L5M6 Category Management Questions and Answers

Supplier 1 → Price Acceptance + Bottleneck

Supplier 1 is the sole supplier of a critical item, and XYZ has confirmed through market research that there are no substitutes available. This places Supplier 1 in the Bottleneck quadrant of the Kraljic Matrix, which is defined by high supply risk but low profit impact (or limited ability to influence price). In bottleneck situations, buyers have limited leverage, making them price takers rather than price setters. That’s why the appropriate cost approach here is Price Acceptance—XYZ must accept the price dictated by the supplier because of the absence of alternatives. Procurement’s role becomes risk mitigation, ensuring continuity of supply rather than focusing on negotiation power. The recommended strategies include maintaining strong supplier relationships, holding safety stock, and monitoring supply risks. Price cannot be influenced significantly, so procurement must accept the terms, reflecting a bottleneck scenario.

(Ref: CIPS L5M6 Study Guide, pp.80–83, 97–100 – Cost ApproachesKraljic Matrix)

Supplier 2 → Cost Down + Leverage

Supplier 2 provides items that, while not purchased in large volumes, have a high impact on profit and carry a low supply risk. These characteristics fit into the Leverage quadrant of the Kraljic Matrix: high profit impact, low risk. In such cases, buyers hold strong bargaining power and can use competition or collaborative cost reduction measures to secure better value. The chosen cost approach here is Cost Down, which involves working with suppliers to systematically reduce costs without reducing value. XYZ’s long-term relationship with Supplier 2, combined with a focus on identifying where costs could be lowered, matches the cost-down philosophy. Examples might include value engineering, supplier process improvements, or volume consolidation. Leverage items are ideal for competitive sourcing, e-auctions, and bulk negotiation. By applying a cost-down approach, XYZ can ensure sustained profitability while keeping supply risk under control.

(Ref: CIPS L5M6 Study Guide, pp.80–81, 97–100 – Cost ManagementLeverage items)

Supplier 3 → Price Management + Non-Critical

Supplier 3 provides indirect goods such as stationery, which have little impact on company profits and are purchased regularly in small quantities. These fit into the Non-Critical quadrant of the Kraljic Matrix, which is characterised by low profit impact and low supply risk. In these cases, procurement’s focus should be on administrative efficiency and price management, rather than extensive strategic negotiations. The chosen cost approach here is Price Management, since XYZ meets with the supplier regularly to discuss pricing and bulk discounts. This approach ensures that, although the spend is low-value, the company avoids unnecessary waste or inflated costs. Tools such as catalogues, e-procurement systems, or framework agreements are commonly used in this quadrant to manage spend efficiently. Price management helps free up procurement resources for more strategic categories while still ensuring best value in non-critical areas.

(Ref: CIPS L5M6 Study Guide, pp.80–82, 97 – Non-critical items and price management)

Supplier 4 → Cost Out + Strategic

Supplier 4 is supplying a one-off capital expenditure item. XYZ has engaged in months of negotiations regarding specifications, and both parties are collaborating to reduce costs before manufacturing begins. This aligns perfectly with the Strategic quadrant of the Kraljic Matrix, where items have high profit impact and high supply risk. Strategic items require strong, long-term partnerships and close supplier collaboration. The appropriate cost approach here is Cost Out, which focuses on eliminating unnecessary costs during the design and specification stages, before production. This proactive approach ensures that efficiency and value are embedded in the product from the outset. Cost-out strategies often involve redesign, engineering collaboration, and innovation to reduce total cost of ownership. In such relationships, trust and partnership are critical, since both buyer and supplier must work together to achieve shared value and risk reduction.

(Ref: CIPS L5M6 Study Guide, pp.80, 97–99 – Strategic items and Cost-Out approach)

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Supplier 1 → Star Category + Profitability Concern

Supplier 1 holds a large market share in a growing market, which places it in the Star category of the BCG Matrix. Stars are typically leaders in expanding markets and require continuous investment to maintain their dominance. The concern here is not competitive weakness but profitability. Although revenue potential is strong, Supplier 1’s costs have increased by 36% due to rising raw material prices. This erodes margins and threatens profitability despite growth. Stars often generate high cash inflows, but if costs spiral out of control, their ability to sustain investment weakens. Profitability management (e.g., through cost reduction, supplier negotiations, or efficiency gains) is critical to ensuring Supplier 1 continues its growth trajectory and avoids slipping into the “Cash Cow” or “Dog” quadrants in the future.

