Category management is a process most corporates work towards, the main aim for the same is cutting costs and saving money. Some companies do it better than others. The idea is to club similar items of spend together, the larger the supplier contracts the lower the unit prices. Companies usually split their spending into two categories; direct and indirect. The direct ones are the purchases that are sold by the company itself and the indirect ones which are mostly fixed costs involved in the business.
A majority of companies concentrate on the direct, more visible side of spending, where they try to reduce costs efficiently and indicatively. There is a huge scope of savings that are overlooked in the indirect fixed costs. Fixing the supplier rationalization is one such way to achieve results. Pareto principle which was discovered when scientist Vilfredo Pareto pointed that 80% of Italian land was owned by 20% of the people, is an ideal for supply chain management. The principle in simple terms means that reducing the number of suppliers can result in lowered unit-price and lesser management hassles.
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