Now that we have cleansed data we need to prepare it for the analysis by organizing the data into logical commodity categories. This commodity structure forms the foundation of our spend analysis. A preliminary data analysis can be performed at this stage across different dimensions, such as spend by organizational unit and by supplier.
The categorization structure must be explicit enough to ensure clear spend visibility. Each category must be clearly defined. A good categorization structure has the following features:
– Category titles are unambiguous and mutually exclusive
– Hierarchical structure (i.e. Class and Commodity)
– Products/services appear in one category; categories each have only one parent
– Products/services are grouped according to dominate usage in world market
A commonly used categorization structure is UNSPSC.
UNSPSC, also known as “United Nations Standard Products and Services Code”. That is a globally used classification hierarchy for products and services.
UNSPSC is an open standard taxonomy.
Open standard means:
– There are publicly available specifications
– Those standards and taxonomy are not proprietary (i.e. available to all to implement, no license fees for usage, no restrictions on sharing codes with partners)
– A classification system of products and services bought
– A hierarchical tree structure which enables “drill down” and “roll up” analysis
There are obvious benefits of using UNSPSC:
1. Segments for raw materials, industrial equipment, components and supplies, end-use products, and services are available in over 20,000 categories
2. Collaboration with customers or suppliers through the use of a common classification system
3. “Roll up” and “drill down” analysis better identification opportunities
4. Responsive to the marketplace
Strategic sourcing team has to decide how much detail they would like to drill down in each category at this high level stage of the spend analysis.
So then we classify spend data based on the defined categorization structure. Additional information can be brought into consideration to gain insights into appropriate commodities. This includes researching existing contracts, as well as looking at categorization standards within the relevant commodity industry.
For larger transactions, we may revisit the actual contract documents to better understand line-item purchases. These purchases can then be grouped into logical commodity categories.
For smaller transactions, where the cost of detailed contract research outweighs the benefits, it could be a better idea to extrapolate appropriate commodities based on information gathered from the analysis of larger contracts. For example, if large suppliers under a given FSC code typically provide a certain product or service, it can be assumed that small suppliers with the same FSC code provide similar product or service.
To supplement the contract research we may also review other documents from the purchasing paper trail such as purchase orders and invoices.
Insights on commodity structure can also be gained by looking at how top suppliers group their products and services. Typically, product/service categories converge within an industry (particularly those that are more mature) to reflect a relatively stable classification structure.
It is also recommended to look at standard industry classification systems such as FSC or NAICS to understand how they breakdown spending into different categories.
Industrial products and services categorization standards:
FSC – federal supply codes are used by the United States government to describe the products, services, and research and development purchased by the government.
NAICS – North American Industry Classification System is used by business and government to classify business establishments according to type of economic activity (process of production) in Canada, Mexico and the United States