(Ref: CIPS L5M6 Study Guide, p.117 – BCG Matrix application)

Supplier 2 → Question Mark Category + Gearing Concern

Supplier 2 operates in a fast-growing market but has only a small share, making it a Question Mark in the BCG Matrix. Question Marks are high-risk: they may grow into Stars or fail and become Dogs, depending on how they perform and whether investment supports expansion. The major financial concern here is gearing—Supplier 2 has taken out significant loans and a large mortgage, meaning it is heavily leveraged. High gearing increases financial risk, as debt repayments must be met regardless of market conditions. In rapidly growing markets, high gearing can restrict reinvestment and leave firms vulnerable to interest rate fluctuations or downturns. For Trydo, this means Supplier 2 could face difficulties sustaining its growth, posing supply chain risk. Monitoring debt levels and financial stability is essential before committing to long-term contracts.

(Ref: CIPS L5M6 Study Guide, pp.117–118 – Question Marks and financial analysis)

Supplier 3 → Cash Cow Category + Liquidity Concern

Supplier 3 operates in a small, stable market but commands a strong market share. This places it firmly as a Cash Cow—a business that generates consistent revenue without requiring major investment. Cash Cows fund other areas of a portfolio but face limited growth prospects. The concern here is liquidity. An Acid Test reveals that Supplier 3’s current liabilities are four times greater than its assets, suggesting it lacks sufficient short-term liquidity to meet obligations. This imbalance can result in cash flow problems, even if long-term profitability remains sound. For Trydo, the risk is that Supplier 3 may fail to pay debts or manage day-to-day operations, creating supply disruption. Procurement managers must ensure financial health checks are conducted regularly and consider diversification strategies if reliance on Supplier 3 is high.

(Ref: CIPS L5M6 Study Guide, p.117 – Cash Cows and liquidity issues)

Supplier 4 → Dog Category + Efficiency Concern

Supplier 4 operates in a shrinking market and already holds a low market share, placing it in the Dog category of the BCG Matrix. Dogs are generally unattractive, offering little growth and limited returns. The key concern here is efficiency. Supplier 4 is struggling with capital management issues, such as poor stock turnover and prolonged debtor days. These inefficiencies damage competitiveness and further weaken financial stability. For Trydo, relying on Supplier 4 poses significant risk because inefficiency can lead to delays, reduced quality, and increased total cost of ownership. Unless Supplier 4 improves performance, it may eventually exit the market, leaving Trydo vulnerable. In procurement terms, buyers should avoid long-term commitments with such suppliers and instead focus on exit strategies or alternatives.

(Ref: CIPS L5M6 Study Guide, pp.117–118 – Dogs and efficiency management)

The categories most likely to be outsourced are Marketing services and Facilities Management [FM]. These are examples of indirect spend categories where external providers often offer specialist expertise, cost efficiency, and scalability.

CIPS identifies five indirect categories frequently outsourced: Marketing, Facilities Management, IT/Communications, Human Resources, and MRO [Maintenance, Repairs, Operations]. Outsourcing these allows organisations to focus internal resources on core competencies such as manufacturing or R&D.

Raw materials, warehousing, and operations are typically core to production and therefore managed internally or strategically sourced, rather than fully outsourced. While warehousing may sometimes be outsourced [3PL], it is not listed among the primary categories in the study guide.

Outsourcing decisions must balance cost, risk, and strategic importance. For example, outsourcing FM reduces overheads while ensuring professional management of buildings and services, whereas marketing agencies provide creativity and campaign expertise.

[Ref: CIPS L5M6 Study Guide, pp.46–47 – Categories commonly outsourced]

A black swan event is an unexpected and rare occurrence with significant impact. Examples include the 2013 horse meat scandal in the food industry, which was unforeseen and highly disruptive.

