When I manage the spend analysis process for clients, I typically use a hybrid approach to develop the spend category taxonomy put in place. First, I apply a Procurement-focused taxonomy to the data at large – in other words, classifying spend not by what a supplier does, but how Procurement buys from them. Then, I blend in information from the client to ensure any unique, client-specific vendor relationships are properly represented in the taxonomy. This sometimes takes time to accomplish, but the result is a highly targeted analysis that best serves Procurement’s needs.

Yet I often get a question at the outset of a new analysis: “Why not just use UNSPSC?” This is a valid question. UNSPSC is a popular choice. SIC or, more recently, NAICS codes are also prevalent. While these standards have their advantages, they may not be best suited to Procurement’s purposes. Why?

What Do We Want to Accomplish?
We want to a consolidated view our supplier base and spend profiles organization-wide – this means using a commonly understood taxonomy so every level of management across all business units have the same interpretation of the data. Adopting and sticking with any taxonomy helps alleviate a common problem organizations face: no longer will various silos speak a different language when describing suppliers.

It is important to note, however, that this is only a step in the process. The goal of a spend analysis, beyond bringing this clarity, is to support Procurement in identifying strategic sourcing initiatives. If a taxonomy can’t help Procurement identify strategic sourcing initiatives and save money, it is not valuable.

Where Standardized Taxonomies Fail
Standard taxonomies like UNSPSC, SIC, and NAICS are a great start to developing a taxonomy. However, there are three common problems that prevent them from being as valuable as a custom built taxonomy:
  • They weren’t built to alignment with strategic sourcing goals.
  • Their rigid structure likely doesn’t align with organizational profiles – featuring categories of spend that don’t apply to a specific organization, and not delving into the detail needed for other crucial categories.
  • The highly granular level of detail, while being useful for some purposes, is often overkill for spend analyses. Time spent adhering to such a granular system is time not spent executing on initiatives to save money.
These issues make sense. Any standard taxonomy was created, first and foremost, to apply broadly. Accounts Payable may use UNSPSC because they know that the rest of Finance uses it. They also know that any third party providers, software solutions, and consultants are also familiar with and use it.

Procurement, however, needs a system that speaks to our needs. By developing a taxonomy that speaks to our vendor relationships, specifically, we are building something that can provide key insights and allow us to better understand the opportunities available to us.

Choose a Taxonomy That Serves Procurement
When developing a taxonomy, make sure your goal is to build something that supports Procurement directly.

UNSPSC is easy. The taxonomy exists, and can be implemented immediately. There is value in this from a speed-to-implementation perspective, and can make an organization’s first dive into spend analysis easier.

These gains in speed, however, will be lost later on. If you aren’t able to clearly outline actionable takeaways from a spend analysis because the taxonomy used isn’t well suited to doing so, you’ll be spending all that saved time (and then some!) piecing together your sourcing strategy later on.
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