product classification systems

Product classification systems available to categorize spend

As procurement professionals, one of our main responsibilities is to manage spend across our organizations effectively. This requires us to categorize spend in a way that is consistent and accurate, which can be a challenging task. Fortunately, there are a number of product classification systems available to help us categorize spend, including the product classification system United Nations Standard Products and Services Code (UNSPSC).

United Nations Standard Products and Services Code (UNSPSC)

The United Nations Standard Products and Services Code (UNSPSC) is a global classification system used to categorize products and services. Developed in 1998 by the United Nations Development Program (UNDP) and Dun & Bradstreet, the system was created to standardize procurement across organizations and industries, promoting transparency and efficiency in global trade.

The UNSPSC is a hierarchical classification system that categorizes products and services into a series of four-level codes. It covers a wide range of products and services, including everything from raw materials to finished products, and can be used by organizations of any size and industry.

One of the main benefits of using UNSPSC is that it provides a standardized framework for categorizing spend. This can help organizations to better understand their spending patterns and identify areas where they may be able to consolidate spend, negotiate better contracts, or find cost-saving opportunities.

Structure of the system

The UNSPSC is arranged in a four-level hierarchical system:

  1. Segment (broad categories)
  2. Family (subcategories within segments)
  3. Class (specific product or service groups)
  4. Commodity (individual items)

This structure enables detailed product/service tracking, ensuring consistent descriptions across sectors, facilitating procurement, spend analysis, and supplier management globally.

Similar product classification systems

GTIN

The Global Trade Item Number (GTIN) and the United Nations Standard Products and Services Code (UNSPSC) serve different purposes in the supply chain.

  • GTIN is a unique identifier used to identify specific products globally. It includes standards like the EAN and UPC barcodes, used primarily for tracking and selling individual products at the retail level.
  • UNSPSC, on the other hand, is a classification system used to categorize products and services into broader groups for procurement, spend analysis, and supply chain management.

Together, they complement each other by helping track individual items (GTIN) while categorizing them into broader classes (UNSPSC).

EAN

The European Article Number (EAN) is a barcode standard used globally to identify products in retail settings. Developed in 1976, it serves as a unique identifier for products, streamlining inventory management, pricing, and checkout processes. The EAN system is part of the GS1 standard and is widely used in Europe and globally. Each EAN code consists of 13 digits, which include country codes, manufacturer codes, and product identifiers, ensuring that each product is uniquely identifiable, facilitating efficient commerce and logistics.

The European Article Number (EAN) is not a product classification system like the UNSPSC. Instead, EAN is a barcode standard used for uniquely identifying products, mainly in retail, for inventory, pricing, and checkout purposes. Each EAN code uniquely identifies a specific product, but it does not classify products into broader categories.

In contrast, the UNSPSC is a hierarchical system used to classify products and services into categories for procurement and supply chain purposes, allowing for more detailed product categorization and analysis.

CPV and HS

Common Procurement Vocabulary (CPV):

  • Purpose: The CPV system is used across the European Union to standardize descriptions of procurement items, ensuring clarity and transparency in public tenders.
  • Structure: It consists of a main vocabulary (numeric codes) for product and service categories and a supplementary vocabulary for additional details (e.g., delivery conditions).

Harmonized System (HS):

  • Purpose: The HS Code is a global classification system used primarily for customs and international trade. It categorizes goods for tariffs, duties, and trade compliance.
  • Structure: It has a six-digit code hierarchy that defines categories, subcategories, and further specifications of goods.

Comparison with UNSPSC:

Purpose:

  • UNSPSC is used globally for classifying products/services in procurement and spend analysis.
  • CPV is focused on public procurement in the EU.
  • HS is designed for customs and tariff classification.

Use Case:

  • UNSPSC helps companies analyze spend and manage procurement efficiently.
  • CPV ensures consistent public tendering across the EU.
  • HS facilitates cross-border trade compliance and customs processes.

While all three systems are classification tools, their specific uses (procurement, public tendering, and customs) define their scope and application.

By using these product classification systems, procurement professionals can gain a more comprehensive view of their organization’s spending patterns, identify areas for improvement, and ultimately drive cost savings. This is particularly important in today’s business environment, where companies are under increasing pressure to reduce costs and operate more efficiently.

Custom Category Trees in Spend Classification

Many companies opt to create their own category tree for spend classification instead of using standardized systems like UNSPSC. A custom category tree is designed to align specifically with the company’s internal operations, industry focus, and strategic goals.

Key Features:

  1. Tailored to Business Needs: Custom categories reflect the company’s unique product or service offerings, helping to categorize spend more accurately according to internal processes.
  2. Flexibility: Companies can adjust or add new categories as the business evolves.
  3. Strategic Alignment: Categories can be structured around corporate objectives, such as sustainability, cost reduction, or innovation.

