Category Management Made Simple With ServiceNow Source-to-Pay
Sourcing professionals are constantly searching to enhance supplier relationships and at the same time, reduce costs. If you are a sourcing professional in a large organization, you have probably used category management as part of your sourcing strategy. At some point, you may have even worked as a Category Manager.
For those unfamiliar with this topic, Category Management is a sourcing strategy where goods and services are organized and managed as groups rather than individual items. Category management is complex. It often requires weeks of preparatory work to obtain a thorough understanding of your organization’s purchases necessary for Category Management. Category Managers gather and analyze months or even years of spend data. They figure out which items were purchased and how they should be grouped. Without S2P, spreadsheets are often used to delve into the specifics. This includes information on what was purchased, who the suppliers were, the number of suppliers used for similar items, the amount paid, and a comparison of pricing from different suppliers.
After the tedious and labor-intensive analysis is complete, category managers are able to develop and implement a strategic category management plan,
With today’s technology, getting actionable intelligence from your data shouldn’t be this difficult. And with ServiceNow’s Source-to-Pay, it’s not.
The remainder of this article will focus on how you can leverage ServiceNow’s Source-to-Pay to uncover the intelligence needed for efficient and effective category management and the benefits that can be realized by doing so.
ServiceNow Source-to-Pay Assists with Category Management Analysis
The steps involved in establishing a Category Management program include:
1) Gathering and cleansing purchasing data
2) Defining categories (based on common characteristics of the items purchased)
3) Understanding spend within the category
— Items purchased, volume, cost
4) Analyzing the supply base within the category
— Number of suppliers
— Volume with each supplier
— Contract terms and service levels
— Competitiveness of each supplier
1. Gathering and cleansing purchasing data
Implementing solutions in the ServiceNow platform for nearly a decade, I have always appreciated the platform’s ability to connect data. Source-to-Pay brings the connected data experience to a whole new level by extending connections to every data element in the source-to-pay process for everything from request to payment. Sourcing professionals now have information at their fingertips that used to take weeks to compile.
2. Defining categories
Why define categories? Three benefits to defining product categories for sourcing are:
1) Matching products to suppliers: When a category is part of the suppliers’ core business, the supplier will usually have a larger selection of products and lower prices.
2) Leveraging purchasing power: Consolidating purchases by product category increases your bargaining power with suppliers allowing you to negotiate better service and lower prices.
3) Category expertise: Large procurement organizations typically employ Category Managers. These individuals work extensively with the products and suppliers in their category. Their knowledge is two-fold – an understanding of the organization’s purchases and knowledge of the market, providing better negotiation ability and the opportunity to take advantage of market conditions and spot buys.
Category Managers often struggle getting the information needed for good category management. GL Data is grouped by accounts which provides some help, but these accounts can be too broad and are aligned with financial reporting needs – not sourcing. Purchase order data is simply not categorized. You can’t even tell from a PO line that “Excel” and “Word” are both software.
Source-to-Pay’s connected data makes it easy to identify similar products for category management. Source-to-Pay organizes product into categories. The structure behind the categories is the United Nations Standard Products and Services Code (UNSPSC). This global standard organizes products into four levels of hierarchical categories. The hard work of product categorization has been done for you.
3. Understanding spend within the category
Once you have categories defined, you will want to understand the spend within each category.
Source-to-Pay provides visibility into the category and the products purchased:
- What was your total category spend?
- What products did you purchase?
- How many did you buy?
You even have the ability to drill into products:
- For product X, what are the prices I paid?
- What is the low price, the high price and the average price paid?
4. Analyzing the supply base within the category
Source-to-Pay assists with supply base analysis by providing you with supplier level visibility into purchase order spend:
- How many suppliers did you use?
- How much did you spend with each supplier?
- How do prices compare for products across suppliers?
Source-to-Pay integrates with Contract Management Pro providing a means to compare contract terms and service levels for suppliers in the category.
Defining a Category Management Strategy
Organizations diving into category management for the first time are usually surprised to find out how many suppliers are providing the same types of products.
How many suppliers do you need? Supply base strategy should consider criticality of products, supplier locations, delivery times, and include plans for minority suppliers, sole suppliers and niche suppliers. A good plan for an indirect spend category is to have a few preferred suppliers for 80% of purchases with 20% of purchases distributed among alternate suppliers including specialty suppliers.
In addition to the supply base strategy, you should have a product strategy. Having a curated list of preferred products keeps support costs down and allows you to negotiate better pricing on high volume products. Product strategy often includes shopping portals that guide employees to purchase private label products over name brand products.
What kind of results can you expect?
Let’s look at one small spend category that is present in nearly all businesses – office supplies. For one of our clients, office supplies were considered small spend and each department and business unit would manage their own purchases. Individual purchases were small and under the radar. No one knew how much was being spent.
The techniques described above were applied to quickly help our client understand how much they were spending on office supplies in total.
- Total category spend for office supplies was $2,000,000
- Over 200 different products were purchased
- A drill-down into products for cost comparison revealed that for multipurpose paper (UNSPSC 14111525), costs varied from $4.39 to $12.99 for a single ream of paper.
- Looking at the supply base showed 12 different suppliers being used.
The category management strategy applied was to use a single preferred supplier for all US office supplies. Private label products for things such as paper, pens and sticky notes were identified as preferred products in the shopping portal. While other products could be purchased, a justification and approval were required and nearly everyone purchased the private label products. Negotiations included 25% off select products, 10% off all other products and free next day delivery to offices in all major cities.
This resulted in an annual savings on office supplies of $500,000!
How much does your organization spend on office supplies and how much can you save? You can quickly find out with ServiceNow Source-to-Pay.
This example illustrates the savings on just one spend category. Applying category management to other spend categories can result in equally large savings in other areas.
Beyond Cost Savings
While cost reduction is a significant benefit, other advantages of ServiceNow’s Source-to-Pay include enhancing operational efficiencies, reducing procurement cycle times, and ensuring compliance with corporate policies. Automating routine tasks and providing actionable insights allows teams to focus on higher-value initiatives that are more strategic to the business.
Maximizing Source-to-Pay with Outcome Driven Solutions (ODS)
The ODS team has over 25 years of procurement, logistics, and supply-chain experience, making them the best choice for unlocking the potential of ServiceNow’s Source-to-Pay. Outcome Driven Solutions (ODS) brings real-world experience, helping organizations implement and optimize their use of ServiceNow’s Source-to-Pay and expand into Service Management and Asset Management Financials. ODS specializes in configuring the Source-to-Pay platform to align with your unique business goals. This ensures that cost-optimization opportunities are identified and leveraged to their fullest potential.
ODS’s approach is about achieving results. Our team will work closely with Procurement, IT, and Finance departments to integrate best practices, streamline processes, and foster strategic supplier relationships. With ODS, you gain a partner committed to your success, offering continuous improvement and guidance long after the initial implementation.
By collaborating with ODS, companies can avoid common pitfalls, realize faster ROI, and unlock more value from their procurement workflows. To learn more about how ODS can help your organization achieve its procurement goals, visit outcomedrivensolutions.com.
Want to learn more?
This article highlights one of the Key Performance Indicators ODS enables with ServiceNow’s Source-to-Pay. Check out our other articles in our ODS Insights section
