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Category Management - Industry vs. Government - Explained

Updated: Dec 16, 2020

This is Part 2 of a summary (working draft) describing the origins of two supply-chain initiatives that were introduced in the federal government: Strategic Sourcing and Category Management. The first post covered strategic sourcing and its application as a government-wide initiative. This will do the same for Category Management. I will explain what it is, how it was introduced within the government, how the government has applied (or mis-applied) it into the public sector and why. A list of sources can be found in the embedded links as well as a source list found at the bottom of the page.


I hope this increases or changes the understanding the origins and application of strategic sourcing and category management within government.

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Category Management — Origins and Definition


There is less academic literature on Category Management than with Strategic Sourcing. Like strategic sourcing there appears to be a lack of clear, agreed upon definitions of terms as it is applied. Just like strategic sourcing, however, the definition as to what the term means has evolved since its introduction, and its application appears to depend on the type of entity you are and the processes developed within. Category Management as a term of reference will differ as to whether we are talking about manufacturing, retail (online or brick), or as an enterprise strategy.


Category Management was developed as a private sector supply chain management activity that began in the mid to late 1980’s as was strategic sourcing. Early academic literature indicates that it was something that replaced a “brand management” practice more closely associated with sales and marketing. Let’s use a hypothetical example (because I don’t know if what I am about to say it 100% accurate, but it is meant for clarity).


When working at Post Cereal there may have been a brand manager for each product that were part of their portfolio (Honey Bunches of Oats, Shredded Wheat, Cinnamon Toasters, etc…). When bought by Kraft Foods, category management would consider it more efficient to ‘bundle’ these brands into a cereal category. By doing so, the cereal category expert would have purview and control the production, distribution, and strategies of that portfolio. In other words the ‘cereal’ category at Kraft would be responsible for the cereal brands, the ‘candy’ category at Kraft would be responsible for the confectioneries, and so on.


Retail chains and supermarkets appear to have adopted this practice as a way to “manage” the way categories of products are offered in their stores as well as a way to create area expertise for certain goods. They discovered they could “improve sales and profit if they could more efficiently administer all their difference products and product classifications.”(O’Brien) Going with the above example, the person responsible for supply-chain relationships would begin gaining expertise in a certain field, so instead of managing the relationship with Post, they would also do so with Kellogg, General Mills, and Malt-O-Meal.


As Dr. Rob Handfield, Chair of the NC State Supply Chain Resource Cooperative, points out, this evolved from a replacement for retail ‘brand management’ to manufacturing in general. What he describes in his blog post on the origins of Category Management (found here), manufacturers had to squeeze value out of their relationships and were required to go deeper into their supply-chain to plan for deliveries and operations. His discussion with Steve Zimmer from the auto industry illuminated the evolution of category management from a sales/marketing tool to a discovery tool. In this instance it was for a manufacturer to completely understand their supplier relationships, the environmental conditions that affected them, and engage in a data intensive initiative that lead to insights that were able to be planned for, and used in, operations and negotiations.


Although not explicitly stated, Dr. Handfield’s article characterizes category management as an organizing, analyzing, planning data driven activity pertaining to your sourcing relationships that (in this case) you rely on for manufacturing your product. Speaking with Michael Vande Woude, President of MVW Consultants and a former IT vendor relationships executive with multiple Wall Street firms, this blog post closely characterizes the general approach he used while managing very consequential relationships with some of the largest US IT firms in hardware, software, infrastructure, and telecommunications for the financial industry.


So for some, category management is a brand and market strategy associated with retail production and product management. For others, category management is a means by which to manage the relationships you are reliant upon to manufacture or support your end products. And for others category management is a way to manage your supplier relationship and/or plan for your enterprise purchasing and operations.

For example, the Sourcing Industry Group (a professional global sourcing association) defines category management as “the process of categorizing goods and services and then managing these categories as “business units” to achieve improved outcomes in the most effective and efficient way.” They state that by using UNSPS Codes one can group goods and services according to certain characteristics or categories.


