Category management is the process of organizing a set of related products into a category and managing the category as a strategic business unit to improve the performance of the entire category of products.
For example, kitchen appliances are grouped in a category (refrigerator, stove, microwave, dishwasher), baking goods are a category (flour, sugar, salt, spices, yeast, nuts, chocolate chips), as is clothing for babies (dresses, sweaters, tights, onesies, socks).
In some cases, products are categorized on value or volume, following the Pareto principle (80% of sales come from 20% of the products) or ABC analysis (products are grouped by the top, middle, and low-performing inventory).
A team is typically assigned to manage an entire category. It is responsible for everything from procuring the products to how they are priced and displayed in the store and any promotions.
Why Do We Need Category Management?
Prior to the creation of category management, products were procured individually from suppliers, giving them greater control over pricing and diminishing returns for the retailer. In addition, suppliers often negotiated separate agreements that increased profits for one product but cut the profits from another similar product, resulting in zero net gain for the retailer.
Bundling products helps drive down unit pricing, removes unprofitable competition, and ensures that suppliers help develop an entire category and add value to the business.
Benefits of Category Management
Brian F. Harris developed the concept of category management in the late 1980s and formalized it in an eight-step procedure in 1997 called the Brian Harris Model. This model emphasizes focusing on the consumer's needs when making decisions and helps teams think strategically about differentiation and competition. It also promotes collaboration and information sharing to improve decision-making and clarifies roles and responsibilities.
Category management bundles products to improve procurement, merchandising (display, planograms, pricing, and promotions), sales, and other retail efforts.
Category teams focus on bringing in the right products, at the right time, and at the right price. They leverage historical sales reports, monitor consumer trends, and consider seasonality when forecasting the right products in the right amount.
This process of managing products ensures that the team responsible for the category stays focused on the consumer needs, making it easier for them to complete their shopping by organizing products together and arranging aisles to flow through complementary products. For example, an aisle displaying pasta also offers jars of spaghetti sauce, tomato sauce, and parmesan cheese. Another example involves displaying cranberry jelly and boxes of stuffing next to frozen turkeys at Thanksgiving.
Category management also helps control pricing when sourcing products. By procuring a group of products from a supplier, the retailer can improve unit costs for all products. A retailer can also shop around to find the right supplier to help them improve their margins. It's also critical that retailers have a diversified supply chain to ensure that if one supplier can't deliver, they have another one who can.
Working With Other Teams
Category management brings together all the teams responsible for managing a category, including suppliers, procurement, finance, and legal. They do not work in a silo.
The team engages with other groups in the company to ensure their category performs well. For example, the team works with merchandising to determine the best layouts for the products on the shelves.
They also work with pricing analysts to determine the right product prices, including promotions and discounts at the appropriate times. And legal and finance teams help category teams obtain the best contracts with suppliers.
Category Management vs. Strategic Sourcing
Strategic sourcing happens as a one-time event and occurs in a silo in the organization. On the other hand, category management is a continuous, evolving process that includes supplier and demand management and involves the entire supply chain.