Supposing you have a menu with 4 categories as below screenshot shown. Now you can apply the Dynamic Drop-down List feature to create a 2-level drop-down list in horizontal direction as follows:

1. Click Kutools > Drop-down List > Dynamic Drop-down List to enable this feature.

2. In the Dependent Drop-down List dialog, please configure as follows:

Tips: In the Output Range box, please select two columns to output the dynamic drop-down.

Now you have created a 2-level drop-down list in the horizontal direction. See screenshot:

You can also create a 2-level drop-down lists in the vertical direction easily with the Dynamic Drop-down List feature in Excel.

1. Click Kutools > Drop-down List > Dynamic Drop-down List to enable this feature.

2. In the Dependent Drop-down List dialog, please configure as follows:
(1) Check the ModeA: 2 Levels dependent Drop-down list option in the Mode section;
(2) In the Data Range box, select the source data you used for the dependent drop-down list;
(3) Specify the destination range in the Output Range box;
(4) Click the OK btoon.

Tips:
(1) In the Output Range box, please select two rows to output the dynamic drop-down.
(2) Do not tick the Dynamic drop-down list horizontally option.

Now you have created a 2-level drop-down list in the vertical direction. See screenshot:

For example, I have a table with continents, countries, and cities as below screenshot shown. And I will use the Dynamic Drop-down List feature to create a 3-level drop-down list in Excel.

1. Click Kutools > Drop-down List > Dynamic Drop-down List to enable this feature.

2. In the Dependent Drop-down List dialog, please configure as follows:
(1) Check the ModeB: 2-5 Levels dependent Drop-down list option in the Mode section;
(2) In the Data Range box, select the source data you used for the dependent drop-down list;
(3) Specify the destination range in the Output Range box;
(4) Click the OK button.

Notes:

1) If your data contains headers, please check the My data has headers option.

2) In the Output Range box, you must select a number of columns equal to the number of columns of the source data. Otherwise, it will pop up a prompt box as following screenshot shown after clicking the Ok button in the Dependent Drop-down List dialog.

3) By default, the values in the created dynamic drop-down list are sorted by the original order of the source data. If you want to sort values alphabetically, click the Advanced settings button in the lower left corner of the dialog, and then select Sort alphabetically from the menu.

You can see the result as the following screenshot shown.

4) There is also an option in the Advanced Settings menu "Format all cells as text". If you encounter the following two error alerts when creating dynamic drop-down list. Here it is recommended that you enable this option.

Error alert 1		Error alert 2

5) If dynamic drop-down list already exists in the output range, the following dialog box will pop up, asking if you want to override it.

So far, I have created a 3-level drop-down list. See screenshot:

Tips: If your data contains 4 (or 5) columns, this feature will create a 4 (or 5) levels drop-down list accordingly.

1. In the Dependent Drop-down List dialog, you can click the Example button to open the example sheet. However, this operation will close the current dialog.

2. You can apply the Clear Data Validation Restrictions feature of Kutools for Excel to clear the data validation of drop-down lists from selections.