Category Management is a term familiar to food, drug and mass market retailers and suppliers. It’s been evolving for the past 25 years in that industry, but it’s virtually unknown in the consumer electronics and technology space. With the high level of customer and transaction data available to sophisticated retailers and suppliers in consumer and technology products, and the current demands Wal-Mart is placing on suppliers in all category, Category Management is ripe for our industry. Those who jump in early will reap long term benefits. Those who wait can be left in the competitive dust. The purpose of this white paper synopsis is to introduce the principals of category management and provide a basis for considering your category management options. While at HP I pioneered category management for our consumer business, and developed the retail relationships, infrastructure, skills and processes that propelled HP into the leadership position not only in the printer and printing supplies categories, but established HP as the leader in category management for the entire industry.
What is category management?
Category Management is a method of aligning product assortment and inventory levels of those products it the stores, to the customer preferences and demand in the local markets.
The latter is achieved by monitoring inventory levels, stock outs and replenishment cycles and adjusting the inventory quantity in store to ‘optimize’ the inventory levels. Too much inventory and you produce a low return on the inventory investment. Too little inventory and you may be experiencing stock outs, potential shopper dissatisfaction and lost sales. The former is the ability to align the proper assortment in the stores to the buying preferences of the local market. This is the art and science of geo-demographics. The goal is to optimize inventory and reduce lost sales by getting the right product to the right stores in the right quantities for the right customers. Some will addd: at the right price with the right message.
Most everyone understands shelf ‘planograms’, but the use of planogramming to optimize inventory levels is underutilized. Most planograms are ‘drawings’ of the shelving with the products placed on the shelf to achieve the right spacing and fit. The planogram is the map for the store ops people to re-set the shelves. The opportunity is to take that one step further to calculate the inventory quantities needed based on very granular historical sales data. The minimum level of granularity needed is sku level sales by store by week. That’s a huge amount of data to manage on an ongoing basis, so data manipulation, data mining and analytics are used. The rewards from establishing the data set and process to accomplish this are astounding.
Assortment planning utilizes statistics about households captured by the US census (geo-demographics) and combine that with research and other syndicated data about the preferences of various classifications of consumers and households to paint a picture of what types and styles of products customers may prefer. When you match those customers to the proximity of stores you can better evaluate whether certain products belong in certain stores. If you have products that customers don’t prefer, you are back to the high inventory problem discussed earlier.
The Category Management Process
Over the past couple of decades the process of managing categories has greatly evolved. Today, category management has many dimensions, any of which, or all together can greatly benefit both retailers and suppliers.
Those processes include
* Category definition
* Role and goal of the category
* Assessing the current strengths and weaknesses of the category
* Establishing metrics by which categories will be managed
* Setting the business strategy for the category
* Defining the tactics from shelf placement through promotions, pricing and advertising
* Category review processes
This industry standard diagram of the entire category management process outlines the sequence and rigor that dedicated and well established category management organizations follow. Not all parts are utilized all of the time, but an understanding of how well managed categories come about is important.
Benefits of Category Management
Once you visualize the combined power of assortment planning and inventory optimization, the benefits of category management start to crystallize.
1. Increase sales through lower stock outs
2. Improve inventory turns through inventory optimization.
Historical gains from category management implementations in food, mass and consumer electronics are anywhere from 5% ROI to over 25% ROI.
In most category management relationships there is a ‘Category Captain’. The role of the captain is to bring the best knowledge of the category being managed with the best analytics skills and processes to manage the ENTIRE category with the retailer. The work conducted by both retailer and supplier makes having multiple category managers on a particular category redundant and inefficient. So a retailer typically assigns a single captain to be their ‘partner’ in managing the category. To effectively manage an entire category and make tradeoffs in space and assortment, the captain needs to use data across ALL suppliers, and make neutral, unbiased decisions about how to achieve the highest possible performance. That awesome responsibility should not be taken lightly by either supplier of retailer. Both parties need to be willing and able to take on that role. Typically the captaincy is assigned to the market leader or number two for the particular category. A high level of category knowledge and customer insight is required to make the best choices, and the market leaders typically possess this information.
Category Management has some specific disciplines that provide the foundation for better product assortment decisions, store placement decisions and how you decide to promote and price your products.
Getting started – Assessing your organization’s ability and willingness to try category management.
Not all organizations should attempt category management. There must be willingness and ability to do category management. Your retail partner must also be willing and able to participate. There are several considerations for getting started in category management:
1. Do you own the #1 or #2 market position in your category?
2. Are your merchants smart about the business of retail, as well as open minded about collaborating with suppliers as opposed to ‘beating them up’?
3. Can your merchandise VP’s understand the possibilities, and can support the merchants?
4. Do you have quality historical sales data, and can this data be sent to the vendors?
5. Is there good availability of quality consumer research?
6. Is there a strong partnership between manufacturer and retailer?
Both sides need to be willing and able to walk down the category management path together, sharing data and insights with an open trust and collaboration.
Put your big toe in first.
To tackle the breadth of category management disciplines and processes from the starting gate if a fool’s journey. When HP started down the path, a single product category was selected, with one or two pilot accounts. The goal was to identify a more optimal shelf set for ink cartridges with the goal of improving the inventory asset utilization at the pilot accounts. That’s all. It wasn’t systematic; it wasn’t even across all suppliers of ink, just HP ink to start. The pilots proved so successful, category captain relationships were established at several accounts across several categories with a couple of short years. We were so successful in one account, they asked HP to manage a category HP didn’t even play in, because the processes and analytics were so good, they wanted that applied to a couple of their troubled categories. We were very flattered, but turned them down none the less.
What we can offer.
Stratus offers consulting in what it takes to establish category management skills and discipline in your organization.
Stratus will use a process to asses your willingness and ability to enter category management.
Stratus will design the processes to get you started, and help identify the right category and potential retail partner to start a pilot.
Stratus can bring the data, analytics and planogramming resources together to perform the category management functions.
Stratus can assess the current skills and identify needed positions to be successful long term in category management.
Stratus can train the organizational leaders and contributors in the art and science of category management from understanding the retail business model, how to define a category, financial training around inventory management and ROI as well as the latest in consumer marketing trends and approaches.
Give us a call….
About Bill Cooper
Bill Cooper has over 25 years experience in consumer electronics in sales, marketing and category management. Bill created and led Category Management at HP and initiated new retail relationships around category management disciplines developed for technology products. Bill is now a Stratus Consultant working in a variety of areas including Channels Strategy, business development and Category Managemen.