External analysis helps connect business requirements to the supplier base in developing a strategic approach to category management. It builds on preparation and internal analysis as the foundation for excellent category management outcomes. 

External analysis is a critical step in the 7 stages to business-aligned strategies that organizations should follow to develop or update their category management strategy.  This series of posts summarizes the critical information from a recent CAPS whitepaper, A Playbook for Category Management.

7 stages of category management

1. Preparation
2. Internal Analysis 
3. External Analysis
4. Category Strategy Development
5. Negotiation and Contracting
6. Supplier Relationship Management
7. Category Performance Management

We’re exploring each stage to emphasize the process of building a category management program. Let’s move on to stage 3.

Focus on external analysis for category management

Like the internal analysis, the external analysis stage requires detective and analytical skills to identify the current environment, threats, and opportunities for the organization's procurement playbook.

Your external analysis efforts should provide information about the market, suppliers, and competitors. The data will also provide insight into the potential cost of a good or service as well as category-related and supplier-related risks.

External analysis examines the current supply base characteristics, marketplace dynamics, legal and regulatory impacts, and supplier market analysis.

External analysis targets

Supply base: Identify major and minor suppliers and their corporate relationships, financial indicators of health, and significant competition. Delve into compliance with environmental and ethical sourcing regulations and the risk of non-compliance impacting your supply chain.

Market dynamics: Look at recent M&A activity, emerging entrants, disruptive trends, and the long-term forecast for the category. Use models such as Porter's Five Forces, SWOT Analysis, and PESTLE Analysis, along with consultation with stakeholders and vendors through RFIs and informal information gathering, to develop the final analysis.

Market pricing & cost: Examine suppliers' market share, pricing indexes in the category, and vendor use by industry and geography.

Value chain analysis: Identify the activities that go into creating value for the customer. The results help identify opportunities for cost savings and increased efficiency.

Risk assessment: Identifies situations that could impact the availability of products and services and potential avenues to mitigating those risks. This exercise can create a fear of the unknown, but the solutions are basic: accept, avoid, transfer, or mitigate those risks.

You can accomplish much of this research through public filings, online news sources, industry reports, trade consultants, and other supplier and market information sources. Organizations should compare and contrast information from various sources before relying on it to support decision-making.

The analysis may reveal how many vendors the company actually engages for similar services and products, and the relative strengths and weaknesses of the leading companies. The market research can uncover at-risk areas in the supply chain, such as disruption in raw materials sourcing or transportation bottlenecks.

You may realize your organization is a "small fish" in specific categories and may not have the leverage to negotiate quantity pricing.

With the foundation from the Preparation and Internal and External analysis stages, it's time to move to stage 4, Category Strategy Development. This step is the heart of an organization's category management approach to develop supply management and supplier relationship strategies.

From the CAPS Research whitepaper, A Playbook for Category Management, CAPS Research, November 2020. 

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