Time to review your Spend Taxonomy
- Sanjay Agarwal | Founder, Proacure | May 5, 2022
Spend Taxonomy presents the entire organization’s spend data in a systematic hierarchy, enabling tracking of the increase or decrease in spends for each specific category on an ongoing basis.
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:
- Level 1- Group
- Level 2- Family
- Level 3- Category
- 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 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 difficult to keep track of the increasing or decreasing spends for each individual category on an on-going basis. 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. 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 spend that doesn’t have their own commodity level ends up being classified in a more generic bucket and then subsequently gets lost or remains untracked.
When to Review Spend Taxonomy
Whenever an organization gets a new product line, the raw material, packaging and the support services will change. This is an ideal scenario when the spend taxonomy should be reviewed.
Spend Analytics taxonomy can be reviewed 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. This would require a change in the requirement of raw materials and production processes. It is 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. It becomes a business case to review the spend taxonomy.
Proacure is a procurement technology & data-science organization based in the San Francisco Bay Area. Our ‘Koreografy’ model leverages multiple frameworks like congruence of different data sets, fusion of digital, analytics and business processes, and synchronous collaboration between various stakeholders. The model enables 100% Spend Visibility with prescriptive actionable insights to transform Strategic Sourcing and help realize untapped value in the Supplier and Tail Spend. Proacure’s deliverables include cost savings of 7-30%, a 20%+ increase in EBITDA, cash flow optimization, and reduced supply-chain disruption.