Fundamental to Success in Category Management Implementation - Research Paper Example

A Path is Made By Walking On It Can the supply of materials be managed more effectively with the implementation of category management by using a metaphor? may 2011 Contents Introduction 2 Category Management 4 Portfolio Analysis 6 Purchasing Policy 6 Sourcing Plan 7 Change Management vis-à-vis Category management Implementation 8 Organizational Readiness 8 Stakeholder Management 9 Governance of Category Management Implementation Process 10 Analysis of Mart.com Category Management Decision 10 Conclusion 12 References 14 14 Introduction In recent years both large and small organizations are seeking to define an appropriate operating model, to establish a strong foundation for execution. The two key dimensions in defining an operating model are process standardization and process integration. As described in Ross et al (Ross 2006), 4 general types of operating models are – 1. Diversification (low process standardization, low process integration) 2. Coordination (low process standardization, high process integration) 3. Replication (high process standardization, low process integration) 4. Unification (high process standardization, high process integration) Mart.com’s decision to implement Category Management reflects a significant organizational change in its Procurement process, a strategic decision made by Senior Management, to effectively compete in global market. The focus of this paper is on organizational change and management of the same, when a business undergoes, a significant process change as a result of corporate strategic decision (in our case Category Management). In this paper, we define ‘Category Management’, and its impact on Procurement in the organization’s Supply Chain Management (SCM) process. We briefly define and describe what is under the scope of this study and what primary processes and activities are of importance. Following this introduction, we focus on the change management aspects involved in successfully implementing Category management as a successful tool for procurement and its strategic impact. This is done by evaluating the three most important factors governing the change in terms of ‘Organizational Readiness’, ‘Stakeholder Management’ and Governance. We conclude this paper by defining the fundamental principles behind effective Category Management practice, and the process Mart.com need to undergo, considering its current state and what management expects by implementation of Category Management process. Category Management In the overall Source To Pay process, Sourcing has two components – Category Management RFP and contracting In the context of this paper our focus is on Category Management, and what its impact on contracting. RFP process is not in scope for this discussion. As organizations have grown in scale and have become more global, need for Category Management arose from repetitive purchase of products and services with common characteristics. Category Management was introduced as part of strategic procurement needs for the global organization to remove inefficiencies from tactical procurement done by local divisions of an organization. The basic motivation for implementing global sourcing is to achieve synergy in purchasing. This synergy is achieved when two or more business units combine their buying of similar items to gain higher purchase volumes, better prices and, as a result, competitive advantage through cost efficiency. Synergy is realized as business units exploit their interrelationships, share know-how and resources, coordinate strategies and pool negotiating power (Faes et. al. 2000, Vizjak 1994). The main question in achieving purchasing synergy is how to manage and organize purchases on a corporate level, without losing the proximity benefits of decentralized purchasing. There is a need for balanced approach which takes into consideration the need for having problem-solving capabilities close to where problems occur, cost containment in profit centers, and close relationships in selected collaborative supplier relationships (Gadde and Håkanson 1994). Another important fact is to recognize the fact that Category Management is an evolutionary process, wherein process improvement goes through iterative cycles. The basic Category Management process model is as shown below. Figure 1 – Category Management Process All organizations, in order to execute its operations uses products and services from different markets and suppliers. These products and or services have common internal customers hence spend on the same can be aggregated. Grouping ‘the spends’ across categories helps an organization help manage the spend efficiently. This affects the organization’s spend management by giving an organization ability to plan it purchases proactively. In terms of Category Management as part of Sourcing, the following activities are part of this process – Spend Specifications Supplier Intelligence Purchasing Policy Sourcing Plan Portfolio Analysis As mentioned before two of the primary activities of Category Management are Spend specifications and Supplier intelligence. (OGC – Portfolio Analysis, 2006) These two directly affect the sourcing strategy followed by an organization. One of the simplest techniques to gather requisite information is to use Portfolio analysis of spends. Portfolio analysis process includes creating grid with 2 dimensions – Total spends on all items from a supplier relative to measured relative to their market A combination of complexity of the item and market competition for the same. The Portfolio analysis grid is shown below – High ^ Degree of Market Difficulty v Low Technical Complex or non-competed items that we buy relatively few of Strategic Items essential to core business Acquisition Everyday low cost commodities. Leverage Lot of market competition for low cost items. Low< Spend >High Figure 2 - Portfolio Analysis in Category Management (OGC – Portfolio Analysis, 2006) This analysis serves the following purposes – Understanding the relative power in sourcing technique, i.e. where the buyer has the power, where supplier has the power, and where buyer and seller are interdependent. It helps in understanding what process to follow in a local and corporate situation. It facilitates identification of opportunities in cost reduction and thus assists in proactive planning of procurement. Purchasing Policy One of the fundamental activities in Category Management involves defining a Purchasing Policy for the organization as a whole. Purchasing