Category Management Toolkit

Categorisation and Category Analysis

Categorisation and Category Analysis Summary

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What is Categorisation and Category Analysis?

Categorisation allows you to prioritise your activities and to approach the market in an efficient and manner that they will understand. By implementing a market facing categorisation structure, the organisation will be able to achieve optimum value from the supply market. Category analysis is the development of a detailed understanding, through high quality data collection and interpretation, of the products or services that make up the category. This focus on the category will complement business requirements analysis, which assesses the needs of the business in relation to the category or sub-category.

Where does it fit within Category Management?

Gathering Category Information Strategic Analysis and Generation of Options

What is included in this guide?

Categorisation & Categorisation Systems Categorisation Terminology Categorisation Analysis

Which processes does the tool apply to?

Strategic Sourcing, Demand Management and Supplier Relationship Management

Which other tools link to this guide?

Project Planning Business Requirements / QCLDM Data Analysis Source Planning Technology Roadmap Cost Driver Modelling

Categorisation and Category Analysis

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Categorisation
One of the early stages of Category Management whether you are considering an organisations overall spend or a particular category is the process of categorisation. This involves creating a hierarchy of items and assigning the organisations spend to that hierarchy. Categories consist of items of: Similar supplier sources Similar production processes Similar internal use Similar material content/complexity Similar specifications Similar product technology.

Categorisation
These rules of been developed using Supplier, Account For example a Trainline provides all spend with this to the Train category

Note that:
who buys them how they are bought how they are accounted for do NOT appear on this list!

Systems
categorisation have a combination of Code and Cost Centre. supplier such as The train tickets. Therefore supplier will be allocated within Travel.

A supplier such as Capita provides several services such as Office Services, Records Storage, Consultancy and Recruitment. For Capita invoice postings will be categorised according to the account code used, and in certain cases the cost centre. Here is an example of categorisation for Professional and Technical Services

Categorisation Terminology
Terms widely used in industry as part of Category Management are Direct and Indirect goods. Direct goods are those that directly support a platform, major equipment, or product and service, for example glass in a bottle manufacturer. Indirect goods are those that do not directly support a platform or major equipment, but instead are associated with the overhead cost structure, for example Business Travel costs. You will often hear terms like Master Category used. Here is a simple guide to their meaning:

Master Category Category

Used to define a group of categories Defines a group of items with similar properties generally the level at which procurement strategies are planned A logical sub-grouping within a category, used to identify levels of similarity which is reflected in the supplier market An optional sub-division used to identify specific types of goods or services.

Sub-category

Micro-category

Examples from the categorisation structure include:

Master Category
Marketing & Comms Document Management Travel Professional & Technical Services

Category
Advertising Postal Services Business Travel Clerical

Sub-category
Publications Courier Rail Travel Casual

Microcategory
Newspapers Documented Post <none> Typists

You would expect to find further levels of division below sub-category, but the items will be very closely related e.g. headlight bulbs for trucks, sharing common components, common manufacturers but for different platform. It is quite possible, and entirely normal, for the category structure to alter once the sourcing project understands the dynamics of the supply market. The most important thing about categorisation is that it is market facing. This means that it reflects the way that industry sees the items, rather than the way that the public sector buyers see them. This is because we need to exploit the dynamics of the supply market to our advantage. It is very common for indirect goods to be centrally managed and/or centrally purchased by specified Category Managers. Some categories (such as Personnel-related Professional Services) would best be managed centrally, creating a need for a central procurement organisation (in common with most of industry). Direct goods can be purchased centrally or by teams embedded in the business.

Category Analysis
One of the key aims of category analysis is to ensure that that your suppliers do not know more about you than you know about them! This is an opportunity to ensure that the requirement is being framed in a way which the supply market can supply, so supplier input is of value. With this in mind, information should be collated on the following areas: Category Definition; An overarching statement on the category requirements and the contribution the category makes to meeting the business needs Statement of Requirements - Including future needs; The specifications of purchased materials and services need to be clear, agreed, and appropriate for both intended user and the supplier

