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| Tuesday, 12 October 2004 |
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Category Management benefits manufacturer and consumer by Prasanna Perera, Marketing and Management Consultant, Chartered Marketer, CIM UK Category Management has benefited the consumer through improved assortment, lower prices, reduced out of stocks and ease of shopping. This is made possible by the collaboration between the retailers and suppliers to improve the effectiveness and efficiency of demand/supply chain management. What is Category Management? Category Management is a distributor/supplier process of managing categories as strategic business units, producing enhanced business results by focusing on delivering consumer value.
There are three key concepts in this definition. First, both distributors (retailers and wholesalers) and their suppliers (manufacturers and agents) focus on delivering the best possible value to the consumers. Second, it is a collaborative process that produces enhanced business results for both partners. Third, this process requires managing categories as Strategic Business Units. (SBUs). Another way to think about Category Management is to view the entire value chain as consisting of demand/supply chain, with Category Management being focused on the manufacturer/retailer interface. Internal to the manufacturer, there are product management functions that should be organised by categories. Similarly, internal to the retailer, there are customer management functions (such as loyalty programs) that need to be aligned with the Category Management functions for maximum impact. Components of Category Management Best practices Category Management consists of six components. Two of these are considered essential, without which Category Management cannot be started and are therefore called core components. The other four are considered enabling, since without these, Category Management can be started but not institutionalised on an on-going basis. The two core components are strategy and business process. The four enabling components are performance measures, information technology, organisation capabilities and collaborative relationships between trading partners. While these six components apply to distributors and suppliers, there are areas of overlap and differentiation. Some components - strategy, performance measures, information technology and organisation capabilities - have major differences in their development and execution between the different participants in the value chain. On the other hand, business process and collaborative relationships have significant overlap, since Category Management requires the alignment of business processes in the distributor supplier organisations. Scope of Category Management Category Management has been a topic of growing importance to the consumer products industry, ever since Point of Sale (PoS) scanning allowed an accurate assessment of product movement. Starting with shelf space allocation in line with product movement category management has evolved to include a variety of concepts for managing the demand chain. Category Management describes an emerging organisational design for distributors/retailers. The retailers buying and merchandising functions are integrated through Category Management teams, responsible for developing category business plans internally and with suppliers. These category business plans are aimed at improving the overall performance of the category, instead of buying the best "deals" and then merchandising the best "sale" without understanding the impact of merchandising plans on the category as a whole. Category Management also describes the reorganisation of the supplier's customer interface and internal profit centres. It represents organising around customers (as multi-functional customer teams) and categories, instead of geographies and brands. Customer teams are supported by policies and practices designed to add value to the Category Management process. Benefits of Category Management Obviously the benefits form Category Management vary across retail formats, category partners and geographies, depending upon how well it is being practised. On average, in the United States, the following results have been achieved: * Sales increases of about 7% for the total category, with about 5% being achieved for the manufacturer selected as the category partner. * Margin improvement of about 5% for the retailer, with reduced number of items and retail inventories. * Margin improvement for the manufacturers due to lower cost of sales and trade promotion costs. This number has varied considerably depending upon how differentiated the category is and how well the manufacturers have developed their internal capabilities. The current situation Approximately 90% of all retailers say they are at various stages of implementation. However, only a few are doing it right. Most are compromising the definition of Category Management with broad ranging applications. The end result will be that most retailers will fall short in return on investments in technology, people, systems and processes which are required to support the concept. Retail behaviour, in many instances is undermining the concept. E.g. focusing on internal measures at the expense of consumer orientation, charging slotting allowances, product diversion, charging for Category Management training. Manufacture behaviour, in many instances, is also undermining the concept. E.g. carrying brand biases into the category planning process, special quarter end and year end promotional offers, resulting in lower weighted pricing to certain markets and inconsistent business practices across markets and retailers. Category Management will be closely aligned with a concept called Market Place Planing, both of which are essential components of strategic business planning. The alignment of Category Management with Market Place Planning will heighten the importance of timely efficient execution of category plans at store level. Consequently, retailers will place pressure on manufacturers and agents to reallocate retail resources to support more efficient, unbiased, speed-to-market initiatives. |
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