Category Strategy & Spend Categorization: The Foundation of Strategic Procurement

Why spend categorization is the starting point for everything

A category strategy is often oversimplified as a document that answers the 5 W's — Who are we buying from, What are we buying, Where is it sourced, When do contracts renew, and Why do we buy it this way — plus the How of procurement execution. That framing is useful shorthand, but a robust category strategy goes much deeper.

At its core, a category strategy is the critical guide that directs a Category Manager in applying different procurement levers and tactics to generate value in an assigned spend area. It turns raw spend data into a prioritized action plan — and spend categorization is the first, non-negotiable step.

The reason is simple: you can't apply the right strategy to spend you don't understand. Before you segment suppliers, before you run a Kraljic Matrix, before you identify sourcing levers — you need a clear, granular picture of what you're spending, with whom, and where.

The high-level view: total spend by category

The first waterfall chart in any category strategy presentation shows total addressable spend broken down by major category. This is the 30,000-foot view — the chart that tells leadership where the money goes before anyone dives into the details.

A typical enterprise might categorize spend into buckets like Raw Materials, IT Services, Logistics, Professional Services, and MRO Supplies. Presented as a waterfall, each bar builds on the previous one, stacking from the largest category to the smallest and landing on a total addressable spend figure on the right.

This high-level waterfall is the starting point — the chart that opens the conversation. But the real analytical power comes from drilling down. Each of those bars represents an entire category with its own sub-categories, supplier dynamics, and sourcing strategies. The waterfall gives you the map; the category strategy gives you the turn-by-turn directions.

Drilling down: sub-category waterfalls

Once you've established the high-level view, the next step is breaking each major category into its sub-categories. This is where the real insights live — and where a second waterfall chart becomes essential.

Take MRO Supplies as an example. At the top level, MRO shows up as a single $37M bar. But within that category, you might have General MRO, PPE (Personal Protective Equipment), Transmissions & Motors (T&M), Pipe Valve Fittings (PVF), Fasteners, Power Tools, and several others. Each sub-category has different suppliers, different market dynamics, and different sourcing levers.

This drill-down waterfall immediately reveals that General MRO and PPE together account for nearly half of all MRO spend. That insight changes the sourcing strategy: instead of treating MRO as a monolithic category, you now know exactly which sub-categories to prioritize for competitive bidding, catalog consolidation, or demand management.

The pattern repeats for every major category. IT Services breaks into Cloud Infrastructure, Software Licenses, Managed Services, and Staff Augmentation. Logistics breaks into Freight, Warehousing, Last-Mile, and Customs. Each sub-category waterfall surfaces the Pareto insights that drive strategic action.

From spend data to category strategy: the 6 key elements

Spend categorization is the foundation — but it's just element one of a complete category strategy. A truly robust strategy includes six key elements that build on each other. Each element makes the next more powerful, and together they transform a Category Manager from a reactive buyer into a strategic value creator.

1. Internal Needs Assessment

Before touching the data, start by setting the baseline for the category. This means building a foundational understanding of sub-categories, major suppliers, key requirements and stakeholders, internal controls and policies currently in place, and a brief category history — including both the challenges and successes it's had.

This element is especially valuable when reviewing your category strategy with someone unfamiliar with the category and its scope. A VP of Operations who hasn't been involved in MRO procurement needs context before they can evaluate your strategy. The internal needs assessment provides that context in a structured way.

Key questions to answer: Who are the internal stakeholders? What are their top priorities and pain points? What policies govern purchasing in this category? What's been tried before, and what worked?

2. Spend Analysis

The foundation of any category strategy depends upon a solid understanding of historical — and ideally forecasted — spend. Without accurate and granular detail, it's hard to imagine how you can formulate any worthwhile strategy that you can feel confident in. If you did nothing else in developing a category strategy, at least conduct a thorough spend analysis before making any type of recommendations to stakeholders or leadership.

There are a million different ways to slice and dice your data, but at the bare minimum you should break your spend down by:

• Sub-category — as shown in the MRO waterfall above
• Supplier — who gets the largest share of spend
• Location — which sites or regions drive the most volume
• Business group / facility — which P&L owners control the demand

Data visualization deserves special mention here — it's a skill in itself. How do you take raw spend data and transform it into an eye-opening story that opens the door to powerful business insights? Tools like Tableau can help, but you can never go wrong with Excel or PowerPoint. The Pareto chart (80/20 analysis) is a classic go-to format, and waterfall charts are equally powerful for showing how sub-categories stack up to the total.

The waterfall chart is particularly effective for spend analysis because it does two things simultaneously: it shows the magnitude of each component and it shows how they build to the total. A Pareto shows ranking; a waterfall shows accumulation. Use both.

3. Supply Market Analysis

Understanding the supply market is key to developing a robust strategy. You can begin by gathering market intelligence and benchmarking information from a variety of sources — Beroe Live is a decent free starting point for commodity and services market data.

Two commonly used market analysis frameworks:

• Porter's 5 Forces — analyzes the competitive intensity of a market: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitutes, and competitive rivalry. This model is particularly useful when entering a specific sourcing event or negotiation, as it helps analyze the level of competition at a specific point in time.
• Structure, Conduct, Performance (SCP) — examines the market structure (number of suppliers, barriers to entry, product differentiation), the conduct of market participants (pricing behavior, innovation, competitive tactics), and the resulting market performance (profitability, efficiency, technological progress). The SCP framework tends to be more useful as part of the ongoing category strategy development process because it provides a more structural view of market dynamics.