More specifically, I think Dr. Handfield characterizes the private sector description of category management quite well. In a LinkedIn discussion that he states:

“Category management involves trying to understand the supply market, profiling the stakeholder needs, assessing and segmenting the supply base, developing the business case, and taking the stakeholder along for the ride — all before you ever begin negotiations. And then a big piece of CM is post-award contract management- continuing to drive improvement…. which is where most of the cost savings occur, after the ink is dry on the contract.” (More on this in the government application of CM below.)


All of this being said, it is interesting to note that the academic examples, blogs, Wikipedia entries, and Forbes articles, all closely relate category management as either a manufacturing or retail endeavor. It appears that its application into enterprise operational activities is not studied well and has evolved from this original application. That may be because for many of these operational activities (at least in the realm of IT and under the purview of the CIO) are covered through other inventory and management initiatives and practices.


So let’s now take a look at how Category Management entered the government lexicon and what it looks like today.

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Category Management in Government


Category Management as a government-wide initiative began in 2014. It began as an internal initiative at the General Services Administration and then brought to OMB for government-wide application. A definition was developed that assigned a federal allusion to the term as was done with strategic sourcing. Regardless of the definition, the government-wide application of the term category management is centered on an effort to reduce contract duplication.


Definition


Then Administrator of the Office of Federal Procurement Policy, Anne Rung, introduced “Buying as One Through Category Management” into the federal government in her December 2014 memo on “Transforming the Marketplace: Simplifying Federal Procurement to Improve Performance, Drive Innovation, and Increase savings.” Under this program the memo states directly that the goal is to “reduce contract duplication”, which is believed increased costs — a completely reasonable goal that many responsible parties within the federal government, and industry, can agree on.


The memo describes (not defines) category management as a set of strategies that include strategic sourcing, transparent acquisition performance, data analytics, and leveraging best practices. It further describes the responsibilities of certain parties, including a government sourcing leadership council, Government-wide Acquisition Contract (GWAC) executives, and the General Services Administration. The latter has been tasked with the administration of this program, with oversight from the OFPP, and is still the process today.


Strategic sourcing as an activity crossed Presidential administrations, as has category management. In a 2019 memo Deputy Director of Management at the Office of Management and Budget, Margaret Weichert, issued memo M-19–13 titled “Category Management: Making Smarter Use of Common Contract Solutions and Practices.” Here she states that “the term “category management” refers to the business practice of buying common goods and services as an enterprise to eliminate redundancies, increase efficiency, and deliver more value and savings from the Government’s acquisition programs [with the expected results being] more efficiently managed contracts; reduced unnecessary contract duplication and cost avoidance; and continued achievement of small business goals and socio-economic requirements….shifting time, effort, and funding currently spend performing repetitive administrative tasks towards accomplishing mission outcomes.”


Implementation Summary


GSA is the agency designated to administer and execute category management on behalf of OMB, as they had with strategic sourcing. To implement category management GSA developed 10 categories of assets categories (and identified sub-categories) with associated leads for each identified below.


GSA Acquisition Gateway Category Management Overview (Table 1)


As part of category management implementation GSA developed the “Acquisition Gateway”. This platform was meant to serve as the clearing house of practices and information associated with procurement pertaining to each of the above-mentioned categories. This is also where some of the dashboards and data sets associated with category management are housed and accessed by authorized (government) users.


The vision was to create a virtual retail environment comprised of “category hallways” that segments the market as described above, and creates “virtual “corridors” to the most relevant available products and services based on the agency’s need.” * Note that the virtual marketplace/retail category management application was the analogy most used when describing its’ early application.


In order to facilitate contract reduction OMB, facilitated by GSA, developed the Best-in-Class vehicle designation initiative. This initiative assessed government-wide vehicles on criteria such as customer/agency input at the time of creation, whether they are actively promoted and managed with associated training, whether they have success metrics, and whether they capture needed data elements through designated fields for the execution of category management. They have the goal of “maximize the government’s shared purchasing power, allowing agencies to leverage volume discounts; help agencies operate more efficiently by reducing administrative costs and contract duplication; and expand collection and sharing of government-wide buying data, leading to better informed business decisions.”


