Purchasing Category Management From Analyzing Costs to a Proactive Management Practice

Purchasing Category Management From Analyzing Costs to a Proactive Management Practice Jussi Heikkilä Helsinki University of Technology P.O.Box 5500, FI-02015 TKK jussi.heikkila@tkk.fi Tel. +358-9-4514491 Fax +358-9-4513736 Riikka Kaipia Helsinki University of Technology P.O.Box 5500, FI-02015 TKK riikka.kaipia@tkk.fi Tel. +358-9-4513664 Fax +358-9-4513736 The objective of our research was to explore the situation of purchasing category management in a select group of industrial firms with operations both in home markets and abroad. We analyzed the purchasing category management practices of seven manufacturing firms in several industries. All of the analyzed companies were using purchasing category management as an important part of organizing their purchasing and supply management. The approaches and practices in purchasing category management varied across the companies we studied. The approach to purchasing category management needs to be different on different levels of purchasing category hierarchy. On the highest level, there are only a small number of categories with the need to support the company s global operations and its way of organizing. The logic is different on the second level of hierarchy. As a result we point out areas of further research. Keywords: purchasing and supply management, purchasing categories, organizing purchasing and supply management. 1

Introduction It is essential in international industrial firms to centralize purchasing in order to benefit from the advantages of high purchase volumes. Forming groups of purchase commodities to gain volumes and negotiation power is not new; it has been practiced in the most important production related materials for example, commodity raw materials for production for decades in most companies (Davis et. al. 1974). The established term for this practice has been commodity management. Earlier, commodity management was done in a limited share of all supply items. A more recent phenomenon is that companies are systematically analyzing all of their costs spent on purchasing and forming purchasing categories covering the whole purchasing spend. This categorization of purchase items includes all kinds of purchasing targets, not just standardized commodities. Therefore, it is common in industrial firms today to call this practice purchasing category management. In this paper, we prefer to use the term category management instead of commodity management. The primary reason is that it is commonly used terminology in industrial firms. Purchasing category management is commonly practiced in industrial firms but little understood in the research literature. In our literature search we found very few articles that would address and explain how companies form and manage purchasing categories. Therefore, we selected an exploratory approach to study this practice. In our research we analyzed the purchasing category management practices of seven manufacturing firms in several industries in international business context. All of the analyzed companies were using purchasing category management as an important part of organizing their purchasing and supply management (PSM). Gaining cost savings through higher purchase volumes is an important motivating factor, and the most important for some companies. But we found out that the ways of forming and managing purchasing categories varied considerably across the companies studied. Research design and method The objective of our research was to explore the situation of purchasing category management in a select group of industrial firms with operations both in home markets and abroad. More specifically, we were addressing the following questions: 1. How do companies form their purchasing categories? 2. How is the formation of purchasing category management related to organizing the PSM function within the firms? Our research process consisted of three steps: (1) literature review, (2) survey questionnaire of the contextual factors of PSM in the companies included in the case research, and (3) interviews of senior purchasing officers in the case companies. Overall, our research design was exploratory (Stake 1995; Yin 1989). The reasoning behind choosing the exploratory research approach was that our initial impression of literature was that formation of purchasing categories was not yet treated in such a rigorous manner in academic research that would enable a more explanatory approach through a large sample empirical research design. The phenomenon being focused here 2

required a closer look at processes and practices than what would be possible through, for example, large scale survey research. On the other hand, we decided to include seven companies as our focused cases, instead of only one or a few in-depth cases, meaning that we consider the phenomenon studied to be rather in the mapping stage (identifying and describing critical variables) than in discovery or description stage (Stuart et. al. 2002). Looking into several companies across industry boundaries enabled us to make more generalizable conclusions than what would be possible through single cases or a few cases in one industry. We asked for access to the most senior PSM executive who was responsible for all of the firm s PSM activities. In one of the seven cases, the interviewee was Executive Vice President of Supply Chain Management, who was a management board member and reported directly to the CEO of the firm. In the other six cases, the interviewees reported to a management team member who reported further to the CEO. In this paper, we report three cases. The reason is that they represent the breadth of issues that we observed in the total sample of seven firms. Instead of reporting all the results for all seven cases, we decided to report them as selected standalone cases. Company practices were different and companies were making different choices in their purchasing category management practices and processes. In order to guide our empirical research, we formulated a set of research constructs on which to focus our data collection efforts. The first set of research constructs was related to the context of PSM in the firms. This set of constructs aims at establishing a connection between the context in which the categories are formed and the way they are formed. Context of purchasing category formation: Industry, company and its customers Rate of change in the company s business Products and production principles Suppliers Characteristics of PSM function The contextual factors were searched by sending a survey questionnaire to the senior purchasing officers in the case companies, in order to be filled in and sent back to the researchers before the research interviews were carried out. The second set of constructs focused on the formation of purchasing categories in the companies. Formation of purchasing categories: Length of experience in the use of categories Motivation behind using purchasing categories Stability of categories Purchasing category formation process Factors taken into consideration when forming categories Order of importance of the factors taken into consideration when forming categories 3

