Strategic Sourcing Vs. Category Management

Organizations often use two of the most common procurement strategies – category management and strategic sourcing, interchangeably.

As a result, they fail to exploit the benefits of what each strategy has to offer.

To understand and utilize both these procurement strategies effectively, it is essential to understand the key similarities and differences in strategic sourcing and category management.

What is Strategic Sourcing?

Businesses use strategic sourcing for selecting ideal suppliers and negotiating the best pricing for best outcomes. The main goals of strategic sourcing are two: cost reduction and spend optimization across the supply chain.

The following are strategic sourcing steps used generally:

• RFP Process and Supplier Selection
• Optimizing Contract Negotiation
• Evaluating Sourcing Needs
• Analyzing Current Spend
• Identifying Potential Suppliers

Why Does Strategic Sourcing Matter?

Strategic sourcing isn't just about saving money—it's about building stronger relationships with your suppliers. By taking a closer look at who you're working with, you can ensure they truly meet your company’s needs. This careful selection process not only benefits your bottom line but also helps you build lasting, productive partnerships.

Another key advantage of strategic sourcing is the ability to regularly review your contracts. When you revisit the RFP process often, you ensure that you're always getting the best deals and the most competitive prices.

Furthermore, regular supplier audits also keep you in the loop on the latest advancements and new players in the market. Without this strategic approach, contracts might just roll over automatically, leading to missed opportunities for innovation and growth.

What is Category Management?

Category management helps you understand where your money is going and how you can get better ROIs. By analyzing spending in different areas, you can find the best ways to drive savings, improve quality and boost efficiency.

For instance, think of spend categories like different departments in your organization—HR, IT and marketing—or specific areas like facilities maintenance, technology, travel, and office supplies. By looking at current spending, pricing, and how your suppliers are performing, you can figure out the best way to manage each category.

While the category management process can be streamlined to get quicker results, it generally involves a few key steps:

• Analyzing current spend to identify categories
• Setting clear KPIs for each category
• Developing strategies to meet these KPIs
• Continuously evaluating and refining your approach

The Benefits of Category Management

Category management segments suppliers and aggregates demand, achieving economies of scale and reducing total cost of ownership. This approach fosters strategic supplier relationship management, enabling collaborative value creation aligned with organizational objectives. Category managers leverage market intelligence for effective sourcing, analysis, and risk mitigation. It shifts procurement to a center-led model, optimizing maverick spend and enhancing P2P processes.

Sophisticated analytics provide granular spend visibility, enabling data-driven decisions and continuous improvement. Best practices like TCO analysis, value engineering, and collaborative cost reduction are facilitated, yielding both hard-dollar savings and soft benefits through efficiencies and innovation.

Strategic Sourcing vs. Category Management: The Difference

Category management is more of a strategy, while strategic sourcing is the process that can be part of that strategy. For example, when category managers want to optimize spend, they might use strategic sourcing during the supplier selection process.

The focus of these two approaches also differs. Strategic sourcing is about spending less within supply channels, while category management is more focused on achieving specific goals, like getting better value or making smarter buying decisions.

The results are different, too. Strategic sourcing leads to overall spending optimization, whereas category management helps you get the most out of your suppliers.

Despite these differences, both strategic sourcing and category management share a common foundation: research and analysis. Both approaches start with evaluating your current spending and end with a review of how well your strategies worked.

Both can also play a role in managing your supply chain. Strategic sourcing looks to cut costs in the supply chain, while category management aims to make each step more efficient, ultimately leading to better supplier and product choices.

When you use these approaches together, they can have a powerful effect. Focusing on suppliers who align with your company’s values fosters stronger relationships, shared goals and better collaboration across your organization.

Getting the Best of Both Strategic Sourcing and Category Management

Utilizing category management and strategic sourcing within your direct procurement strategy is usually a given. Are you putting the same amount of thought and consideration into your indirect spend? For most, the answer is probably no due to limited resources like time and manpower.

Partnering with supply chain and procurement experts can be an effective way to bring these two concepts together. They will help you focus on these unmanaged areas of spend and facilitate indirect spend best practices. They can also identify and help cutback on maverick spend and tail spend.

Also Read: A Category Management and Strategic Sourcing Leader

To Sum Up

Category management is more of a strategy, while strategic sourcing could be part of this strategy. Both can also play a role in managing your supply chain. While strategic sourcing looks to cut costs in the supply chain, category management aims to make each step more efficient, ultimately leading to better supplier and product choices. Partnering with a supply chain and procurement expert can help optimize operations and drive savings.

Learn how GEP can help.