Time to review your spend taxonomy?

Reasons to review spend Taxonomy

  • Spend Taxonomy provides the spend data of the entire organization in a structured hierarchical manner. This hierarchy can be either 3 or 5 levels depending on the number of commodities and services being sourced by the procurement organization.

  • The classification of this structure is as per the following: a) Level 1- Group b) Level 2- Family c) Level 3- Category d) Level 4- Commodity

  • In this classification, Level 1 is the highest level, which is then broken down into Categories, which are then further broken down into Commodities.

  • The idea behind this classification exercise is that Commodities, which is the last level in this classification, should represent a unique set of suppliers with the same capabilities and offerings.

  • The idea is that they should be good enough to be brought together and compared in the same RFP.

Because of these above stated facts, since the commodities are meant to represent unique RFPs, it is highly imperative to keep this taxonomy very relevant and updated. This would help us in identifying the categories that need to be sourced, plan well in advance and save our time and effort.

Benefits of Reviewing Spend Taxonomy:

  • In a business scenario, it is very difficult to keep track of the increasing or decreasing spends for each individual category on an on-going basis

  • So if the review of the spend is not done on a frequent basis, there are chances that we may lose out on some high spend categories that could give us substantial savings in the current market scenario.

  • Also some of the low spend categories might have their own commodity level and it may be possible to RFP them separately as well.

  • In this case, the spends that don’t have their own commodity level, end up being classified in a more generic bucket and then subsequently get lost or remain untracked.

When to Review Spend Taxonomy

Whenever there is an updation in the product line of the company, the raw material, packaging material and the support services will change. This is an ideal scenario when the spend taxonomy should be reviewed.

Another scenario to review spend is when there is a major change in the business environment of the company, i.e. the company has landed a new client account or the revenues have increased substantially from some other reason. This would require a change in the requirement of raw materials and production processes. However it’s not necessary that this change shall happen across all the SKUs as well. The rate of increase or decrease for some of them is on a higher side as compared to some of the others. So it makes sense to review the spend taxonomy of the company.

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