Organizing PSM function in the company Measurement and success of PSM in the company We acknowledge that a potential source of bias exists in our research results because of the focused selection of case companies for our research. Firms volunteering to participate in research might be considered having more advanced practices in the area of research compared to companies that do not volunteer. Therefore, our attempt at this stage of research is not to suggest generalization of the findings but rather to increase understanding of the factors leading to alternative ways of organizing purchasing category management in industrial firms. Literature review The literature review consists of two parts. First, we present the motivation and organizational solutions for global sourcing as described in the PSM research literature. Second, we review how classification of purchase items into purchase categories is being treated in earlier research. Synergy benefits through global sourcing The basic motivation for implementing global sourcing is to achieve synergy in purchasing. This synergy is achieved when two or more business units combine their buying of similar items to gain higher purchase volumes, better prices and, as a result, competitive advantage through cost efficiency. Synergy is realized as business units exploit their interrelationships, share know-how and resources, coordinate strategies and pool negotiating power (Faes et. al. 2000, Vizjak 1994). The primary sources of purchasing synergies are economies of scale, scope, process and learning (Faes et. al. 2000; Rozemeijer 2000). Successful implementation of global sourcing strategies may bring companies material cost savings by more than 30 percent, the average saving being 15 percent, according to a study by Trent and Monczka (2003). Other benefits from global sourcing include improvements in quality, supplier responsiveness and supplier technology contribution. Organizing purchasing in large corporations The main question in achieving purchasing synergy is how to manage and organize purchases on a corporate level, without losing the proximity benefits of decentralized purchasing. There is a need for balanced approach which takes into consideration the need for having problem-solving capabilities close to where problems occur, cost containment in profit centers, and close relationships in selected collaborative supplier relationships (Gadde and Håkanson 1994). How to organize PSM in companies relates to the question of what coordination structure under what circumstances is the most effective. In principal, pooling purchasing power occurs when a parent company or head office promotes centralized purchasing (Goold and Campbell 2000). Most authors distinguish between different types of purchasing organizations, which differ in how they coordinate international purchasing efforts. Typically centralized, decentralized and some form of a mixed structure is suggested (for example Fearon 1988; Giunipero and Monczka 1997). Based on nine case studies concerning the fit between organization structure and sourcing, Arnold (1999) suggests three ideal types for global sourcing organization: 4

- Central purchasing model; is useful for organizations with generally low international or global sourcing activities and a high degree of centralization. Purchasing needs to be organized as a strong central purchasing department to bundle demand and to establish a central purchasing process, because decentralized structure can not reach the same benefits due to low degree of global sourcing activities. Centralization refers to sourcing, contract handling and supplier management. - Outsourcing model; fits to internationally oriented organizations with high degree of decentralization, where business units are autonomous and source globally. Outsourcing means that a business unit or an established trading organization manages one or more specific supply market, and sells its services to other decentralized business units. - Coordination model (called also as pooling structure; Van Weele 2005) is based on cooperation between business units or regions, not on a strong hierarchical structure to manage purchasing. This approach fits to organizations with a centralized structure and international activities. The coordination model aims to combine the benefits of centralized and decentralized purchases: with the advantages of local flexibility combined with bundling volumes and maintaining knowhow on supply markets. Coordination and centralization of purchasing is considered as a logical step in the professionalization of the purchasing function (Faes et al. 2000). According to Van Weele (2005), the main direction in purchasing restructuring is to move from fully centralized and fully decentralized purchasing activities towards a hybrid or coordinated structure. In spite of low degree of interdependency between PSM units in large corporations, there has been a tendency towards more coordination of PSM activities (Van Weele 2005). Managing commodity teams Aligned with the globalization of their businesses, companies have predicted an increase in the use of commodity teams and cross-functional teams or other pooling structures in managing PSM (Van Weele 2005). Especially in large companies with multiple individual business units to create synergy within PSM function and help coordinating the variety of activities involved, commodity teams (see e.g. Trent 2004; Englyst et. al. 2008) or cross-functional teams (Trent, 1996, Van Weele 2005) are established. The purpose of these teams is bringing together knowledge and resources required for coordinated purchasing or purchase pooling. Also, their purpose is to ensure strong commitment from regional organizations and independent business units. Often in such a structure, all operational purchasing activities are decentralized. The establishment of global commodity teams has been considered a prerequisite for realizing economies of scale from volume bundling (Smart and Dudas 2007). In addition, Englyst et. al. (2008) point out that commodity teams may achieve further synergies in economies of information and learning, which may result from knowledge and information sharing. One benefit is economies of process, which is a result of adapting standard procedures for example in sourcing or benchmarking, or in training. Another result from pooling is reduction in the number of suppliers (Faes et. al. 2000). There are many challenges in managing commodity teams. Pooling structures are invisible in most organization charts, as they build upon the existing hierarchy or line organization (Englyst et. al. 2008; Cavinato 1992; Van Weele 2005). A typical team consists of purchasing professionals who work part-time in the team, and a team manager. The right team structure, 5