Structure:

A custom category tree typically has a hierarchical structure similar to UNSPSC, with broad categories at the top (e.g., IT, Marketing, Manufacturing) and more detailed subcategories underneath (e.g., software licenses, raw materials).

Benefits:

  1. Better Internal Control: Custom categories reflect internal priorities, allowing better tracking and reporting.
  2. Easier Adoption: Employees and suppliers may find it easier to understand and use a system tailored to the company’s processes.
  3. More Relevant Analysis: Tailored categories provide more relevant insights, leading to better procurement decisions.

Challenges:

  1. Consistency: Without global standards, comparing spend data with external benchmarks can be difficult.
  2. Maintenance: Custom category systems require regular updates to stay relevant as the company grows or changes.

While a custom category tree offers a more personalized and flexible solution for spend management, it requires significant upkeep and lacks the universal standardization offered by systems like UNSPSC. Companies often choose this approach when their business needs are highly specialized or when existing classification systems do not fully capture the nuances of their operations.

Standard Category Trees for purchase?

There are standard category trees that companies can download or purchase for spend classification and procurement management. They are often connected to a proprietary solutions as for example spend management platforms (e.g., Coupa, SAP Ariba). These can often be customized and integrated into procurement software systems.

    Case Study: Classifying Spend Data Using UNSPSC

    Company Scenario:
    A multinational company is reviewing its procurement spend across various departments. The goal is to analyze and categorize spending to identify opportunities for cost savings, supplier consolidation, and better procurement strategies. The company uses the United Nations Standard Products and Services Code (UNSPSC) to classify its spend data.

    Step 1: Collecting Spend Data

    The procurement team gathers data from various departments, including IT, manufacturing, marketing, and facilities. The data includes purchase orders, supplier invoices, and contract information.

    Sample Spend Data:

    IT Department:

      • Laptops and software licenses.
      • Cloud hosting services.

      Manufacturing:

        • Raw materials (e.g., steel, plastics).
        • Equipment maintenance services.

        Marketing:

          • Advertising services.
          • Printed materials.

          Step 2: Assigning UNSPSC Codes

          The procurement team assigns UNSPSC codes to each spend category to standardize descriptions and group similar purchases. For example:

          • IT Purchases:
            • Laptops: UNSPSC code 43211503 (Portable computers).
            • Software licenses: UNSPSC code 43232100 (Software licenses).
          • Manufacturing Purchases:
            • Steel: UNSPSC code 30101701 (Rolled steel).
            • Equipment maintenance: UNSPSC code 72101507 (Industrial equipment maintenance).
          • Marketing Purchases:
            • Advertising services: UNSPSC code 82101500 (Advertising services).
            • Printed brochures: UNSPSC code 14111513 (Brochures).

          Step 3: Analyzing the Data

          Once spend data is classified under UNSPSC codes, the procurement team can perform a detailed analysis to identify:

          • Top spending categories: For example, IT hardware might account for 20% of the total spend.
          • Supplier consolidation opportunities: If multiple suppliers are providing similar products (e.g., laptops), the company could negotiate better pricing with fewer suppliers.
          • Cost-saving potential: Identifying high-cost areas, such as software licenses, and exploring alternative suppliers or solutions.

          Benefits of Using UNSPSC for Spend Analysis

          1. Standardization: UNSPSC provides a uniform way to categorize spend data across departments and suppliers.
          2. Transparency: By classifying every purchase under a specific code, the company gains visibility into spending patterns.
          3. Data-driven decision-making: With clear categories, the procurement team can make informed decisions about cost reduction, supplier performance, and contract management.

          In real-life procurement departments, using UNSPSC to classify spend data helps organizations streamline their procurement strategies, identify cost-saving opportunities, and enhance supplier management. It transforms raw spend data into actionable insights, ensuring that procurement decisions are both strategic and data-driven.

          Conclusion – product classification.

          In conclusion, product classification systems such as UNSPSC, EAN, and GTIN can be powerful tools for procurement professionals looking to manage spend effectively. By using these systems to categorize spend, organizations can gain greater visibility into their spending patterns, identify areas for improvement, and drive cost savings across the organization. So, if you’re not already using a product classification system, it’s worth considering implementing one in your procurement process. Learn more about Spend analysis in EFFSO’s course.

          About Learn How to Source

          Learn How to Source (LHTS) is an online platform based in Sweden, offering a range of procurement courses accessible globally. It serves as a community where procurement experts share their knowledge through online courses, designed for various experience levels from introductory to expert. Courses are concise, about 30 minutes each, and cover different aspects of procurement, tailored for different buyer roles. The courses focus on practical knowledge, presented by seasoned professionals, and include quizzes and certificates. They can be accessed from any device, emphasizing microlearning for flexibility and efficiency. More about LHTS in Swedish.

          Note. Illustration to the blogpost “Product classification systems available to categorize spend” was created with Chat-GPT on September 15, 2024.

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