The primary adoption measures OMB and GSA to measure impact centered on Spend Under Management. According to GSA, “spend under management (SUM) is the percentage of an organization’s spend that is actively managed according to category management principles — or smart decision-making where agencies buy the same kinds of goods and services through best value solutions. Increasing SUM will eliminate redundancies, increase efficiency, and deliver more value and savings.” In other words, what % of spend for a certain category is being spent through an aligned contract vehicle: a BIC designated contract vehicle, a government-wide non-BIC designated vehicle, or actively managed agency mandatory source.


Beyond the assignment of Category leads, and Acquisition Gateway and Best-in-Class initiative, GSA also envisioned a Common Acquisition Platform. This GSA-specific system, which is part of a much larger change initiative at the agency, with a goal towards “acting as one acquisition community equipped with more informative, innovative and cost-effective acquisition systems, tools and shared services.”


So, what can we conclude?


Based on the descriptions above are there any fundamental differences between the “Industry” application of category management and “Government’s” application of consistent processes and procedures? If so, what can we conclude?


At first blush it appears that that category management in government is a misapplication of the term, as was with the case with strategic sourcing. The overarching goal of the federal initiative is admirable and unequivocal — reducing duplication in government contracting and to collectively capture and analyze data to better inform agency buyers. You would be hard pressed to find many taxpayers, policy makers, industry representatives, or federal procurement professionals who find this an arguable premise.


One disconnect could be found in the unstated implication of Dr. Handfield’s description which involves an activity or process taken around the time of an actual transaction or point of exchange. Both parties have skin in the game, which also implies that there are mutual stakes at play. This makes sense. The manufacturer categorizes his relationships with his supplier base, as well as their relationships with the commodity market (oil, electricity, water, etc…), in order to strategically plan and manage the ability for them to buy, track, and source (predicatively rather than reactively) the needed parts that constitute their manufacturing needs. The supermarket or retailer engages in advanced analytics, market expertise, product placement, and their customer and supplier knowledge to strategically manage production and transportation relationship, product stock and placement, and even the architecture and design of their virtual or brick-and-mortar location.


It appears that the government’s application has been at the level of pre-exchange, as no money is directed by a government-wide vehicle; it is simply a means meant to simplify the way in which agencies buy commercial products and services. The money resides with the agency transaction (task or delivery order), and the vehicle (GWAC or Schedules) is simply a means to the end. How this concept was initially introduction (internally at GSA vs. government-wide) could explain why this is the case.


The retail model of category management was what GSA envisioned when this was being introduced as an internal initiative prior to it being a government-wide initiative. They envision themselves as the federal marketplace for commercial items as they sought ways to reorganize how they interact with the market (industry and government) and re-imagine (and simplify) their suite of vehicles (and platforms) by which they serve the federal marketplace. This was how category management was viewed prior to becoming a government-wide initiative, and it should not be a surprise that this concept traveled with the Administrator who brought it to OFPP.


Part of GSA is in the business of creating and managing acquisitions vehicles for federal agencies to use in order to buy, and so it should not be a surprise that they view category management as a vehicle initiative akin to a retail environment rather than a strategic, requirements-driven initiative that Dr. Handfield describes. Unlike the private sector, however, the point of exchange is not at the vehicle level but rather the task/delivery order level where these requirements reside.


So what does this mean for category management as an initiative in government? Here are some potential possibilities in no particular order:


Possibility #1 — Its principles be absorbed into another initiative, as strategic sourcing was absorbed by category management.


An effort introduced with the current administration in Technology Business Management (TBM) could be seen as being very similar to those of category management: both are attempts at organizing, categorizing, tag, and assess data as a means to take a strategic approach at inventory, assets, and expenditures. CIOs have been working on this to help gain inventory, security, and cost controls over their operation. Interestingly, the application of TBM requires agencies gather information on expenditures (what they actually spent money on) which means the primary information source becomes their fiscal systems. This also more closely mirrors private sector implementation that what we see happening today.