resources given to the team, capable team leadership, as well as committed team members affect clearly on the success of the team. Team member effectiveness was supported with abundant feedback and a reward system (Trent 1996; Trent 1998; Englyst et al. 2008). How to select items to a category There are very few research articles available about purchasing category formation and management. According to one of the few articles, category is defined as follows (Trautmann et. al., forthcoming): A category encompasses a group of similar items that are required for specific business activities of the firm. One important issue in implementing purchasing synergy is managing and analyzing the product range and the whole purchasing spend. Identifying common requirements across buying units is necessary for global success (Trent and Monczka 2003). Van Weele (2005) presents that the greater the commonality of the purchased products required by the business units, the more benefits can be obtained from a centralized or coordinated approach. Prices of some types of raw materials are very sensitive for volume, and pooling volumes of this type of materials, including both raw materials and high-tech components, may lead to remarkable cost savings. Therefore large companies have concentrated raw material purchases or packaging materials into one organizational unit. The complexity of analyzing purchasing spend can be described with a company case, where six months was spent in determining what different business units with different coding systems were purchased (Trent and Monczka 2003). This task is even more difficult when companies have undergone mergers and acquisitions. In the study by Trent and Moczka (2003) it was noticed that there was a high number of different specifications within the same material group, because each business unit had created their own specifications. Even if similar specifications were used, they were purchased from different suppliers. This resulted in a large number of suppliers delivering the same or similar items for different business units (Smart and Dudas 2007). Smart and Dudas (2007) observed that MRO (maintenance, repair and operations) goods, commodities and indirect materials are the preferred items when companies start pooling initiatives. Purchasing portfolio approach An approach to classifying purchasing items and differentiating supply is utilizing purchasing portfolio models. In principle, the following steps are suggested in portfolio solutions for managing different purchasing items: - Analysis of products and their classification into four groups according to two dimensions - Analysis of required supplier relationships to deliver the products in each category - Development of action plans in order to bridge the gap between current and required supplier relationships Categories in this approach are the four classes into which components or purchasing items are divided (Gelderman 2003), which is a very different way of defining categories than what is 6

