What’s in your Taxonomy?

I regularly come across organizations debating about their taxonomy. Often the debate is about using UNSPSC, SIC, or NAICS codes - and, on occasion, a custom taxonomy. As such, I thought I would spend a moment providing a high-level overview of these (leaving NIGP, FSC, eCl@ss, ETIM, and others for another time), as it may apply to spend visibility…

What is UNSPSC (\u-n-s-p-s-c\)?

The United Nations Standard Products and Services Code® (UNSPSC®) provides an open, global multi-sector standard for efficient, accurate classification of products and services. The UNSPSC offers a single global classification system that can be used for company-wide visibility of item by item spend analysis.

Note: Due to the granularity of UNSPSC code at the eight-character level, it is not usually appropriate for strategic sourcing – and four-character has been too vague for sourcing activity. As you can see, from the example below, that both forklifts and elevators at anything less than eight-characters is simply “lifting equipment” or “material handling machinery”.

UNSPSC Example:

UNSPSC classifications are highly valuable within materials management, organizations with high spend on raw materials, or other organizations that need to source at such granularity. The healthcare industry, for example, often goes deeper than eight-character classification, as items such as syringes may be sourced differently based on deeper insight (e.g., 10cc, 20cc, etc.) – and the automotive industry, as another example, is highly part-oriented and benefits from a global standard.

The reality is, though, most organizations do not source based upon UNSPSC, due to: 1) difficulty in obtaining classifications across most items; and, 2) the “buckets” of items are often not similar in nature.

What is SIC (\ˈsik\)?

The Standard Industrial Classification (SIC) system has served as the structure for the collection, aggregation, presentation, and analysis of the US economy. An industry consists of a “group of establishments primarily engaged in producing or handling the same product or group of products”, or in rendering the same services.

Note: SIC is well established and has been utilized for many strategic sourcing projects; however, the SIC table is very dated and some consider the commodities to be grouped poorly.

SIC Example:

Group 353: Construction, Mining, and Materials Handling

Group 3534: Elevators and Moving Stairways

Establishments primarily engaged in manufacturing passenger or freight elevators, automobile lifts, dumbwaiters, and moving stairways. Establishments primarily engaged in manufacturing commercial conveyor systems and equipment are classified in Industry 3535, and those manufacturing farm elevators are classified in Industry 3523.

Automobile lifts (elevators)
Dumbwaiters
Elevator fronts
Elevators and elevator equipment, passenger and freight
Elevators, powered: nonfarm
Escalators, passenger and freight
Lifts (elevators), passenger and freight
Stair elevators: motor powered
Stairways, moving
Walkways, moving

Note that, in this case, the SIC classification is more relevant in grouping – and “forklifts” is appropriately absent, yet we, unnecessarily, picked up “automobile lifts”.

What is NAICS (\ˈnā-ks\)?

Developed in cooperation with Canada and Mexico, the North American Industry Classification System (NAICS) represents one of the most profound changes for statistical programs focusing on emerging economic activities. NAICS, developed using a production-oriented conceptual framework, groups establishments into industries based “on the activity in which they are primarily engaged”. Please note that this is now activity-based, and now also becomes better equipped to classify services.

NAICS has become the predominate standard for strategic sourcing (aside from custom taxonomies), as NAICS provides a grouping that is most similar to how procurement teams research industries and source commodities.

NAICS Example:

333921 Elevator and Moving Stairway Manufacturing

This U.S. industry comprises establishments primarily engaged in manufacturing elevators and moving stairways.

With each NAICS code, the US Census Bureau provides relevant data, such as: employees, number of companies, etc. (please see: http://www.census.gov/econ/isp/index.php)

Further, many standards are now dependent upon NAICS codes, such as small business classifications.

How do these apply to spend visibility, and strategic sourcing?

IF a company can achieve meaningful coverage of UNSPSC, and they re-bucket the commodities into usable groups (e.g. elevator manufacturing and repair), it offers the deepest spend granularity. Often this is a multi-step process, such as: use a spend analytics’ data pump to classify PO line-item detail; perform a cross-walk from supplier-level detail (e.g., SIC/NAICS), coupled with GL indicators (in case a company has multiple SIC/NAICS listings, to assign four-character UNSPSC codes); identify, research, and classify those four-character items that need deeper classification; etc. Aside from the examples above, is this really necessary to effectively source?

Supplier-level classification, like SIC and NAICS, can be easily achieved. One can simply ask for their classification upon onboarding a supplier – and, if you have it, running spend reports is simple.

But what if there are multiple potential SIC, or NAICS, codes for some suppliers? Today’s Supplier Information Management systems can easily, and in an automatic manner: survey the supplier, as needed; present the questionable spend; and, and request they complete a simple, online table associating spend with the appropriate SIC/NAICS code. This can then be incorporated into the appropriate spend reports. Net-net: for most organizations, spend analysis can be easy and timely.

What’s my preference in taxonomy? I have always liked UNSPSC, when it is appropriately needed, and can be achieved; SIC is dated and NAICS has been a great improvement, which is very usable for most organizations; yet… my preference is a custom taxonomy, which is tailored to exactly how you buy and track goods and services. Note: even with a custom taxonomy in place, it would be still be beneficial to maintain a secondary taxonomy, like NAICS, for consistency through changes in the custom taxonomy, small business identification, etc.

Just my two cents.