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Spend Classification: Where to Stop?

It’s tempting to think that more classification is better, but over-classification can derail a sourcing effort before it starts.

For example, if every savings initiative proposed is cross-commodity, then the spend is likely over-classified. When negotiating with a vendor for lower prices, it’s going to be much more difficult if multiple commodity managers are involved in the effort, or if spending is split unnecessarily across unrelated subtrees (as it is, for example, when using UNSPSC as a classification structure).

There aren’t any hard-and-fast rules about “too much” or “too little” spend classification. There’s no point, of course, to separating staplers from pencils. But there might be a point to separating toner from other office supplies, since there are toner vendors who may offer better prices. On the other hand, if toner is removed from the buying basket for an office supply vendor, they may choose to lower their discount on the rest of the items. And, there’s an implementation issue: if buyers are confused by “buy this from Vendor A, buy that from Vendor B”, the projected savings may turn out to be illusory.

Another judgment call is in direct mail — sourcing paper, printing, and envelopes. If the direct mail effort is modest, it might be best to source these items together, so one might group them together. But if there are millions of pieces, then those elements may be sourced separately, so different categories might make sense.

Reasoning about classification is easiest if the impact on sourcing efforts is held clearly in mind. Organizations typically have their own ways of looking at spending, which are generally sensible classifications based on their buying patterns and needs. But if a vendor is 98% classified to one commodity, and 2% to another, is that useful? Most of the time it isn’t — in fact, most of the time it’s a classification error and ought to be flagged as such.

Extreme examples of over-classification are everywhere — we’ve seen a single data services vendor split across two dozen vastly different categories. As Dennis Miller said after a trip to the local plumbing supply warehouse, “Faucet guys! Stop!!”.

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