suggested in the definition of Trautmann et. al. given above. In the original Kraljic matrix the classification dimensions are profit impact and supply risk (Kraljic 1983). The rationale for selecting these dimensions is, according to Kraljic, to minimize supply vulnerability and make the most of the company s potential buying power. In later work these dimensions have been named differently (for example by Olsen and Ellram strategic importance and complexity of the supply market, 1997), but there are no principal differences with the original Kraljic approach (Gelderman, 2003). The use of portfolio approach helps companies to better understand purchasing problems and to differentiate purchasing strategies (Gelderman 2003). The benefit and a source of criticism of portfolio models is that it simplifies a complex situation. Portfolio approach is used as a strategic tool to analyze and classify items and to create purchasing strategies for each group. Olsen and Ellram (2007) suggest that portfolio tool should be used in combination with other methods. This advice is followed for example by Smart and Dudas (2007) who use spend analyses and develop a decision making framework for analyzing purchases. Due to the increasing importance of classifying purchasing items, the use of portfolio approaches has grown (Van Weele 2000; Lamming and Harrison 2001). An article by Monczka and Markham (2007), which is targeted primarily for practitioners, deals with the question of how strategies for purchasing categories need to be formed. The article is based on a study of 260 companies and it summarizes the purchasing category management challenges facing companies as follows: Companies need to develop forward-looking category strategies, looking beyond products and services. Totally new categories will be developed because of changing business models and technological advances. Category strategy objectives should focus on value creation, supply base reduction, global sourcing and ways to increase supplier integration. Time-horizon will be extended to 5-10 years. Important enablers include, for example, executive management focus, effective crossfunctional teams, high quality spend analysis and global contracting process. This article gives valuable insight into the multiple challenges of purchasing category management, but it does not make any notes how categories are actually formed in companies. Integration mechanisms in purchasing An information processing perspective to category management is taken by Trautmann et al. (forthcoming), who study management of 12 categories in three firms in order to understand the use of integration mechanisms among geographically dispersed purchasing units. They classify the categories according to three primary motives for global sourcing: economies of scale, economies of process and economies of information sharing and learning. The studied categories represent four types of purchases in each firm: raw materials, capital equipment, services and MRO (maintenance, repair and operations). Trautmann et. al. analyze the characteristics of five factors (purchase novelty, product complexity, purchase importance, demand volatility, and supply market characteristic) of each category to explain the type of interdependence in each 7

case. They conclude that the type of uncertainty in each category varies and requires different integration mechanisms as follows: - Economics of scale is the primary motivation, when the product typically is a standard product, volume is high or medium and demand is relatively stable and supply market is competitive, thus, delivery risk is low. Category manager and local managers work in teams; decision making for strategic purchasing is centralized to a category manager, while operational purchasing is carried out at each site. This type of category needs a standardized purchasing process with clear definition of roles and responsibilities. - Economies of information is the motivation in environments with new buying situation, high volume and high criticality for highly customized products with irregular demand. Supply market can be characterized with high or medium delivery risk and few global suppliers. Category manager s role is to transfer category and market knowledge, and to approve sourcing decisions. The purchasing process itself may differ across sites. - Economies of process is the motive for global sourcing for standardized low volume products with irregular demand and high quantity of orders. Purchasing is decentralized to sites with full authority, but standardized purchasing processes are defined. In order to ensure efficiency global catalogs and instructions are created and knowledge of best practices is leveraged across the purchasing organization. According to Trautmann et. al., due to the simultaneous existence of these differences across categories in the same company, different categories require different ways of integration even within the same firm. To manage different categories efficiently, different information processing capacities and organizational designs are needed. The focus of Trautmann et. al. is the integration approaches in existing purchasing categories. It gives valuable propositions to the different approaches in managing different types of categories. However, it does not give advice how category structures should be formed in an industrial firm. Summary of the literature review The term category management is very little used in academic purchasing literature but in the practitioner literature it is beginning to be more generally used terminology. Coordinated purchasing structures to gain purchasing synergies are found in the existing research literature. However, it is emphasized that the important decision is not the coordination decision itself, but the identification of the right cases in which to do it and the establishment of how implementation within the company should be executed (Faes et. al. 2000). The insights into the contents of categories, their formation and management, are scarce. The viewpoints from where this topic was considered, included organizational solutions, centralization-decentralization of PSM, purchasing team effectiveness, or which types of products are the most suitable for pooling. According to Vizjak (1994), the implementation process is the crucial part in achieving purchasing synergy. Empirical studies of how to implement purchasing synergy are few, the papers by Smart and Dudas (2007), Monczka and Markham (2007), Englyst et. al.. (2008) and Trautmann et. al. (forthcoming) being among the exceptions. 8

