Category management
Category management in a retail context
Each
category is run as a "mini business" (business unit) in its own
right, with its own set of turnover and/or profitability targets
and strategies.
Introduction of Category Management in a business tends to alter the
relationship between retailer and supplier: instead
of the traditional adversarial relationship, the relationship moves to one of collaboration, with
exchange of information, sharing of data and joint business building.
The focus
of all supplier negotiations is the effect on turnover of the category as
whole, not just the sales of individual products. Suppliers are expected,
indeed in many cases mandated, to only suggest new product introductions, a new
planogram or
promotional activity if it is expected to have a beneficial effect on the
turnover or profit of the total category and be beneficial to the shoppers of
that category.
The
concept originated in grocery (mass
merchandising) retailing, and has since expanded to other retail sectors such
as DIY, cash and carry, pharmacy, and
book retailing.[2]
Definition of category management (retail)
Category management lacks a single definition thus leading to some ambiguity even among industry professionals as to its exact function. Three comparative mainstream definitions are as follows:Category management is a process that involves managing product categories as business units and customizing them [on a store by store basis] to satisfy customer needs. (Nielsen)[3]
The strategic management of product groups through trade partnerships which aims to maximize sales and profit by satisfying consumer and shopper needs (Institute of Grocery Distribution)[4]
.. marketing strategy in which a full line of products (instead of the individual products or brands) is managed as a strategic business unit (SBU). (Business Dictionary)[5]
The Nielsen definition, published in 1992, was a little ahead of its time in that customising product offerings on a store by store basis is logistically difficult and is now not considered a necessary part of category management; it is a concept now referred to as micromarketing. Nevertheless, most grocery retailers will segment stores at least by size, and select product assortments accordingly. Wal*Mart's Store of the Community, implemented in North America is one of the few examples of where product offerings are tailored right down to the specific store.[6]
Definition of a category
The
Nielsen definition of a category, used as the basic definition across the
industry is that the products should meet a similar consumer need, or that the
products should be inter-related or substitutable.[8] The
Nielsen definition also includes a provision that products placed together in
the same category should be logistically manageable in store (for example there
may be issues in having room-temperature and chilled products together in the
same category even though the initial two conditions are met).
However,
this definition does not explain how the process often works in practical
retailing situations, where demographic or
marketing considerations take precedence.
The category management 8-step process (retail)
The
category management 8-step process
The
industry standard model for category management in retail is the 8-step
process, or 8-step cycle developed by the Partnering Group.[9] The
eight steps are shown in the diagram on the right; they are :
- Define the category (i.e. what products are included/excluded).
- Define the role of the category within the retailer.
- Assess the current performance.
- Set objectives and targets for the category.
- Devise an overall Strategy.
- Devise specific tactics.
- Implementation.
- The eighth step is one of review which takes us back to step 1.
The
8-step process, whilst being very comprehensive and thorough has been
criticized for being rather too unwieldy and time-consuming in today's
fast-moving sales environment; in one survey only 9% of supplier companies
stated they used the full 8-step process.[10] The
current industry trend is for supplier companies to use the standard process as
a basis to develop their own more streamlined processes, tailored to their own
particular products[11]
Market
research company Nielsen has a similar process based on only 5 steps :
reviewing the category, targeting consumers, planning merchandising,
implementing strategy, evaluating results
Category captains
It is commonplace for one particular supplier into a category to be nominated by the retailer as a category captain. The category captain will be expected to have the closest and most regular contact with the retailer and will also be expected to invest time, effort, and often financial investment into the strategic development of the category within the retailer.In return, the supplier will gain a more influential voice with the retailer. The category captain is often the supplier with the largest turnover in the category. Traditionally the job of category captain is given to a brand supplier, but in recent times the role has also gone to particularly switched-on private label suppliers.[12]
In order to do the job effectively, the supplier may be granted access to a greater wealth of data-sharing, e.g. more access to an internal sales database such as Walmart's Retail Link
Category management in purchasing
Category
management can also be applied to purchasing within
an organisation. Although the term is the same and there are many similarities
with elements of retail category management including the use of similar tools
and techniques applied in reverse, the methodology is fundamentally different.
Applying Category Management in purchasing benefits organisations by providing
an approach to reduce the cost of buying goods and services, reduce risk in the
supply chain, increase overall value from the supply base and gain access to
more innovation from suppliers. It is a strategic approach that focuses on the
vast majority of organisational spend. If applied effectively throughout an
entire organisation the results can be significantly greater than traditional
transactional based purchasing negotiations.
The
concept of Category Management in purchasing originated in the late 80's. There
is no single founder or originator but the methodology first appeared in the
automotive sector and has since been developed and adopted by organisations
worldwide. Today Category Management is considered by many global companies as
an essential strategic purchasing
approach. Category Management has been defined as “an evolving methodology that
drives sourcing strategy in progressive organisations today”.[15]
"organising the resources of
the procurement team in such a way as to focus externally onto the supply
markets of an organisation (as against having a focus on the internal customers
or on internal Procurement departmental functions) in order to fully leverage
purchasing decisions”.[16]
Jonathan
O'Brien, author of Category Management in Purchasing, defines Category
Management as:
"the
practice of segmenting the main areas of organisational spend on bought-in
goods and services into discrete groups of products and services according to
the function of those goods or services and, most importantly, to mirror how
individual marketplaces are organised. Using this segmentation organisations
work cross functionally on individual categories, examining the entire category
spend, how the organisation uses the products or services within the category,
the marketplace and individual suppliers.",[17]
Peter
Hunt, partner at ADR International, writes
“the term category management can
mean different things to different people, so a working definition is needed. A
‘category’ is the logical grouping of similar expenditure items, such as spend
on advertising agency services or IT hardware. Category management is the
sourcing process used to manage these categories to satisfy business needs
while maximising the value delivered from the supply base”.[18]
Many
public sector organisations have recently adopted category management as a
strategic transformation tool. Sir Philip Green, in his
“Efficiency Review” of UK government spending, recommended that “centralised
procurement [should be] mandated for common categories to leverage this buying
power and achieve best practice”.[19]
Source: Wikipedia.
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