I spend a lot of time thinking about how to properly classify the products and services vendors offer to their customers. Bringing order to what can sometimes be the chaos of company spend data is the first step in identifying savings opportunities. How products are classified also plays a part in tariff rates, with different percentages being applied to different classes of product.

Usually, this process is simple enough; welding supplies are welding supplies, plastic containers are plastic containers, Snuggies are… well… wait, what?

When Classification Isn’t So Simple

A key pitfall of any given classification taxonomy is an incomplete structure that leaves blind spots among product or service types, allowing a few to fall through the cracks – Exhibit A, submitted to the US Court of International Trade, is the Snuggie. Part blanket, part garment, the product has caused some confusion in terms of how it should be classified. Although it sounds silly, the hard dollar implications are real: as these products are made abroad, classifying them as a blanket rather than a garment means a difference of 6.4% in terms of tariffs. Hence, the court case.

In the end, the court sided with the producers, putting the to-blanket-or-not-to-blanket question to bed (pun merrily intended). The Snuggie is officially a blanket, meaning big savings for the producer but a loss of revenue for the government.

Real Lessons Learned from a Silly Subject

At the end of the day, unless you are actually in the Snuggie business trade, this court decision may not apply to you directly. However, there are real lessons to be learned in terms of spend classification:
  • Always recognize the limitations of the classification taxonomy you employ 
  • Address these limitations through organizationally-specific custom classifications 
  • Review your taxonomy to ensure it addresses current-day business needs

Many organizations adopt UNSPSC codes or other industry standards when performing a spend analysis, and this can be a wise move in terms of utilizing an already built system with a wide coverage. However, classifying via UNSPSC and sourcing via UNSPSC are two very different things. The structure works for some industries and for some purposes, but not all – review the resulting spend classifications with key stakeholders, and confirm that they will meet your needs of classifying spend for the purpose of identifying savings opportunities.

If you find any gaps, work with stakeholders to modify your classification structure by adding additional layers. Perhaps your organization is in the specialty chemical business, but UNSPSC doesn’t delve deep enough to accurately represent your data – add additional layers needed to properly segment spend and suppliers. Finally, recognize that business goals change; certain changes may make your current taxonomy invalid. Although organizations grow and evolve, a taxonomy is going to stay static – unless you take the time to update it. Identify activities that should trigger a taxonomy review, such as the launch of a new service product line. Consider what the new direct costs associated with these new products will be, as well as any indirect costs that support them. Likewise, take a fresh look at existing spend categories and determine if the new products will require any more depth be built into them.
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