Case study research results In the results of the seven case studies 1, we realized that there were clear similarities in the researched companies motivation factors for purchasing category management. These similar motivating factors included scale economies, centralization of PSM, and improving skills and capabilities of PSM. However, even if there are clear similarities between the motivation factors of companies and the use of purchasing category management, we found out that the ways of forming categories and managing categories varied considerably across the companies studied. All of the seven studied organizations seem to have followed a certain similar development path, even if they at the time of the data collection were in a different stage of that path. At some stage all these companies had started forming categories, primarily with the logic of pooling similar items and centralizing the purchasing of these items in order to gain economies of scale and cost efficiencies. Some companies might be satisfied with these results. For example, companies in the process industry with a heavy emphasis on the costs of some raw materials might end up in a reasonable number of these pooled categories. However, for many other companies the number of categories grows very high, bringing along a new type of challenge. The forming of categories with the pooling logic might result in several hundred categories, and the requirement to organize a higher level of main categories, with a large number of different subcategories. The formation of these main categories seems to be done very differently in different companies. Next we describe three selected cases in more detail to illustrate the differences that companies have in forming their category structures on two hierarchy levels. Three company examples of purchasing category formation 2 Case company 1: recently started category work Case company 1 is a company that had recently started category work with a goal to cover the whole purchasing spend. The company had started to use purchasing categories systematically about 1,5 years prior to our data collection. Earlier, a few main raw materials had been treated as commodity groups, and there had been some ad hoc formation of commodity groups on a project basis. The company did not have a hierarchical category structure. For the last 1,5 years, the company had been running, supported by consultants, a systematic program to cover the whole purchasing spend by categories. At the time of the data collection, there were 60 categories, being managed by 35 category managers. In four-month cycles, 5-8 new categories were formed. The main criterion for forming new categories was the possibility to pool corporate-wide purchase volumes and to gain better purchase prices with higher volumes. Company 1 used the following definition of its purchase categories: A purchasing category can be global, regional or local. Category consists of one raw material or a family of raw materials, having synergy between them. Category is a defined purchase area, over which a category manager has responsibility. A category has its own category team, which is responsible for developing the category and sourcing for it. 1 For the general characteristics of purchasing category management in the seven companies studied see Appendix 1. 2 Characteristics of the three selected case companies are described in Appendix 2. 9

In its purchasing category formation, company 1 aimed at centralizing purchasing. Also, they wanted to make PSM more professional, to benefit from synergies, cover 90% of the whole purchase spend systematically in order to gain purchasing power and to manage key suppliers through one single category team. They considered their main challenges as finding competent people with PSM expertise, knowledge of the total-cost-of-ownership concept and service attitude. Case company 2: emphasizing reduction of total-cost-of-ownership Case company 2 had used purchasing categories for a long time in its main raw materials. In the other purchased materials categories had been used for about five years. The number of categories on the highest hierarchy level was three, consisting of raw materials, additives and auxiliary materials for production and services. The second hierarchy level consisted of 20 different categories. The company was systematically forming some new categories every year. All new categories were not meant to be forever, but they were considered as projects to search for cost savings in an area of purchase items where a considerable savings potential existed. Company 2 used the following definition of its purchasing categories: A purchasing category means a group of purchasing items in which the whole purchasing volume of the company can be combined and in which new solutions with lower total cost of ownership can be identified together with internal customers in the company. In its purchasing category formation, company 2 strongly emphasized search for total cost savings. During the last five years, the company had carried out a comprehensive analysis to cover its whole purchasing spend. The main results of this spend analysis can be summarized into the following three issues: savings potential, purchase items sharing same suppliers, purchase items being used in several business units, and new solutions to achieve lower total cost of ownership. In forming new purchasing categories the most important factors were: savings potential through combining purchase volumes over the whole company, and improvement of control over suppliers for the category. In company 2, the purchase category term was reserved only for categories taken care of by the centralized corporate purchasing. Forming new categories depended to a large extent of the availability of appropriately capable PSM resources, in this company this was considered as the most important constraint for effective PSM. The most important performance measure for PSM in company 2 on the corporate level was achieved cost savings. In addition they used delivery performance and product quality to measure the operational PSM performance. Case company 3: main categories formed according to the company s business requirements Case company 3 was in a stable situation with its purchasing categories. They emphasized the connection between purchase categories and the way the company competes in its business. The company has had certain materials organized according to commodity groups for several decades. Systematic work to cover a large share of total spend by purchasing categories started three years ago. The company had not made changes to the categories formed three years ago and it did not use a formal process to form new categories. New categories can be considered if there would be 10