Possibility #2 — Category Management will move down the acquisition stack, and government-wide analysis and information will be gathered and contextualized.


Just as strategic sourcing is how an agency executes against a vehicle (after all, it is implied in its name), category management will occur at the agency level where the requirements will reside. This is where strategic decision making, and vendor relations (directly related to agency mission) resides because this is where the transaction resides.


That does not mean that we don’t speak with the vendor’s as a community to advocate for government interests. Government-wide coordination should still occur to gather, analyze, and assess agency data. However, the analysis has to move on from simplistic distribution curves and prices paid range identification and comparison. Simplistic analysis is not a function of what Dr. Handfield describes. Data needs to be used strategically, which means drawing out information from the data that agencies can make actionable. This requires looking at contingencies that affect a unit price (when something was bought, in what volume, along with what other things, as a total price of a procurement, small or large business considerations). This is the type of information an agency can use to and consider, and government-wide vehicles that are capable of capturing data that unpacks line-item level information in a complex buy would be natural partners for agencies seeking categorized information that can be contextualized for decisions.


This is also data-use that most in industry should not have an issue with as the data will help inform government as to the conditions that impact a price (requirements, risk, level of effort, terms and conditions, bundling, volume, etc…). Data use on a software price X for one agency and price Y for another as a basis of conversation is a non-starter because it is always conditional. Data-use concerning the conditions/variables that affect prices they can pass along to government would lead to a more informed customer base, manage expectation on behalf of the parties, and help create better conditions for both.


This more closely resembles category management in the way Dr. Handfield describes, but it also requires the rejection of IT as a commodity…which it isn’t (the subject of another missive).


Possibility #3 — Category Management is being applied today where the conditions more closely match those of its applications in industry.


Rather than the retail interpretation of this initiative, it would not be a surprise to see this as a best practice in practice with the elements of government engaged in manufacturing or construction. As the government builds planes, rockets, satellites, or engages in a construction project, category management is likely to be a part of the process either through agency contracting commands or the contractor holders themselves. This would be the most applicable case for the industry version of the field.


Conclusion

Clearly there are more possibilities than described above, and what will happen will be dependent on a number of factors. What shouldn’t be dependent is the stated, agreed upon goal, which is in reducing duplication in government contracting, and in collectively capture and analyzing data as a means to better inform agency buyers.


Sources

  • Youngjin Bahng, Doris H. Kincade, Retail buyer segmentation based on the use of assortment decision factors, Journal of Retailing and Consumer Services, Volume 21, Issue 4, 2014, pp. 643–652

  • Zenor, M. J. (1994). The Profit Benefits of Category Management. Journal of Marketing Research, 31(2), 202–213. https://doi.org/10.1177/002224379403100205

  • Lodish, L. (1998). Store brands and category management.

  • Dussart, C. (1998). Category management: Strengths, limits and developments. European Management Journal, 16(1), 50–62.

  • Morgan, N. A., Kaleka, A., & Gooner, R. A. (2007). Focal supplier opportunism in supermarket retailer category management. Journal of Operations Management, 25(2), 512–527.

  • Lysons, K., & Farrington, B. (2016). Procurement and supply chain management. Pearson.

  • O’brien, J. (2019). Category management in purchasing: a strategic approach to maximize business profitability. Kogan Page Publishers.

  • Handfield, R. (2014). The Origins of Category Management. NC State Supply Chain Research Cooperative. https://scm.ncsu.edu/scm-articles/article/the-origins-of-category-management. Accessed 8/7/20

  • “The Guide to Understanding Category Management”. Sourcing Industry Group. https://sig.org/blog/guide-understanding-category-management. Accessed 8/9/20

  • Webb, Jonathan. (2015). What is Category Management?. Forbes Magazine, 12/23. Accessed 8/8/20

  • “Category Management”, Wikipedia entry, https://en.wikipedia.org/wiki/Category_management#cite_note-1, Accessed 8/8/20

  • Handfield, R. (2020). LinkedIn reply to Daniel Kinenstadt. https://www.linkedin.com/posts/activity-6696874022824759296-niED. Accessed 8/7/20

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