policy for any organization is the guideline followed by all in the organization who are involved purchasing. A typical purchasing policy should define the following – Product/Services Policy – Identification of spends and forecast. Suppliers Policy – Market and supplier analysis, supplier selection criteria and policy, supplier assessment Savings Policy – Policy regarding savings in procurement including what is the basis in which savings is calculated. Procurement Policy – Defines the implementation of procurement process e.g. portal for internal customers, portal for suppliers etc. This is to optimize the procurement process. As a guidance principle for creating these policies takes into consideration the factors of customers, competition, ethics, ‘health, safety and environment’, objectivity/transparency in the purchasing process and appropriate fitness for the purpose. Sourcing Plan As Category Management is an iterative process Sourcing plan (OGC- Sourcing Plan, 2006) grows in maturity over a period of time. Sourcing plans can start with short-term tactical plans to long-term sourcing strategies. Typically it grows from short term (6 month) ‘quick win’ plans, to short and medium term source plans (12-18 months), Long term / advanced procurement plans (18-24 months) to a mature procurement strategy in about 24-36 months. While ‘quick win’ and short term plans primary focus is procurement for near future with milestones and action plans, long term plans focus on forecasting, reinvestment in new supplier and cost improvement plan. Finally strategies can be formulated by extending the long term plans, for categories which have long term impact as regards ‘Category Management’ is concerned. In this chapter, we have briefly introduced Category Management and its components. This would help understand the primary focus of this paper, which is organizational change management for successful implementation of Category Management. Change Management vis-à-vis Category management Implementation Implementing successful Category Management in an organization is not a very simple process. It requires organizational readiness, internal alignment, detailed planning, good governance and a very good team. In this chapter, we will deliberate some of these requirements, from Change Management perspective which need to be taken into consideration for Category Management to be successful. Organizational Readiness Organizational readiness is the capacity of an organization to implement a change. For Mart.com to be successful, it needs to perform an organization readiness assessment by exploring all aspects of its business which is related to category management. (OGC-Organisational Readiness, 2006).This should include how the changes would be perceived and handled by different stakeholders. As part of the process, Mart.com needs to proactively seek answers to the following – What is the likely resistance to change? Where will be the barriers to change? Does the organization have previous history of change culture? Is the leadership strong enough to enforce the change(s)? Do people have the right skills to implement the change? In case of Mart.com bringing in Category Management involves a significant change in the procurement process, wherein the procurement shifts from local to corporate. In order to be successful the team in charge of implementing Category Management needs to adopt a gradual process of getting the requisite information on organizational readiness. It starts with Fine tuning current process with minor changes, and then slowly elaborating on the process of incremental adjustment (reorganization of procurement activity), organization transformation (reorganization of procurement department in local and corporate offices), and finally completing the transformation by establishing organizational strategy of procurement and complete implementation of Category marketing process. Organizational readiness process is conducted by means of interviews, and then concentrating on focused discussion groups, followed by supportive workshops to sponsor and stakeholders. The leadership of the Category management team is absolutely significant in assessment of operational readiness of the organization, and throughout the implementation process of Category Management, would be monitored and refined as objectives of each stage is achieved, and transition to the next stage. Stakeholder Management While progressing on the Organizational Readiness, the second important change management aspect needs to be addressed is Stakeholder Management. Stakeholder can be defined as a person/group which is impacted by any organizational change, and the amount of influence it has on successful incorporation of the change. The steps involved in this process includes – It is ideal to start with a simple two-dimensional graph of stakeholders with their degree of impact/influence on the change process. Use of a RACI chart of all personnel who are impacted/influence/influenced by change brought in by Category management initiatives. The chart should analyze current and ‘to-be’ RACI, and use that as an input to stakeholder management. In order to achieve the transition over a period of time, the evolution of the RACI in terms of ‘control’ needs to be eased in not forced upon. The next activity in the process is to assess the stakeholder and categorize them from advocates and followers to blockers and opponents in the extreme, with indifferent somewhere in the middle. Management techniques would vary from understanding opposition to encouraging opposition. Fundamentally this is a subjective process wherein control is the key theme, and management techniques are built around communication. The communication techniques commonly applied varies from proactive communication, clearing misunderstood doubts by valid reasoning of business fundamental (cost and profit implications), and sometimes conflict resolution techniques. The final objectives of this process are – Assessment of stakeholder influence and defining appropriate managing techniques Effective transition of RACI from current to ‘to-be’ state when Category management is adopted as a matured strategy. Effective communication throughout the process of transition. Governance of Category Management Implementation Process We briefly want to emphasize that implementation of Category management needs to be strictly governed, with monitoring and audit at stage boundaries. The stage boundaries will vary on the process implementation tasks of – Portfolio Analysis. Purchasing Policy. Sourcing