Understand the QCLDM and technical requirements of the product /service. The supplier can always play a role in helping to enhance the design of the product/service. Full evaluation of current specifications is crucial for developing new sources, establishing alternative specifications (value analysis projects) and quality definition. Function/Application; A clear understanding of the specific application and function of the product/service will allow appropriate consideration of substitutes, a better understanding of quality and technical needs, and the most appropriate definition of the market place Forecasted Requirements; In order to plan for demand and suppler capacity, it is important to have a database which details part number / service reference and description, volumes required over time and part number / service reference and volume by principal locations Historical Information - (spend / supplier spend / pricing); Map out historical and total spend by category to detect trends and strengthen cases for cost reduction, specification reviews. It may also prove useful to extend this exercise to categories / sub-categories to identify major contributors to spend to identify areas for consolidation, cost improvement, demand reduction etc Identify past and future spend across your active suppliers and determine the value of your business as a percentage of the suppliers turnover %. This will give focus to the key suppliers and any risks / opportunities which a significant spend / supplier poses Extrapolation of this data per product and supplier again may indicate areas for product regrouping and reallocation between suppliers for maximum value Supplier Profiles (active and potential); Identification of potential suppliers will provide a starting point and key input to any potential resourcing and / or negotiation strategy The past and future rate of specification change and variation for a category should be monitored carefully so that cost, capacity, and availability implications are constantly evaluated Component Cost Structure (Cost Model); It is important to have a complete picture of the cost elements of the purchased goods or service and how it relates to the final good / service being delivered Identify the major cost contributors and areas where cost can be improved i.e. specification changes, process changes etc. (See also Cost Modelling)

Technology trends Determining whether the technology and process are leading edge or trailing will help to determine the supply base available to produce the product. A leading edge technology may dictate the supply base needed to stay abreast or ahead of the field by virtue of the R&D. Even if the technology is trailing, the component may require a manufacturing and assembly process that can be viewed as leading in order to drive down costs. (See also Technology Roadmap). The table below shows an example category analysis; however, note that category teams should adapt this template to suit the information requirements of the individual category they are dealing with.

Category Owner: Steve Smith Function of category To market the Boots brand via the customer base. To provide the customer with a free means by which to carry their purchased goods from the store

Category: Bags and Packaging Specification overview Business User Requirements Polymer H2349 Grade H Colour White 43 Q Paper Recycled Grade 3 Colour White XA23 C L D M Polymer H2349 Grade H Colour White 43 135 ppm defects 13% cost reduction by 0302

Date 2 March 2001

Paper Recycled Grade 3 Colour White XA23 25ppm 15% cost reduction by 0302 On time in full to the distribution centre 32QY Investment in machines to increase efficiency by 3% by 0302 Production line staff to remain constant less than 3% turnover in staff Annual Volume History and Forecasts 000s 1998 1999 1800 950 250 9000 700 2000 2500 1000 250 12000 500 2001 3350 900 250 15000 500 2002 4530 450 500 17000 500 2003 7000 150 500 20000 400 1765 700 250 7000 900

On time in full to the distribution centre 32QY

Category Subgroups Plastic bags

Unit Of Measure 1000 per box 1000 per box 1000 per box 500 per box 1000 per box

Category Subgroups 342X 100g 452B 350g 675C 750g Z34782 200g AXZ 237 125g Year 00 01 02 BUKI 00 01

Paper bags Total spend 000s Year 00

01

02

Unit Price Per bag

Spend Per Business Unit - % breakdown HAL BRI Comments 02 65 45 75 35 15 00 01 02 20 30 20 15 45 00 01 02 15 25 5 50 40

342X 100g 452B 350g 675C 750g Z34782 200g AXZ 237 125g Totals Mio Current Supplier

150 80 575 6480 65 6.83

184 747 55 7500 55 8.54

235 324 87 7140 46.5 7.83

342X 100g 452B 350g 675C 750g Z34782 200g AXZ 237 125g

0.06 0.08 0.23 0.54 0.13

0.055 0.83 0.22 0.5 0.11

0.052 0.72 0.174 0.42 0.093

Spend History per year million 00 01 0.986 7.5 02 0.246 7.1 0.4

Status Exit/Preferred/ Strategic 00 01 02 P P P P E S

Potential Suppliers

Status

Volumes-new product 000s Product 02 03 4000 04 8000

Simco Poly DLZ Paper Poly

0.287 6.5

Ramfords SCA

Qualified and in negotiations Qualified

Poly bag light weight

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