Why Contracts Are Key to Executing Your Sourcing Category Strategy

What is category management?

Category management is the process by which companies segment all the goods and services they need to procure into discrete categories that reflect the specific common characteristics of the products they're buying. For procurement organizations, "category management" is considered a best practice for sourcing. 

Real-world examples of category management 

For example, the procurement department at an automobile manufacturer will likely be responsible for sourcing everything from steering wheels to cleaning services. While in both cases the company needs to make prudent decisions about its spend, what goes into to choosing vendors for those goods and services are obviously very different: Some goods are highly commoditized and therefore cost will be the determining factor. Other goods may have stringent performance requirements attached to them, so will be evaluated based on the quality of the vendors bidding for business. Some goods are business critical. Others, less so.

A category management strategy for steering wheels may look something like this:

• The company's steering wheel vendors should be equally dispersed between the North American, APAC and EMEA regions;
• No one vendor should supply more than 40% of all steering wheels;
• The total spend on steering wheels can't exceed a pre-determined amount.

This strategy means that the supply of steering wheels is more resilient to disruptions like natural disasters (since they are coming from various geographies) and not exposed to undue damage if a single vendor fails (since no one vendor dominates the supply). And, of course, it provides predictability in how much will be spent procuring the product.

Executing the category strategy 

But designing the category strategy is just the first step of the process. The greater challenge is carrying it out. The history of large enterprises trying to execute category-strategy-driven procurement shows that while they are sometimes able to apply the category rules at the time of sourcing, it becomes a struggle to monitor adherence during the operations phase of a contract. For example, contracts may have been awarded assuming a certain mix of supply sources (with differing costs and quality parameters) to deliver on certain quarterly cost goals, but issuance of purchase orders in a different proportion at the execution stage will invalidate those assumptions and cause the category strategy to fail.

Contracts are the key to compliance with category strategies

To improve compliance with a category strategy, leading enterprises are taking a new approach: putting contracts at the center of the process.

Using contracts to drive category management compliance is enabled by the emergence of digital contracts and contract management software. By managing contracts on an enterprise contract management platform, companies can leverage contract data to execute effective contract strategies—and design superior strategies to begin with.

How it works

Let's go back to the steering wheel example and see how enterprise contract management can optimize the process.

1. Develop a strategy

First, the procurement organization develops the category strategy for steering wheels. The development of a category strategy is a consultative process and depends on data to draw insights and validate assumptions. Much of this data exists in past contracts: supplier performance on existing contracts, spend on different sub-categories and geographies, and other data points. That information, when available on a contract management platform, gives rise to a superior strategy.

2. Solicit bids from vendors

Next, the company put out requests for bids from vendors. Contract requests and bid lists aligned with the adopted strategy are launched from within the contract management system. This ensures that the vendor shortlisting and price discovery process conforms to the category strategy.

3. Set business rules in a contract management platform

Once purchase orders begin to be issued, business rules in the contract management platform ensure the strategy is carried out. If a buyer tries to execute a contract that goes against strategy–for example, with a vendor whose geography has already reached its limit in the strategy–the contract will be blocked or routed for special approval.

4. Monitor vendor performance

Finally, the contract management software monitors in real time vendor performance against the contract, both through data tracked within the platform itself and through integrations with other enterprise systems. This way category managers can not only make sure contracts comply with the strategy, but that performance complies with the contract.

Contracts are the foundation to buyer-supplier relationships

Since contracts are the foundation of buyer-supplier relationships, an enterprise contract management platform can support all phases of a category strategy: Insights to develop the strategy; tools to execute the strategy; rules to enforce the strategy; and integrations to monitor the strategy.

Icertis is focused on how digital contracts and cloud-based enterprise contract management software can improve business performance, including in procurement. To learn why Gartner has named Icertis a "Cool Vendor in Sourcing and Procurement" and why "the clear leader" in buy-side contract management, speak with an Icertis Specialist today. 

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