Cross-Functional Teams (CFTs) are essential in category management, as they bring together expertise from different areas of the organisation. Their success depends on having a clear, articulated purpose and endorsement from leadership to ensure authority and resource allocation. It is not necessary to have exactly four functions (the guidance suggests three or more), nor for all members to have technical expertise—CFTs should balance technical, procurement, legal, and operational knowledge. Strong leadership support ensures the team’s recommendations are implemented, while a clear purpose ensures alignment and focus. Without these, CFTs risk becoming unfocused discussion groups with limited impact.

The correct score is 25, which is the highest possible risk score on a 1–5 scale. This reflects a major risk with both severity [5] and likelihood [5] rated as high. The risk assessment methodology multiplies these two factors [5 × 5 = 25] to produce a risk rating.

This scoring system enables supply chain managers to rank risks and prioritise mitigation strategies. A risk scored at 25 requires urgent attention, such as developing contingency plans, dual sourcing, increasing safety stock, or renegotiating terms with suppliers.

Lower scores such as 1, 5, or 10 indicate lower overall risk exposure, but in this case, the combination of long geographical distance, reliance on a low-cost country supplier, and criticality of the order elevates the risk to the maximum score.

Risk assessment tools like this are central to category management because they support proactive risk mitigation rather than reactive crisis management.

[Ref: CIPS L5M6 Study Guide, p.56 – Risk assessment scoring and protocols]

This is a bottleneck item. According to the Kraljic Matrix, bottleneck items are characterized by high supply risk and low profit impact, which makes them difficult to source. Holding contingency stock is a recommended strategy for such items.

Total Cost of Ownership [TCO] refers to the full cost of acquiring, operating, and maintaining an item over its entire lifecycle—not just the purchase price. For Steve, the relevant elements are:

Purchase Price [A]: The initial acquisition cost.

Maintenance and Downtime [D]: Costs of repairs, spare parts, and losses during equipment downtime.

Training [E]: Expenses incurred in training staff to use new systems or equipment.

By contrast, Location and Supplier Relationship are important considerations but cannot be quantified as direct financial costs in the same way.

The TCO model is often illustrated as the Cost Iceberg, where the purchase price is only the visible tip, while hidden costs [e.g., energy use, repairs, obsolescence, disposal] represent the bulk. Understanding TCO enables procurement to make more informed decisions, ensuring long-term value rather than focusing narrowly on upfront cost.

[Ref: CIPS L5M6 Study Guide, p.9 – TCO and the Cost Iceberg]

SIC [Standard Industrial Classification] codes are numerical codes used to classify industries. For example, 1000 = mining, 1500 = construction. These codes help in categorising spend, benchmarking, and market analysis but are not intended for memorisation.

[Ref: CIPS L5M6 Study Guide, p.82 – SIC codes]

Peak pricing is another term for dynamic pricing, where the cost of a product or service changes in response to fluctuations in demand and market conditions. A common example is airline ticket pricing, where fares increase during peak travel periods and drop during off-peak times.

Dynamic pricing relies on market data, technology, and sometimes artificial intelligence to adjust prices in real-time. It maximises revenue by capturing higher margins during periods of strong demand while stimulating sales when demand weakens.

Other options are different strategies:

Penetration pricing involves initially low prices to gain market entry.

Limit pricing aims to deter new entrants by setting prices low enough to discourage competition.

Price skimming involves launching at a high price, then gradually lowering it as demand declines.

In category management, understanding pricing models like dynamic pricing helps procurement anticipate supplier pricing strategies and develop negotiation tactics.

[Ref: CIPS L5M6 Study Guide, pp.180–182 – Pricing models and procurement]

In category management, reliable decision-making depends heavily on the analysis of historical spend data. According to CIPS, the key forms of usable historical data include:

Spend analytics: consolidated information showing how much has been spent, on what items, and with which suppliers.

Line item details: transaction-level data that provides specific insight into products or services purchased.

Ledger codes: financial classifications that group expenditure for reporting and control purposes.

These data sets allow category managers to identify trends, supplier dependency, opportunities for consolidation, and potential cost savings. In contrast, inflation rates and spend forecasts are forward-looking metrics, not historical data. Using accurate historical information is critical for preparing budgets, supporting negotiations, and identifying anomalies in expenditure. Organisations that fail to utilise this data often struggle to align their category strategies with financial realities, leading to overspending or missed opportunities.

