Learn about:
- What category management is
- How to manage it
- Three basic rules retailers use for category management
Category Management Definition
Category management is a strategic approach to procurement and supply chain management that involves analyzing data, understanding consumer behavior, and collaborating with suppliers to optimize the performance of specific product categories. This systematic method of purchasing goods and services by grouping segments of procurement spend helps businesses increase revenue, reduce risks, and maintain strong partnerships with suppliers. By focusing on entire categories rather than individual products, companies can develop more effective category management strategies that align with their overall business goals.
Key Principles and Components
Defining “Categories”
A category is a group of products or services that share similar characteristics and serve a common purpose for consumers. In the context of procurement, categories can be direct or indirect, depending on their relevance to the core operations of the business. Direct procurement categories refer to raw materials and items used in the manufacture of goods for resale, while indirect procurement categories encompass goods and services required to support day-to-day business operations. Companies can use global standards like the United Nations Standard Products and Services Code (UNSPSC) or develop an internal classification method, also known as a spend taxonomy, to determine their categories. By clearly defining procurement categories, businesses can better manage their procurement process, identify opportunities for cost savings, and implement effective category strategies that drive overall business success.
Category management is the process of grouping similar products and services into categories to maximize procurement, efficiency, and value. Product categories are then used to define purchasing behaviors. Examples of product categories are dry grocery goods, cosmetics, women’s apparel, and pet food. A category manager plays a crucial role in overseeing these procurement strategies and processes.
Category management allows retailers to streamline supplier relationships by simplifying their inventory process, reducing risk, and improving profitability. This ultimately allows the retailer to enhance the customer experience by systematically aligning product assortments with customer needs and shopping behavior.
Category management can be demanding for retailers who sell thousands of products within hundreds of categories. Some retailers address this by choosing one supplier as a strategic partner called a category captain. Category captains provide essential assistance in category performance through market insights into customer preference and hands-on shelf layout to maximize sales and improve shopper engagement.
According to Nielsen, a category definition “involves determining the specific SKUs that constitute the category, based on a manageable group of products that consumers perceive to be interrelated and/or substitutable in meeting a consumer need.”
Categories are based on consumer needs, similar need or substitution value, and manageability. Consumer need is defined as the value a product brings to the consumer. For example, minute rice is nutritious, easy to make, and can be prepared quickly. Inter-related or substitutable items are defined as products that meet similar needs or can be swapped for other products (such as minute rice for jasmine rice). Manageability is the process of expressing categories that can be controlled in an in-store environment. This includes factors like product logistics (such as refrigeration needs) and category size (such as dry goods versus just “rice”).
Walmart and other retailers segment their products into subcategories and finelines to better merchandise items. This aids in understanding the Consumer Decision Tree (CDT) (also known as product hierarchies), which helps determine consumer buying habits and the decision-making process.
Related Reading: Walmart Departments, Categories, and Finelines Cheat Sheet
Category management is defined in a number of ways. It is a process of turning product categories into business units and customizing them to satisfy consumer needs. It is also a strategy to maximize sales and profit via trade partnerships (e.g., retailer and supplier). Category management is also considered a marketing strategy.
For example, Walmart has so many categories that they have specific numbers they assign to each supplier, and specific numbers they assign per category per supplier. This helps Walmart keep things organized within its various categories to maximize both efficiency and profitability across the entire category.
The 8-Step Process of Strategic Sourcing in Category Management
Retail category management is a continual process. The Partnering Group first created the idea of the 8-Cycle Category Management Process. The cycle consists of:
Category Definition: What products make up a specific category, and what are the subcategories, finelines, etc?
Category Role: What is the purpose of the category, and what is its place in the retailer’s portfolio?
Category Assessment: How is the category performing? Identifying core areas within Category Management is crucial for enhancing procurement efficiency.
Category Scorecard: What are the category’s objectives and targets, and how well is it meeting those key performance indicators?
Category Strategies: What are the marketing strategies and in-store services for the category?
Category Tactics: What are the optimal products for the category? And what are optimal placements, promotions, pricing, and supply tactics?
Plan Implementation: Is there a written plan in place to achieve the category’s role, implement strategies, and meet the category’s scorecard?
Category Review: Measure, monitor, and modify the category’s progress.
This process provides a framework for the retailer and supplier to collaborate and create profitable product scenarios.
Retailers must understand the volumes and margins of each category item. This knowledge can help fulfill consumers’ demands and enhance sales. Instead of paying attention to individual margins, the objective must be to maximize the absolute margins that result from shelf space.
The Four Ps of Category Management
The four Ps of category management are Product, Placement, Price, and Promotion. This concept is used to better understand the consumer decision tree (CDT) and create a product schema. The idea is “putting the right product in the right place for the right price at the right time.”
