Procurement classification, the first step into Spend Analysis
Without an appropriate Procurement classification, companies are unable to properly understand third party expenditure, and accuracy is not were it should be to design and execute a state-of-the-art sourcing strategy.
There are applications able to perform spend analysis from invoices, but the necessary accuracy is directly related to the pertinence of the underlying Procurement classification.
On the other hand, using a coding system such as UNSPSC is not advisable due to dealing with multiple versions and the sheer volume of codes being used - nearly 60,000 for UNSPSC.
There is no better classification than the one developed by each company, tailored to its own type of operations and business processes. It should be led by procurement, involving all other stakeholders such as Finance, Operations, Engineering, Manufacturing, Maintenance, Customer services, .…
The best way to conduct this process of elaborating the classification structure and defining product groups or categories is to keep the end goal in mind: Define consistent families of product or services, facing a specific supply market, for which a procurement strategy can be elaborated. Prerequisite is to define Critical attributes for each level of the classification hierarchy.
This task is more difficult than it seems because of the different points of view from stakeholders who work at different levels of aggregation, and the different possibilities of categorization for the same item.
Nevertheless, no matter the pain, it is absolutely necessary to go through the process to save a lot of hidden costs, ensure spend accuracy and build winning category strategies.