Pareto Analysis identifies the “vital few” issues that cause the majority of problems, usually presented as the 80/20 rule. While it is useful for prioritisation, its limitation is that it only highlights the frequency of issues and not the root causes behind them. In James’s example, identifying that “website errors” are the top cause of complaints is useful, but it doesn’t explain why the errors occur. Therefore, further investigation such as root cause analysis or process mapping is required to implement corrective action. Another limitation is that Pareto analysis is based on quantitative data only, not qualitative, meaning it cannot capture customer perceptions or subjective insights. This reinforces the need to use Pareto in conjunction with other diagnostic tools for effective problem solving. In practice, category managers must use Pareto as a screening tool to highlight priorities and then follow with more detailed analysis to ensure improvements are sustainable.

Survival of the fittest in supplier management means driving competition by focusing heavily on price reduction, with minimal emphasis on building long-term relationships. This approach treats suppliers as interchangeable, encouraging them to compete aggressively for contracts.

It can yield short-term cost savings but risks damaging supplier collaboration, innovation, and resilience. It is suitable for commodities or non-strategic items where price is the dominant factor.

Other approaches differ:

Trust-based or partnership models balance price with collaboration.

No-cost modelling focuses on process transparency.

Strategic alliances prioritise innovation and value creation.

Category Managers must carefully choose when to apply “survival of the fittest” as it may undermine long-term supplier stability if used indiscriminately.

[Ref: CIPS L5M6 Study Guide, p.160 – Supplier relationship models]

Leverage items [low supply risk, high financial impact] are best suited for e-auctions. Buyers can use competitive bidding to drive down prices when multiple suppliers exist.

By contrast:

Bottleneck items [low value, high supply risk] are not suited as choice is limited.

Strategic items require partnership and collaboration, not price-only competition.

Non-critical items don’t justify the effort of auctions.

[Ref: CIPS L5M6 Study Guide, p.97 – Kraljic Portfolio Matrix]

Inflation is directly linked to the Economic factor within STEEPLED. It affects costs, purchasing power, and business profitability.

[Ref: CIPS L5M6 Study Guide, p.109 – STEEPLED analysis factors]

Price acceptance is the least transparent approach because the buyer simply accepts the supplier’s quoted price without investigating its basis or fairness. There is no visibility into the supplier’s cost structure, margins, or pricing methodology.

By contrast:

Price management involves actively managing pricing discussions.

Cost down involves collaborative efforts to reduce costs after production.

Cost out involves eliminating costs before production through design.

[Ref: CIPS L5M6 Study Guide, p.81 – Costing methods]

These items follow a cyclical demand pattern, meaning that sales fluctuate in predictable cycles—typically aligned with seasons or climate conditions. For example, demand peaks in summer and falls sharply in winter. Recognising cyclical patterns allows procurement professionals to plan supply and inventory effectively, avoiding both shortages during peak demand and excess stock during low demand periods. This type of forecasting is particularly important in industries such as fashion, tourism, and consumer goods. Failing to account for cyclical demand can lead to missed sales opportunities or increased storage costs. In category management, understanding demand cycles ensures efficient resource allocation, supplier scheduling, and financial planning. It also supports collaborative planning with suppliers to ensure capacity aligns with market needs.

A Category Plan is a strategic document that sets out how a category will be managed to deliver organisational objectives. It typically includes:

Supply market analysis to understand supplier dynamics, competition, and risks.

Category objectives, which align with organisational strategy and specify what procurement aims to achieve.

Category risks, which outline potential threats and mitigation strategies.

HR information and a full history of the category are not required, as the plan is forward-looking, focusing on strategy rather than operational details. While historical context may be summarised in an executive overview, it does not form a full section. A well-structured Category Plan supports better decision-making, stakeholder engagement, and ensures consistent management of spend. It provides a roadmap for how value will be captured, risks managed, and supplier relationships developed. Without it, category management risks becoming reactive and fragmented.