Product in Category Management
Product refers to the assortment of items that a retailer offers. Introducing a procurement category helps group products or services with similar characteristics, which is essential for effective purchasing practices.
Placement in Category Management
Placement involves the strategic positioning of products within a store to maximize visibility and sales.
Price in Category Management
Price is the amount of money consumers are willing to pay for a product, and it plays a crucial role in the purchasing decision.
Promotion in Category Management
Promotion encompasses the marketing activities that communicate the value of a product to consumers. Effective risk management is necessary to minimize vendor risk while establishing strong relationships with suppliers, underlining its role in category management.
Product in Category Management:
Suppliers need to be able to group their products into defined buckets as defined by the supplier and the retailer together. This involves creating a unified brand name; defining the quality, types, and sizes of the product; creating packaging that properly displays a product's use; the styling of the product; and the service the product provides and how it relates to other products in the same category. For retailers, they need to look at the number of items in a category, the assortment of products, and the market coverage.
How to track category management product:
An in-depth analysis will look at the market share per SKU, the sales per point of distribution and distribution points, the product's cumulative rank, and the variety of the product versus its duplication in a category.
Best Practices in Action:
The product-level benchmarks should consider the share of items in a category, including the fair share index versus category share.
Trends to watch are the change in the number of items, the share of items as a point change, and the distribution point change.
Consumer analysis must consider demographics, the market basket, household expenditures, the product's share of requirements and loyalty, and shopper/store clusters.
Place in Category Management
Suppliers should be able to define the placement of their products by category, including the destination channels, sales coverage, warehousing, and logistics. Retailers will need to consider shelf allocation and layout and devise detailed planograms.
How to track category management placement:
Data-driven planograms allow for an in-depth analysis, examining turns, category profit, gross margin return on investment (GMROI), and out-of-stocks.
Best practices in action:
Suppliers should track their share of shelf space and the fair share index.
Watch for linear and percent shelf change trends.
Consumer analysis of shopper/store clusters, demographics, and the CDT.
Pricing in Category Management:
Suppliers must create a price strategy for their products in a particular category. They should consider allowances or deals they give their buyers and create a discount structure, as well as provide bundles of products. Retailers must consider the cost of products in a category and create a price strategy, examining market prices and price gaps.
How to track category management pricing:
An in-depth analysis will check the return on investment (ROI), product lift, category efficiency, GMROI, the correlation and regression of sales and forecasts, the category and its products' contribution to the sales margin, the sales per million sold, and price elasticity.
Best practices in action:
The pricing benchmarks look at the percent of a category's products sold on temporary price reductions, compare the index with the market value, and examine sales margins.
The average price percent change and the percentage change versus the category's market price are important trends to watch.
Consumer analysis compares the percentage sold on a deal and compares brand loyalty in a category.
Promotion in Category Management:
Suppliers must provide advertising, a sales strategy, sales promotions, and publicity for their products in a particular category. Retailers should also consider the feature frequency and feature price of products in a specific category and create promotional displays.
How to track category management promotion:
An in-depth analysis will examine product lift, efficiency, gross profit, best sales vehicles, incremental sales, promotion pricing, percent All-Commodity Value (ACV) sell-out, and competition.
Best practices in action:
The promotion benchmarks are the category's share of ads, the cooperative share of promotional materials from the retailer versus the supplier, and the fair share index.
Ad changes, the percentage sold on ads, and changes in sales numbers due to ads are important trends to watch.
Consumer analysis checks the purchase frequency and the consumer purchase cycle.
Successful and Effective Category Management Strategy
Category management is a strategic approach that improves efficiency, enhances customer satisfaction, and drives sales by ensuring the right products are available at the right time. It is one of the many tools that retailers utilize to streamline their processes, foster supplier collaboration, and make data-driven decisions, leading to increased profitability. Supplier relationship management is crucial for enhancing category management practices by developing long-term collaborative partnerships with suppliers to drive mutual benefits, manage risks, and optimize sourcing processes.
Supply chain is complicated, and sometimes even the best processes can’t account for every issue that may arise. SupplyPike can help! SupplyPike offers up-to-date industry resources to help suppliers avoid fines by digging into root cause analysis and providing executive-level oversight of the supply chain.
Continued Learning: SupplierWiki's Resources for Supplier Relationships
For more free educational content like this (eBooks, Cheat Sheets, Webinars, and Articles), sign up for our newsletter. We cover material essential for retail suppliers, especially related to revenue loss at Walmart, Amazon, CVS, Target, Kroger, Lowe's, and Home Depot.