particular reasons for that. The number of categories on the highest level of category hierarchy was 20. The second hierarchy level consisted of 150-200 categories. Company 3 defined category as follows: A group of products or services that forms an approachable entity on the global business level. In its purchasing category formation, company 3 emphasized the connection between how the company conducts its business and how this is reflected in its category formation. Top on the list of factors considered when categories were formed were the following: division into products and services together with the division into direct, indirect and investment sourcing. Next became product structure, followed by monetary value, business organization structure of the firm and the structure of the supply chain, meaning the availability of competent suppliers. In order to achieve the connection between category structure and competing in its market, company 3 used a matrix organization structure consisting of main categories, geographic regions, countries and operational sites. Each of the categories had a category manager, but no other full-time personnel. Category manager s task was to balance the strategic sourcing issues in the category and the day-to-day purchasing. As their resources, the category managers used the PSM organizations of the geographic regions. These resources consisted of both the supply management resources responsible for the daily purchasing and call-off activities, as well as the resources from the market interface knowing the market requirements. Discussion of the findings In our research we were addressing the following two research questions: 1. How do companies form their purchasing categories? 2. How is the formation of purchasing category management related to organizing the PSM function within the firms? We will next discuss our observations from the case studies and relating them to the PSM literature that we reviewed for our research. We will also attempt to give some answers to the research questions and give suggestions for further research. The approaches to form purchasing categories in the three selected case companies are compared in figure 1. The approaches are clearly different in many respects. Company 1 has only one hierarchy level in its categories. It is also systematically and consistently growing the number of its categories. The immediate targets are in achieving cost savings through pooling of similar items. It is obvious that sooner or later there will be a requirement to form larger main categories in company 1. Company 2 is a raw materials producer with a limited number of categories on both first and second level. On the main category level the category structure reflects the traditional division of purchasing items into direct and indirect sourcing. Within such broad categories the usefulness of pooling similar items cannot be the reason for forming the category. For company 3, their category definition emphasizes relationship between categories and the company s global way of doing business. 11

Figure 1 Three selected case companies compared Number of categories on the highest hierarchy level Number of categories on the second highest category level How long have categories been used? Definition of a category Examples of main categories Company 1 Company 2 Company 3 60 3 20 0 20 150-200 Systematically less than 2 years, earlier 1-2 main raw materials as categories A purchasing category can be global, regional or local. Category consists of one raw material or a family of raw materials, having synergy between them. Category is a defined purchase area, over which a category manager has responsibility. A category has its own category team, which is responsible for developing the category and sourcing for it. Raw materials, energy, IT and related services, many others About 5 years, raw materials much longer A purchasing category means a group of purchasing items in which the whole purchasing volume of the company can be combined and in which new solutions with lower total cost of ownership can be identified together with internal customers in the company. Raw materials, production related auxiliary materials, services Systematically 3 years, some of the main categories much longer A group of products or services that forms an approachable entity on the global business level. Machinery, mechanics, electrical equipment, R&D services, spare parts etc. Conclusions from the three selected cases are supported by observations in the other cases studied. Company 7 has similarities to both companies 1 and 2. They have followed the same route than company 1 by first forming about 100 categories. Thereafter, in order to rationalize the management of their purchasing organization, company 7 formed a higher level of categories and grouped the about 100 categories into larger entities following a similar logic than company 3 in forming three main categories. These companies state that they are forming categories according to business logic and requirements. Companies 5 and 6 are comparable to company 3 in having some hundreds of subcategories and forming main categories (6 and 14, respectively) according to the business logic of the companies. Based on our findings it seems that purchasing category management is commonly practiced in industrial firms but not yet covered to a great extent in the research literature. There are only a 12

few research articles available using the term category management in purchasing. There are studies available of several related subjects, e.g. pooling of purchase items (Goold and Campbell 2000; Faes et. al. 2000; Smart and Dudas 2007), commodity teams (Cavinato 1992; Trent 2004; Englyst et. al. 2008), cross-functional teams (Trent 1996; Trent 1998) and common requirements across buying units (Trent and Monczka 2003). However, many of these earlier research papers have a strong emphasis on the search for similarities between the purchase items, bundling them and centralizing the purchasing of these bundled items. According to our findings this is important and very relevant for many companies. In our sample of seven cases, for example, companies 1, 2 and 7 have a strong focus on this pooling logic. In all three cases presented in this article, category managers are managing cross-functional teams consisting of local (plant) personnel, r&d personnel and persons responsible for quality issues. The main responsibilities of category managers are to create category strategies, category development, communication, and contracting. Category managers have a service role towards business divisions. Our findings are supported in literature, where is stated that coordinated organizational structures with team arrangements are becoming more common (Arnold, 1999, Van Weele, 2005). Organizational issues affect the forming of categories in multiple ways. For example availability of capable persons (category managers) affect and may even limit forming of categories. For example, company 1 mentioned that finding competent people is a main challenge in PSM. One notion is that some companies have an active intention towards a PSM organization, where the differentiation between operative and strategic tasks and centralized and decentralized roles are not emphasized. This was observed in companies 1 and 3. For example, in hiring new employees company 3 focused on finding persons with multiple capabilities for both strategic and operational natures of the PSM tasks. According to our findings the goal in forming categories and category hierarchies in companies is to create manageable entities. What this means, though, seems to be different in different companies. In literature, for example, Fearon (1988), Giunipero and Monczka (1997) and Arnold (1999) have addressed the centralization decentralization issue of a PSM organization. What is lacking in many articles is the understanding of the multi-layered hierarchical structure of purchasing categories. We feel that a clear distinction should be made in the approach of forming categories on the different levels of a company s category hierarchy. The challenges are primarily in understanding the logic of forming the main categories of the company to match with its global business approach. Also, the relationship between main categories and subcategories under each main category would be worth further scrutiny. Among the few articles that have directly addressed the purchasing category management challenges are Monczka and Markham (2007) and Trautmann et. al. (forthcoming). In their article directed primarily to practitioners, Monczka and Markham are talking about forwardlooking category strategies, looking beyond products and services and having a longer timehorizon than fulfilling the immediate needs of purchasing. Trautmann et. al. are addressing category management on the level of global companies main categories from the point of view of differences in the integration mechanisms according to the category characteristics. We observed that some of our case companies were taking their category formation efforts to these directions. 13

