As we’ve discussed in previous blog posts and white papers, MRO & Indirect Materials often represent one of the single largest cost reduction opportunities within manufacturing and asset-intensive organizations. One of the greatest cost savings opportunities predominantly comes from the ability to effectively analyze and leverage MRO spend by product group (commodity). In order to do so, MRO purchases must be accurately categorized and visible. But with inconsistent or “corrupt” material master data that is incorrectly classified or worse yet, not classified at all, performing an effective spend analysis can be a difficult task.
To make spend analysis easier and procurement processes more efficient, companies often implement and maintain a product group (commodity) classification system, which is applied to each item that is purchased. The use of such system ultimately facilitates seamless communication, commerce, and compliance between buyers and suppliers.
There are many classification systems available, from internationally recognized ones like UNSPSC and eCl@ss, to industry-specific ones such as Shell MESC designed exclusively for the Oil & Gas industry. In addition, some end users and service providers like IMA Ltd., have developed their own internal classification system based on industry specifications, business processes, and subject matter expertise. While each system has its own unique structure and advantages, all have been designed for one common purpose - to accurately classify MRO products/services for efficient spend analysis, procurement, and ecommerce.
So what makes up a classification system and which one is best suited for your company? Let’s take a look at a few of the most common industry classification systems.
The United Nations Standard Products and Services Code® is an open, global, multi-sector standard for efficient and accurate classification of products and services. UNSPSC is one of the most widely used classification systems for MRO products and services, enabling enterprise spend visibility and procurement efficiency. The UNSPSC code structure is comprised of 5 levels:
XX – Segment
XX – Family
XX – Class
XX – Commodity
XX – Business Function
When working with UNSPSC, IMA Ltd. typically assigns the 8-digit UNSPSC code according to the fourth level (commodity).
eCl@ss is another internationally recognized cross-industry product classification system. With 41,000 product classes and roughly 17,000 properties, eCl@ss covers the majority of traded goods and services. Much like UNSPSC, eCl@ss utilizes an 8-digit code structure, comprised of the following elements:
XX - Segments
XX - Main Groups
XX - Groups
XX - Commodity Classes
IMA Product Group Classification
The IMA Product Classification System is an internally developed schema that has been designed as an industry best-practice standard based on project experience and subject matter expertise. Unlike UNSPSC, eCl@ss and other complex, cross-industry classification systems, the IMA Product Group Classification system focuses solely on MRO products and services. As such, the IMA Product Group Classification system provides a high level 4-digit classification code based on a simple category / sub-category schema, which is limited to 7 all-encompassing MRO categories, each having up to 20 sub-categories.
XX – Category
XX – Sub-Category
Using fewer codes that encompass all MRO products and services reduces classification errors, while enabling efficient spend analysis and cost-effective procurement.
Example: Ball Bearing, 6205-2RS
UNSPSC: Ball Bearings – 31171504
eCl@ss: Deep Groove Ball Bearing – 23050801
IMA Product Group: Ball Bearings – 0101
How will product classification reduce MRO spend?
In the era of big data and electronic commerce, accurate product classification is no longer a “nice-to-have”, it has become a requirement. Implementing a common classification system facilitates accurate spend analysis and visibility, while enabling spend leverage and vendor consolidation opportunities. As a result, procurement teams are able to establish preferred vendor agreements that deliver significant purchase price reductions and overall maintenance cost savings.
So if you’re not currently using a classification system, why not?
In most cases companies have neglected to implement and maintain a standard classification system simply because they do not have adequate resources, time and data quality. While it may seem simple to assign and maintain a basic product code, in reality selecting the correct code from an extensive classification list can be a time-consuming process that requires strong product knowledge. Not to mention, developing an internal classification standard rather than using a pre-existing system can take even more time and resources. For most organizations, it’s much more effective and affordable to implement a pre-existing, proven classification system through a third-party service provider. A quality service provider will typically have internal tools and expertise to programmatically classify and validate MRO materials. What that means is that you can spend less time trying to classify items yourself, and more time saving money.
To learn more about best-practice product classification systems and services for MRO materials, contact info@imaltd,com or browse through the sources provided below.
UNSPSC - https://www.unspsc.org/
eCl@ss - http://www.eclass.eu/