Plan. In parallel, governance should include Change management plans and processes in terms of Organizational Readiness and Stakeholder Management. Analysis of Mart.com Category Management Decision Mart.com’s decision to introduce Category Management, is strictly driven by strategic decision to reduce cost on procurement Corporate decision makers in Mart.com wants to introduce Category Management to achieve its success in the competitive and global market. Senior management of Mart.com also values the importance of Category Management, based on its analysis of supplier market of products/services, for certain categories, wherein – Corporate can fairly forecast planned needs of principle categories (spends). Opportunities exist in market for cost reduction in procurement of such categories. The fundamental challenge Mart.com faces is organizational change management in implementation of the strategy. There is fundamental change anticipated in the control structure (RACI) in the organization, in adopting Category Management. Local stakeholders may feel loss of control in the Procurement process with the new process in place especially in terms of contract management. New hierarchical structure may evolve in the organization (e.g. change of reporting structure – maybe transparent), which may affect business as-usual and implementation of Category Management. After our study and analysis, we have come to the following conclusions. Direct transition from current procurement practices to Category Management based practice need to go through the iterative process of coordinated sourcing through to center-led procurement practices. Local procurement at this point cannot be ruled out and hence totally centralized procurement may or may not be a feasible solution in near future. Our reasoning behind the same, is based on Mart.com’s business where in soft drinks may use some local components (Acquisition component of portfolio analysis – different flavor offerings in different local market). Stakeholder Management will address issues of control by appropriate communication and value-add proactively. This can be addressed through appropriate initiatives (e.g. workshops) by Category Management team. Organizational changes can be effectively brought in by slow induction especially in terms of local buying and contract management. Communication in terms of conflict resolution and adoption of Category Management will evolve, based on Mart.com’s maturity in Category Management. In order to facilitate communication IT systems would play a definite role e.g. by use of internal e-procurement portal for local and global procurement and forecasting of product/service requirements. Similarly external portals for suppliers need to be created to increase stakeholder value in terms of relationship. Corporate and sponsor leadership throughout the process is a must for governance and measurement of true progress. Conclusion Category Management of today is based on 5 governing principles (laws being a very strict term). (Hughes 2010). They are – “Value maximized is directly correlated with internal alignment and affluence”. “It doesn’t happen by accident. Proactivity pays off.” “Nothing succeeds like success. Define and agree a process, apply it in a focused way, and use its success as a calling card to key executives and stakeholders.” “The Category Management process needs teeth. Proper governance, programme and project management, market intelligence and transparent performance measurements are critical success factors.” “Tools and techniques are great – they can add lots of value, end to end across the full process of sourcing and supplier management – but they are only as good as the well-trained team using them.” In the context of our study, it is very much clear from the above governing principles that implementation of Category Management is analogous to implementing an organization-wise Change Management process. The change is iterative, gradual and need to be monitored and governed by appropriate authorities to have the desired effect. Based on our study and current understanding of Mart.com’s plan for implementation of Category Management, we conclude that – Mart.com need to go through a process of iteration to move from coordinated to center-led approach in procurement, to implement its decision of Category Management at the Corporate level. This involves the parallel activities of – Study, monitoring, and evaluation of Sourcing Plan from tactical to strategic. Refining Purchasing policy, when going through different stages of Category Management Implementation. Monitoring and influencing organizational readiness to accept process changes in procurement. Implementation of effective Stakeholder Management process, in different stages. A strict governance process on all activities under the Category management project, headed by a sponsor and executed by an independent of the Category Management team. References Category Management Process Diagram http://purchasingpractice.com/services/category-mgt/ [Accessed 05-24-2011] Faes, W., Matthyssens, P., Vandenbempt, K., 2000. The pursuit of global purchasing synergy.Industrial Marketing Management 29 (6), pp: 539-553. Gadde, L.E., Håkanson, H., 1994. The changing role of purchasing: reconsidering three strategic issues. European Journal of Purchasing and Supply Management 1 (1), pp: 27-35. Hughes J., Brown S., 2010. Five laws of category management Available from - http://www.futurepurchasing.com/insightsandbriefings.htm [Accessed 05-24-2011] Ross W. J., Weill P., Robertson C. D. 2006, “Enterprise Architecture As Strategy – Creating a Foundation for Business Execution”, Harvard Business School Press. Office of Government Commerce (OGC), 2006.“Category Management Toolkit – Portfolio Analysis”. www.ogc.gov.uk/documents/Portfolio_Analysis(1).pdf [Accessed 05-24-2011] Office of Government Commerce (OGC), 2006.“Category Management Toolkit – Stakeholder Management Plan”. www.ogc.gov.uk/documents/Stakeholder_Management_Plan.pdf [Accessed 05-24-2011] Office of Government Commerce (OGC), 2006.“Category Management Toolkit – Sourcing Strategies and Options Summary”. www.ogc.gov.uk/documents/Sourcing_Strategies_Options.pdf [Accessed 05-24-2011] Office of Government Commerce (OGC), 2006.“Category Management Toolkit – Organisation Readiness”. www.ogc.gov.uk/documents/Organisation_Readiness(1).pdf [Accessed 05-24-2011] Vizjak, A., 1994. Exploiting your synergy potential: promoting collaboration between business units. Long Range Planning 27 (1), pp:25–35.GPs in Asian Private Equity Read More