The output of this analysis directly informs which procurement levers will actually work. Trying to "leverage competition among suppliers" in a market with only two viable suppliers is a losing strategy. The supply market analysis tells you that before you waste time on the wrong approach.

4. Category Segmentation

Segmentation modeling sets you up to effectively apply the appropriate strategies for the goods and services you're sourcing — and it helps prioritize where you spend your time and with whom.

The Kraljic Matrix, developed by Peter Kraljic, is the gold-standard segmentation model. It evaluates two factors:

1. Overall importance of the good or service — commonly based on total spend, profitability impact, or value-add to the company
2. Market complexity or supply risk — number of qualified suppliers, switching costs, and vulnerability to disruption

These factors are evaluated on a Low-to-High scale across a 2×2 matrix, creating four quadrants:

• Strategic Items (High Value + High Supply Risk) — long-term partnerships, joint development, supply chain risk management
• Leverage Items (High Value + Low Supply Risk) — competitive bidding, volume consolidation, aggressive negotiation
• Bottleneck Items (Low Value + High Supply Risk) — supply assurance, alternative development, inventory buffers
• Non-Critical Items (Low Value + Low Supply Risk) — process efficiency, automation, catalog buying, P-card programs

This same framework can be used to segment your suppliers — and this is an important point: your counterpart on the other side of the table has most likely engaged in a similar segmentation process to evaluate their strategies for their customers. Do you know where you fall in their model? Does your supplier segmentation align with how your supplier views you as a customer? That alignment — or misalignment — fundamentally shapes negotiation dynamics.

5. Strategy Formulation

All the fact-based analysis conducted to this point should allow you to articulate 2-3 high-level strategies that will guide all procurement activity in the category. The analysis isn't an end in itself — it exists to inform strategy.

For anyone engaged in Category Management, The Purchasing Chessboard is an outstanding resource for stimulating thinking around category strategy, procurement levers, and tactics. It organizes 64 procurement approaches across four general strategies based on supply power and demand power dynamics.

Your strategy should also include measurable goals and KPIs. For example, if your strategy is to "Leverage Competition Among Suppliers," a corresponding KPI might be: "Achieve 15% year-over-year cost savings in PVF for the next three years." Without KPIs, the strategy is just a statement of intent.

6. Category Plan

Now that you have an amazing strategy with ambitious goals — where the rubber meets the road is developing a concrete list of initiatives, projects, and tactics that will deliver the results. The Category Plan should include:

• Initiative name — clear, specific, and actionable
• Description — the tactic or approach to be used
• Strategy alignment — which of the 2-3 high-level strategies this initiative supports
• Value — expected savings or value creation in dollars
• Timing — when implementation starts and when value is realized

A Project Prioritization Matrix is useful here — plotting each initiative on a grid of Business Value vs. Ease of Implementation. Even if you don't formally develop scoring criteria, it's critical to think through both dimensions: a $2M savings initiative that takes 3 weeks to implement should be prioritized over a $3M initiative that requires 18 months of system changes and executive sponsorship.

This is also where the waterfall chart comes back into play. A savings waterfall that starts with current category spend and subtracts each initiative's projected savings — arriving at a target spend — is the most compelling way to present the Category Plan to leadership. It connects the analytical work (elements 1-5) to the financial impact (element 6) in a single visual.

Why the waterfall chart is the Category Manager's best friend

Throughout the category strategy process, waterfall charts appear at multiple levels:

• Level 1: Total spend by category — the executive overview that sets the context
• Level 2: Sub-category breakdown — the drill-down that reveals where the real opportunities are
• Level 3: Spend by supplier within a sub-category — the Pareto view that identifies consolidation targets
• Level 4: Savings initiative waterfall — the action plan that shows how much value each initiative will deliver

Each level uses the same visual language — bars building up or breaking down a total — which makes the entire category strategy feel coherent. The audience can follow the logic from the $365M total addressable spend all the way down to specific initiatives that will save $2.1M in Fasteners through supplier consolidation.

This consistency matters because category strategies are living documents. They get reviewed quarterly, updated annually, and presented to audiences ranging from the CPO to plant-level buyers. A visual format that works at every level of detail is invaluable.

Putting it all together

A category strategy is much more than a document that answers the 5 W's. It becomes the critical guide that directs a Category Manager in applying procurement strategies, levers, and tactics to generate value for the organization they represent. By including all six elements — Internal Needs Assessment, Spend Analysis, Supply Market Analysis, Category Segmentation, Strategy Formulation, and Category Plan — you build a strategy that is both analytically rigorous and practically executable.

And it all starts with spend categorization. Get the foundation right — understand where the money goes, at both the category and sub-category level — and every subsequent element of the strategy becomes sharper, more targeted, and more impactful.

Build your spend categorization waterfall

Use the Spend Categorization template in Waterfall Maker to create presentation-ready spend waterfalls at any level of detail — from total addressable spend down to sub-category breakdowns. Enter your numbers, write an action title that states the insight, and download as a fully editable PowerPoint slide. Every bar is a real shape; every label is real text. Ready for your next steering committee, category review, or strategy presentation.