The procurement process involves sourcing or obtaining raw materials for manufacturing. The cost at which a company obtains them determines its level of competitiveness. Plus, it also sets the tone for a company’s profit margin in the subsequent stages.
Commodity management and category management help a company perform two vital steps. With these processes, a business firm in the supply chain can streamline the purchase of raw materials and also categorize them effectively. Though different, both these processes complement each other. Both have their importance and contribute to a company’s success in meeting its targeted goals.
Before you proceed to understand the differences between both terminologies, you need to gain an insight into what they are all about. Read on to know what both the terms mean from the business standpoint and how they differ from one another.
What is Commodity Management?
To begin with, the idea of commodity management comes from the broad-minded approach of supply chain management. It highlights that there is more to the supply chain than engaging with suppliers to lower the costs of different items. Commodity management involves several aspects, so defining it precisely briefly can be difficult.
In a word, commodity management refers to the process of working out a methodological approach to the whole cycle of a list of procured items. The different aspects it involves are negotiation strategy, terms and conditions, quotations, market and industry analysis, relationship management, and supplier sourcing. The effective execution of all these processes also leads to awards that become a part of a company’s commodity management. However, in this connection, a lot depends on a company’s performance and output.
Commodity management also revolves around strategic objectives and risk factors for a firm. The former relates to unique requirements involving a company’s business as well as its customers.
In terms of risk factors, commodity management helps identify and sort out various aspects. These include supplier financial viability, the quality of suppliers, and supply availability. When the procurement of products involves technical items, commodity management also helps a company in keeping an eye on the technology maturity of those items.
Two other aspects that also find a place on the long list of the items of procurement management are the percentage of market share and the current and forecasted spend levels.
However, some individuals confuse commodity management with category management. Oftentimes, they do so due to the lack of a proper understanding of the term. Two aspects of the supply chain that do not belong to commodity management are the orders of different items and detailed negotiation with either a supplier or a group of suppliers.
Benefits of Commodity Management
From performance measurement to the assessment of risk factors, commodity management can benefit a company in several ways. These include the following:
- It simplifies the delivery of sourced items to a procurement firm.
- Commodity management serves as the backbone of improving the business relationship between a procurement company and its suppliers.
- Commodity management enables a company to segregate reliable suppliers from the ones that are less reliable. Oftentimes, this move proves to be a game-changer during critical times for companies that are a part of the supply chain.
- It allows a company to bring about an improvement in the quality of its supplies over time. The assessment of the performance of the sourced goods due to commodity management facilitates the process.
- Commodity management also facilitates the identification of risks. Following the identification of different risk factors, a company can look for ways to mitigate them.
What is Category Management?
The meaning of the term “category management” will become crystal clear to you if you break it up into the two terms that constitute it. The term “category,” from the standpoint of category management, refers to a list of similar items. When a company wishes to procure several items in a particular deal, it compiles them on a list. This list is called a category.
On the other hand, “management,” in the term “category management,” defines the method by which a company takes business initiatives concerning the category of similar products.
In a nutshell, category management describes two things at once. These include the process of pooling all products with similarities under one category and taking initiatives like procurement, sales, and additional retailing efforts on the category.
The objective of category management is to bring all procurable items under a single contract. It prevents several scattered contracts or agreements for products that share similarities. It bundles similar items into a category, thereby preventing scattered or separate agreements. This way, it benefits a company on two fronts at once. Saving a company’s valuable time aside, category management also contributes to its cost-cutting initiatives.
The examples of category management provide a clearer understanding of the term than its definition. You can consider a common example of category management to understand it.
Suppose you are a retailer of sporting items who wants to push up sales before the start of a cricket league. For such a league, you would want to procure a list of items. These include bats, gloves, helmets, balls, stumps, pads, jerseys, and other essential items. After sourcing these items, you can think of two options to obtain them from suppliers. You can either agree with them to procure the items separately. Or, you can also have a single contract for all the items as a whole.
While you can obtain your sourced items in both ways, their cost-related consequences would be different. When you have a separate agreement for each item, it benefits your suppliers as they can demand a price that suits their profit margin. They can also raise the costs citing a shortage of the stock of your required items. Due to fewer items in the contract, there isn’t much that you can do to negotiate the deal.
However, having several items in a single contract gives you a clear advantage. It puts you in a position of strength from which you can negotiate a favorable deal for yourself. It allows you to better negotiate the pricing. At the same time, it also facilitates an effective tracking or monitoring of your negotiation with suppliers. Last but not least, it also saves you both time and hassle.
How does category management benefit an organization?
Category management provides business organizations with some undeniable benefits. These include the following:
- It enables a business organization to better negotiate its pricing with its suppliers. Category management allows a company to prepare a blueprint for better negotiation with suppliers through differentiation and competition.
- Category management creates an effective structure for a company with which it can better collaborate with suppliers. Due to it, a company’s professionals can effectively engage with suppliers both internally and externally.
- Category management promotes better decision-making. Professionals find it easier to go through a single contract or agreement than to study the details of several scattered contracts or agreements at once.
- Category management also allows better grouping or categorization of professionals for specific tasks. After categorizing the essential products to be procured under a category, it becomes relatively easy for a company to assign responsibilities to professionals to negotiate, monitor, and procure products based on their skills and work experience.
Differences between commodity management and category management
Both category and commodity managers perform activities related to strategic sourcing. As a result, you might think that they are similar. But they also have many dissimilarities or differences. These differences draw a line of distinction between both these approaches.
Two points that make both the terms different from each other are sales and marketing. Category managers act on product selection concerning both aspects. On the other hand, commodity managers do not remain a party to it.
Category managers remain responsible for preparing a detailed report on the performance of sales. Based on this report, a procurement firm makes decisions for choosing its supplies as well as suppliers in the future. The responsibility of commodity managers remains confined within the scope of buying the chosen items. It’s their job to buy those items that product development teams choose.
In a nutshell, you can tell the differences between the job roles of category and commodity managers by considering their job responsibilities. A procurement firm defines and segregates the job roles of both these professionals, which highlights the distinction between them.
A procurement firm expects a category manager to be an expert in sales and marketing. They primarily visit suppliers and negotiate the cost of procuring items for their business organization. On the other hand, it expects a commodity manager to be a procurement expert. They are expected to negotiate with experts by applying their aptitude and business management skills.
Both commodity management and category management are essential for procurement firms due to their significance. Both relate to the sourcing and marketing of products in different ways. Knowing their differences and acting accordingly can boost a firm’s ability to derive benefits from both processes.