We feel that there are several issues in our findings that give reason for further research of forming and managing purchasing categories in globalizing industrial firms. In addition to bundling and search for cost efficiency, there is a need for better understanding of the multidimensional nature of forming a global PSM organization. In particular, we suggest the following areas for further research: What is the role of the main purchasing categories in the firms and what are the mechanisms of integrating the business organization and the main purchasing categories? What is the logic of combining subcategories to the main categories? What is the role of portfolio models in forming and managing categories? At what level of the category hierarchy are they useful as tools for forming categories and at what level are they used to manage the categories? Summary and conclusion Purchasing category management is a key practice in international industrial firms to organize PSM function. Forming groups of purchase items to gain volumes and negotiation power is nothing new; it has been practiced in the most important direct supply materials for a long time. Therefore, the established term to call this practice is commodity management. A more recent phenomenon is that companies are systematically analyzing all of their costs spent on purchasing and forming purchasing categories covering the whole purchasing spend. This purchasing category management includes many new types of activities for purchasing and supply management, not just standardized commodities. In order to understand how companies are forming and managing their purchasing categories, we carried out research to study the company practices in purchasing category formation and management. We analyzed the purchasing category management in seven manufacturing firms in several industries. All of the analyzed companies were using purchasing category management as an important part of organizing their PSM. Our conclusion from our observations was that companies are using purchasing category management with the aim of to meeting the requirements of the globalizing business environment. However, there is still not much prescriptive research knowledge available to guide companies in forming and managing purchasing categories, acknowledging the multi-layered hierarchical structure of categories. Our study was a start to look at the challenges existing in this area of PSM. We believe that this is an area that would benefit from further research of the choices made in companies in different business situations, and the resulting performance benefits. References Arnold, U., 1999. Organization of global sourcing: ways towards an optimal degree of centralization. European Journal of Purchasing & Supply Management 5 (3-4), 167-174. Cavinato, J.L., 1992. Evolving procurement organizations: logistics implications. Journal of Business Logistics 13 (1), 27-45. 14

