
chains, and shifting business priorities have
rendered traditional category
management practices less effective. The
need for a transformation is more urgent
than ever.
Strategic Procurement has traditionally
focused on segmenting spend into
categories and managing them to achieve
cost savings and efficiency. However, this
approach, often seen as administrative, is
no longer sufficient to meet the demands
of modern procurement. Organizations
must now navigate a landscape marked by
volatility, uncertainty, and complexity,
where risk management, sustainability, and
innovation are paramount. As
procurement professionals grapple with
these challenges, it becomes clear that a
new approach is needed—one that
transcends the limitations of traditional
category management and embraces a
more strategic, integrated, and forward-
looking perspective.
Why Category Management is at a
Crossroads
The need for transformation in
Category Management is more
urgent than ever
The Rise and
Fall of Category
Management
An Analogy Through Global Technological Milestones
In the transformative year of 1983, the technological and strategic landscapes witnessed pivotal
shifts. The Motorola DynaTAC 8000X, the first commercial mobile phone, was approved by the
Federal Communications Commission(FCC), marking a significant milestone in communication
technology. Despite its hefty price of nearly $4000, substantial weight, and limited functionality,
the DynaTAC found its place in the market, symbolizing a step towards mobile connectivity.
Parallelly, the music industry basked in the zenith of vinyl record sales, only to later be eclipsed
by CDs, signalling the relentless march of technological progression. This year also saw the
introduction of the Kraljic / Supply Power Matrix, conceptualized by Peter Kraljic and later
spotlighted in the Harvard Business Review. This matrix, which categorizes spend based on
supply market complexity and purchasing importance, became a foundational framework in
strategic purchasing and commodity group management, maintaining its relevance even four
decades later.
Fast forward to 1985, the concept of time travel was popularized in pop culture by Doc Brown
and his iconic modified DeLorean in the cinematic universe. His adventures through various
epochs alongside Marty McFly captivated audiences and subtly mirrored the rapid evolution
and reinvention witnessed in the telecommunications and music industries over the
subsequent decades. The eventual convergence of these industries, through platforms like iOS
and Android smartphones and streaming services like Spotify, epitomizes the transformative
power of technological innovation.
Celebrating 40 Years of Legacy
As we now reflect on the 40th anniversary of these milestones in 2024, a critical examination
emerges regarding the sustained relevance and application of the Kraljic Matrix and its
derivative, the Procurement Chessboard, in contemporary strategic procurement. In a world
that has witnessed dramatic revolutions in global markets, economies, and companies, the
question arises: Why do these concepts from 1983 still significantly influence strategic
purchasing today?
Kraljic’s M
atrix
What 1983 Looks Like
Understanding Category Management
Category management is a strategic approach to procurement where products and services
are segmented into discrete categories. Each category is treated as a mini-business with its
own set of strategies and objectives. The primary aim is to optimize spending and manage
supplier relationships effectively to deliver the highest value to the organization.
Category management emerged during the early 1980s as a response to the need for more
structured and strategic procurement practices. It provided organizations with a systematic
way to segment their spend into categories and manage each to maximize value. The initial
success of category management was driven by its ability to streamline procurement
processes, achieve cost savings, and enhance supplier relationships. However, as the business
environment evolved, the limitations of traditional category management became increasingly
apparent.
As the business environment is evolving
continuously, several key factors are
contributing to the decline of traditional
category management, and pushing for a
reinvented and future-ready approach to
category management.
Increased Complexity of Supply Chains:
Globalization has expanded supply chains,
making them more complex and
interconnected. Traditional category
management, with its focus on individual
categories, often fails to address the
broader, systemic issues that arise in global
supply networks. This complexity demands
a more holistic and integrated approach.
Shifting Business Priorities: Modern
businesses prioritize more than just cost
savings. Issues such as sustainability,
innovation, risk management, and supplier
diversity have become critical. Traditional
category management's narrow focus on
cost efficiency does not align well with
these broader business goals, limiting its
strategic value.
What Threatens the Very Existence of Traditional Category Management as We
Know Today
Technological Advancements: The digital
revolution has reshaped business operations,
introducing technologies like artificial
intelligence (AI), machine learning, and
advanced analytics for more efficient
procurement management. Traditional
category management remains outdated,
relying on manual strategies and
presentations, missing the benefits of digital
transformation.
Changing Regulatory Landscape: Increasingly
stringent regulations around sustainability,
labor practices, and supply chain transparency
require more comprehensive oversight.
Traditional category management processes
are not equipped to handle the complexity
and dynamism of modern regulatory
requirements.
Outdated Frameworks: The Kraljic Matrix and
Procurement Chessboard: The Kraljic Matrix
has long been a staple in strategic purchasing,
offering a structured way to classify and
manage procurement activities. The matrix
categorizes purchases into four quadrants
based on supply risk and profit impact.
However, these frameworks provide only a
horizontal view across vertical business units,
restricting procurement within its ivory tower.
Traditional category management is threatened by the
increasing complexity of supply chains, shifting
business priorities, technological advancements,
changing regulatory landscapes, and outdated
frameworks like the Kraljic Matrix.
