Commodity Classifications: An e-Supply Chain Necessity

Access to reliable, pertinent data throughout an organization, or even worldwide, is a valuable resource that companies can claim with the advent and acceptance of a global classification standard

Access to reliable data has always been the lifeblood of business. Knowledge of what is bought, in what quantities, at what prices and from who is critical to the management of any company's supply chain. In the past, this data was difficult to assemble and aggregate into meaningful and actionable information. Adequate data classifications did not exist, and those classifications that were in existence were often created for specific industries, limiting their usefulness. In addition, members of the same industry, in many cases, didn't even ubiquitously adopt these classifications. When data was classified, the databases were often difficult to use, and the manipulation of data was limited to one's knowledge of awkward querying techniques of existing databases. The data contained in these databases were often outdated due to inefficient means of data capture/entry, and they often contained an unacceptable percentage of errors due to manual entry.

All these conditions have changed in today's business world. Today, the cost, accuracy and speed by which business data is captured have improved dramatically. The tools used to query data and derive meaningful and actionable information are better, and databases are also more accessible as a result of the deployment of information on intranet- and Internet-accessible systems. Yet these technology advances, while helping to access the data, do little to actually improve the value of the data. The real advancement in recent years has been the creation of a classification system that is currently being utilized and adopted by many commercial and government organizations throughout the world: the "United Nations Standard Products and Services Code" (UNSPSC).

Classification Convention

Classification conventions are meticulously determined. First, they must contain several attributes in design that will allow for wide acceptance by the universe of data end users. These attributes must address issues like hierarchical structure and brand independence. A hierarchical structure must exist that allows the classification system to be extendable to allow for changing products and services. In addition, the classification should be independence of brand reference. All classifications must address the product/service itself and not the provider of the product/service.

Then there's the data. Basically, there are two types of data: aggregate data, which is the summary data of all transactions; and profile data, or the individual data of each transaction. Increasingly, the data involved in e-transactions plays a critical role in business and is being viewed as a critical asset for every organization. The ability to interpret the data and to aggregate the data into useful information is the continuing challenge of many organizations. Data for data's sake has little value. When you are able to take action that results from the assemblage and aggregation of data, its true value and significance becomes prominent.

Data must be:
1) Available to the right people and at the right time
2) Highly accurate
3) In a useable format
4) Importable into analytic applications

Data is used in different types of information systems for:
1) Transaction processing
2) Management reporting
3) Decision support system

UNSPSC Hierarchical Structure

The UNSPSC hierarchy attempts to deliver all of these data criteria. It is comprised of five levels, each denoting greater levels of specificity to improve on the further segmentation of the product/service. These levels allow for the detail that is necessary to satisfy the business information requirement. In order from generalized to specific, the levels are classified as segment, family, class, commodity and business function.

This hierarchy gives the end user of the information the ability to drill down to the level necessary for their particular analysis and business planning. The code is also under constant updating to allow for changes in business informational requirements and for the purposes of expanding the already myriad of products and services in existing classifications.

The existence of a standard classification scheme makes both industry-specific and cross-industry comparison and analysis possible. The official, United Nations sanctioned administration of the UNSPSC code has been transferred recently to Dun & Bradstreet. Dun & Bradstreet has been appointed as the interim manager of the code. The current code and on-going activity can be found on the Web at www.unspsc.com.

Business Justification for Commodity/Service Classification and
Coding

Today's businesses often spend millions, in some cases billions, of dollars annually with their suppliers for both production and non-production, or maintenance, repair and operations (MRO), products and services. Most companies have extremely detailed information regarding their expenditures on production-related products and services. However, very few companies have the same level of detailed information regarding their non-production spending.

Research has shown that both manufacturing and service companies spend approximately 50 percent or more of their total payments to suppliers on MRO-related products and services. This lack of information has left a large, unrealized savings potential that companies can harness if expenditures are better leveraged and managed. However, due to the large range of products and services in this category of non-production, detailed data similar to what is available for products is an unrealistic expectation. Grouping and classifying these products and services can give a sufficient level of categorization to improve the cost control and strategies for these products and services. In many cases, once these expenditures are classified and aggregated, savings of 10 to 30 percent are commonplace and achievable in most instances.

The advent of e-purchasing systems, and their rapid deployment within both private and governmental organizations, has also reinforced business' need to leverage the data captured by these systems. Previously, significant time and dialogue were expended debating the level of information required by a classification convention. The debate focused at a level of detail that had diminishing rates of return in today's business environment. In the past, organizations had also tried to capture data to analyze the acquisition of each and every product and service. The speed of today's business does not afford this level of analysis. Today, in many case, supply chain managers negotiate business terms with suppliers at an aggregate level. Pricing, delivery and quality are negotiated off published documents and are agreed to at the commodity level, not necessarily at the specific product and service level.

This new approach by supplier managers requires a different level of aggregate information, and that level is available to any organization through the use of the UNSPSC classifications.

The future for the UNSPSC as the global standard classification looks bright. As companies achieve the potential to manage their MRO expenditures as a result of recent technology investments and system deployments, standard means of classification and grouping of expenditures for analysis and management purposes will grow at an accelerated rate. In addition, the sanctioning of the UNSPSC by the United Nations continues to validate the legitimacy of this system and it's acceptance on a global business basis. The code is currently being translated into French, German, Italian, Japanese and Spanish. These translations will only further accelerate the UNSPSC into the global classification standard utilized by leading companies throughout the world.

Jospeh A. Yacura is the former vice chairman of Ridgewood Development Corp., Ridgewood, N.J. He is currently the chief procurement officer of Six Continents, Atlanta, Ga.

Danielle M. Yacura is a research associate at Ridgewood Development Corp., Ridgewood, N.J.

Lindsay A. Yacura is a research associate at Ridgewood Development Corp., Ridgewood, N.J.