Davis, H.L., Eppen, G.D., Mattsson, L.G., 1974. Critical factors in worldwide purchasing. Harvard Business Review 52 (6), 81-90. Englyst, L., Jørgensen, F., Johansen, J., Mikkelsen, O.S., 2008. Commodity team motivation and performance. Journal of Purchasing and Supply Management 14 (1), 15-27. Faes, W., Matthyssens, P., Vandenbempt, K., 2000. The pursuit of global purchasing synergy. Industrial Marketing Management 29 (6), 539-553. Fearon, H.E., 1988. Organizational relationships in purchasing. Journal of Purchasing & Materials Management 24 (4), 2-12. Gadde, L.E., Håkanson, H., 1994. The changing role of purchasing: reconsidering three strategic issues. European Journal of Purchasing and Supply Management 1 (1), 27-35. Gelderman, C.J., 2003. A portfolio approach to the development of differentiated purchasing strategies, Eindhoven, Technische Universiteit Eindhoven, doctoral thesis. Giunipero, L.C., Monczka, R.M., 1997. Organizational approaches to managing global sourcing. International Journal of Physical Distribution & Logistics Management. 27 (5/6), 321-336. Goold, M., Campbell, A., 2000. Taking stock of synergy: a framework for assessing linkages between businesses. Long Range Planning 33 (1), 72-96. Kraljic, P., 1983. Purchasing must become supply management. Harvard Business Review 61 (5), 109-118. Monczka, R.M., Markham, W.J., 2007. Category strategies and supplier management. Supply Chain Management Review 11 (6), 24-30. Quintens, L., Pauwels, P., Matthyssens, P., 2006. Global purchasing: state of the art and research directions. Journal of Purchasing and Supply Management 12, 170-181. Rozemeijer, F.A., 2000. How to manage corporate purchasing synergy in a decentralized company? Towards design rules for managing and organizing purchasing synergy in decentralized companies. European Journal of Purchasing and Supply Management 6 (1), 5-12. Rozemeijer F.A., Van Weele A., Weggeman M., 2003. Creating corporate advantage through purchasing: toward a contingency model. Journal of Supply Chain Management. 39 (1), 4-13. Smart, A., Dudas, A., 2007. Developing a decision-making framework for implementing purchasing synergy: a case study. International Journal of Physical Distribution & Logistics Management. 37 (1), 64-89. Stake, R.E., 1995, The art of case study research. Sage Publications. Stuart, I., McCutcheon, D., Handfield, R., McLachlin, R., Samson, D., 2002. Effective case research in operations management: a process perspective. Journal of Operations Management, 20, 419-433. Trautmann, G., Turkulainen, V., Hartmann, E. and Bals, L., forthcoming 2009. Integration in the Global Sourcing Organization An Information Processing Perspective. Journal of Supply Chain Management. Trent, R.J., 2004. The use of organizational design features in purchasing and supply management. Journal of Supply Chain Management 3, 4-18. Trent, R.J., 1998. Individual and collective team effort: a vital part of sourcing team success. International Journal of Purchasing and Materials Management. 34 (4), 46-54. Trent, R.J., 1996. Understanding and evaluating cross-functional sourcing team leadership. International Journal of Purchasing and Materials Management 32 (4), 29-36. Trent, R.J., Monczka, R.M., 2003. Understanding integrated global sourcing. International Journal of Physical Distribution & Logistics Management 33 (3), 607-629. Van Weele, A.J., 2005. Purchasing and Supply Chain Management, 4 th ed. Thomson Learning, London. 15

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Appendix 1: General characteristics of purchasing category management in the seven companies studied. Company 1 Company 2 Company 3 Company 4 Company 5 Company 6 Company 7 Use of purchasing categories A process to form new categories Hierarchical structure of categories Nr of categories on the highest level Nr of categories on the 2 nd level How long have categories been used Yes Yes Yes Yes Yes Yes Yes Yes Yes No Being developed Being developed No Yes Yes Yes Yes Yes Yes 60 3 About 20 About 15 6 14 3 0 About 20 150-200 Several in some of the main categories Systematically less than 2 year, earlier 1-2 main raw materials About 5 years, raw materials much longer Systematically 3 years, some of the main categories much longer Systematically 3-4 years, in indirect for longer No Yes Over 200 Hundreds About 100 Systematically just started, in some categories since early 1990s Since 1984 Three years 17

Appendix 2: Characteristics of the three selected case companies Case company 1 Case company 2 Case company 3 Type of industry Process industry Process industry Engineering and services Annual growth over 3 4% Over 10% Over 10% years Value chain position Raw material producer Raw material producer Installed equipment and Number of direct customers life-cycle services A few thousands A few thousands About 100000 customers in the installed base Most important markets Not available EU and other European countries Europe, Asia, North America Position in own industry Not available Second largest Among three leading companies Typical customer lead time Less than 24 hours or 1-7 days 1-4 weeks New equipment 1-6 months Length of product life From 1 to over 5 years 1-5 years Over 5 years cycle Main production principle Make-to-stock Make-to-order / engineer-to-order Make-to-order / engineer-to-order Main process type Batch production Continuous process Repetitive line production Product standardization / customization Majority of the products standard, some 90% standard / the rest with some Products customized to order specifications Number of suppliers in direct purchasing Number of suppliers in indirect purchasing Share of global suppliers direct / indirect Share of all purchased items of the total sales Share of direct purchasing of all purchasing Most important direct materials Most important indirect purchasing customization standardization Over 5000 800 1500 Over 10000 3000 30000 5% / less than 1% 80% / 30% 15% / 10% 71% 65% 43% About 75% 90% 56% Raw materials for production, energy Information technology, travel, facilities, capital investments Raw materials for production, transportation services Information technology, professional services, maintenance services Machinery, mechanics, electronics Spare parts, product development services, installation services 18