Diving Deeper into
the Old-School
Methods
The Kraljic Matrix
The Kraljic Matrix has long been a staple in
strategic purchasing, offering a structured way
to classify and manage procurement activities.
The matrix categorizes purchases into four
quadrants based on supply risk and profit
impact:
Non-core (Non-critical) Components: These
are elements that exert a minimal impact on
the business and are readily available in low-
risk markets. Typically, the management of
these components is delegated due to their
lower strategic importance.
Leverage Components: These are vital for the
company and are situated in low-risk markets
with abundant availability. The company
usually leverages its bargaining power and
capitalizes on the plentiful supply through
frequent negotiations to ensure optimal
management of these purchasing categories.
Bottleneck Components: These have a
marginal economic impact but pose a risk in
terms of supply continuity. The strategy here
leans towards establishing medium-term
relationships between the supplier and
customer to assure supply, often with a lesser
focus on cost management.
Strategic Components: These are crucial for
the company in both economic impact and
delivery conditions, especially when sourced
from complex or high-risk markets.
Analyzing the Practicality and Limitations
of the Kraljic Matrix
Strategies for these components encompass
a medium to long-term horizon, continuous
market analysis, technical development
tracking, "make or buy" evaluations,
alternative creation, and fostering stable,
cooperative relationships with suppliers.
While the Kraljic Matrix has ostensibly
maintained a stronghold on strategic
purchasing for four decades, a critical
examination of its concepts raises pivotal
questions about its sustained relevance in
the modern procurement landscape. The
matrix, with its focus squarely on the relative
market power of buying and selling
companies, offers a somewhat myopic
purchasing perspective.
The segmentation into four quadrants, while
determining the commodity group strategy,
inadvertently decouples purchasing from the
varied objectives of different business units
(BUs). This narrow "power-play" approach
and the horizontal orientation of the product
groups force procurement to look across
vertical business units in a manner that
focuses predominantly on economies of
scale and commercial savings.
This perspective decouples procurement
from the actual business strategy,
Reflecting on Ruskin’s Economic Law
In juxtaposition with the Kraljic Matrix, the
19th-century philosopher and social
reformer John Ruskin’s Law of Economics
offers a timeless perspective on value and
cost. Ruskin astutely observed: “There is
hardly anything in this world that someone
could not make a little worse and sell a little
cheaper.”
He cautioned against the perils of price-
driven decisions, highlighting that paying too
little could risk losing everything if the
purchased item fails to perform its intended
function. Ruskin’s law underscores the
impossibility of obtaining substantial value
for minimal money, suggesting that if you
opt for the lowest offer, you must account
for the risk and potentially, have enough to
pay for something better.
The Procurement Chessboard, developed
based on the Kraljic Matrix, employs 16
suitable value levers per Kraljic Quadrant,
intended to implement the commodity
group strategy. However, upon closer
examination, especially considering the
previously discussed example, it becomes
apparent that the chessboard, much like the
Kraljic Matrix, also adopts a rather narrow
market power perspective.
The Procurement Chessboard
Identifying Misalignments with Business
Goals
Why is "supply market intelligence" and "RFP &
RFI" limited only to leveraged commodity
groups?
Why are "Compliance Management", "Contract
Management", and "Spend Transparency"
restricted only to routine product groups?
Why are "Sustainability" and "Supplier
Development" confined only to strategic
product groups?
A few examples illustrate the misalignment of
the chessboard levers with overarching
business goals: The resounding answer to these
queries is that traditional approaches CANNOT
adequately explain these limitations
Hence, these limitations underscore a critical
need for reevaluation and revolutionization of
the procurement process.
leading to frustration among stakeholders
who believe procurement is not delivering
what they expect. It also frustrates
procurement professionals who aspire to
have a seat at the board table and
contribute more strategically to the
organization.
Not only does this approach undermine the
long-standing ambition of purchasing to
secure a seat at the "board table," but it also,
crucially, does not directly contribute to,
and in some instances even overlooks, the
strategic corporate and BU goals.
Although the chessboard does provide a value
lever for "innovation", it is positioned in the
bottleneck segment, Consequently, innovation
is utilized merely as a tool to circumvent
commercial dependence on a supplier,
especially one with relatively high market
power in comparison to the purchasing
company.
This approach results in innovation being
decoupled from the overarching BU strategy.
Ideally, purchasing should contribute to the
innovation, sustainability, and/or agility line of
the BU with all suitable commodity groups,
irrespective of the Kraljic segment in which a
commodity group is categorized for market
power considerations.
The decline of traditional category management is evident in several real-world scenarios
where companies clung to outdated practices, resulting in missed opportunities and strategic
failures.
Real-World Examples of Failures : Retail
A major global retailer relied heavily on traditional category management to drive down costs.
However, when a natural disaster struck a key supplier region, the company faced severe
supply chain disruptions. The rigid category-focused approach failed to provide the flexibility
needed to quickly adapt and source from alternative suppliers, leading to significant financial
losses and operational delays.
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