Kaizen translates to “continuous improvement” in Japanese. It is a philosophy that encourages making small, incremental changes that collectively lead to significant performance enhancements over time. Within procurement and category management, Kaizen focuses on ongoing collaboration with suppliers to identify ways to reduce waste, improve quality, and optimise processes. Unlike one-off cost-reduction initiatives, Kaizen is embedded in the organisational culture and requires engagement from all levels of the supply chain. For example, small adjustments in packaging design might reduce material use, leading to cost savings and environmental benefits. This approach fosters long-term supplier partnerships and supports innovation. In competitive markets, organisations that adopt Kaizen are more resilient and adaptable, making it a key concept for category managers to understand.

In the automobile industry, the most logical method for structuring categories is by part. Large manufacturing organisations, such as Ford or Toyota, procure thousands of parts and materials from hundreds of suppliers. To manage this complexity effectively, they segment procurement responsibilities into categories such as engines, tyres, glass, electronics, or body frames. This allows Category Managers to develop deep expertise in their assigned areas, improving supplier relationships and value delivery.

Other approaches are less effective:

Alphabetical categorisation is impractical and arbitrary, providing no strategic value.

By spend creates imbalances, as high-value categories would attract disproportionate workload and risk, leaving others underrepresented.

By supplier could lead to inefficiency and over-fragmentation, as suppliers often provide multiple types of products.

The study guide stresses that categorisation must allow procurement teams to be efficient, balanced, and capable of strategic focus. By organising categories by part, managers can align more closely with engineering and production needs, ensuring better cross-functional collaboration.

[Ref: CIPS L5M6 Study Guide, p.3 – Defining categories in Category Management]

The Five Rights of Procurement are fundamental principles ensuring procurement delivers value. They are:

Right product – ensuring goods/services meet requirements.

Right quality – ensuring standards are appropriate.

Right time – goods/services are available when needed.

Right place – ensuring delivery is to the correct location.

Right price – balancing cost efficiency with value.

Options B, C, and D reflect these principles. “Right supplier” and “right relationship” are not part of the traditional five rights, though they are important in broader supplier management. By aligning negotiations with the Five Rights, procurement professionals secure both operational efficiency and strategic value. These principles also provide benchmarks against which procurement performance can be measured.

The three key enablers are People, Tools, and Technology. Each plays a distinct but interconnected role in making category management effective:

People: Skilled category managers and cross-functional teams provide the expertise, negotiation skills, and stakeholder engagement needed for success. Without trained professionals, strategies cannot be executed effectively.

Tools: Analytical frameworks like Kraljic’s Matrix, spend analysis, TCO, and risk assessment tools enable informed decision-making. These provide structure and evidence for procurement strategies.

Technology: Digital platforms such as e-procurement systems, data analytics software, and supplier relationship management [SRM] tools support efficiency, transparency, and scalability.

By contrast, options such as “Place” and “Environment” are not formal enablers within CIPS’s framework. While environmental and cultural context matter, they are not listed as the three foundational enablers.

The study guide emphasises that category management can only be effective when these three enablers work together—skilled people using appropriate tools and supported by the right technology.

[Ref: CIPS L5M6 Study Guide, p.6 – Enablers of Category Management]

A Bill of Materials [BoM] lists the components, raw materials, and parts required to produce a product. These represent direct costs as they directly contribute to the finished item. While labour and overheads may also be direct costs, they are not usually in the BoM.

[Ref: CIPS L5M6 Study Guide, p.83 – Direct vs Indirect Costs]

Forecasts must be dynamic and updated when major internal or external changes occur. Losing a key customer significantly reduces demand, meaning forecasts must be lowered accordingly. Similarly, if a key supplier ceases trading, supply constraints may alter procurement strategies, requiring adjustment to supply and spend forecasts. Likewise, significant price inflation impacts both demand planning and budgeting, as organisations must reassess affordability and potentially seek alternatives. On the other hand, relocating operations or new health and safety legislation may change processes, but they do not directly influence demand, supply, or pricing forecasts. For category managers, regularly reviewing and amending forecasts ensures procurement strategies remain relevant and aligned with market realities. Without this adaptability, organisations risk supply disruptions, overestimation of needs, or financial misalignment.