How Accurate Product Classification Can Save Millions on MRO & Indirect Materials

November 20, 2017

When it comes to the strategic sourcing and procurement of MRO & Indirect Materials, accurate Product Classification plays a critical role in the ability to analyze, consolidate, and leverage spend. With detailed Product Classification codes and descriptions assigned to each material record, procurement can easily compile and tender MRO & Indirect spend by product group, enabling purchase price reductions, volume rebates, and inventory optimization, among other cost savings and efficiencies.

 

There are many internationally recognized and commonly used Product Classification systems available. For example, the United Nations Standard Products and Services Code (UNSPSC) is one of the most widely used classifications systems. The UNSPSC is a global, multi-sector classification system, which provides company-wide spend visibility for cost-effective procurement. The UNSPSC schema is built upon the follow levels:

 

XX – Segment

XX – Family

XX – Class

XX – Commodity

 

Alternatively, some companies choose to utilize a custom classification system or adopt a service provider’s classification system. For example, IMA Ltd. has developed an internal classification system based 28 years of project experience and industry expertise. The IMA product classification system is comprised of 7 parent categories, which include over 75 sub-categories. Unlike the extremely complex UNSPSC and eCl@ss systems, which cover a wide range of products and services from all industries, the IMA classification system is much less intricate and focuses solely on MRO & Indirect Materials categories to provide efficient spend visibility.

 

Case Study

 

IMA was contracted by a large North American Manufacturing company to perform Material Master Data Cleansing, Product Classification and Spend Analysis. Upon initial review and analysis of Material Master data and historic purchases, IMA identified the following inefficiencies:

 

  • Company was purchasing parts from a multitude of vendors (preferred and non-preferred)

 

Example: 174 vendors for Bearing & Power Transmission category alone

 

  • In several instances parts were being purchased from a Non-Preferred Vendor at a lower price

 

Example: Item purchased from Preferred Vendor at $13.63 and Non-Preferred at $9.53

 

  • In several instances parts were being purchased from a Non-Preferred Vendor at a higher price

 

Example: Item purchased from Preferred Vendor at $20.29 and Non-Preferred at $30.66

 

  • In several instances the same part was purchased from the same (preferred) vendor at different prices, which varied by 25-60%

 

Example: Item purchased from Preferred Vendor at $5.00, $6.41, $9.72, and $12.60

 

  • In several instances OEM parts were being purchased instead of generic MRO equivalents for 50-60% higher price

 

Example: OEM item purchased at $105.24 while generic MRO equivalent was purchased at $49.70

 

 

Product Classification became a critical element in the overall spend analysis and cost reduction initiative as it enabled the Customer to segment items by product group and prioritize one category at a time. As a result, the Customer was able to consolidate and tender their MRO & Indirect spend, beginning with the largest spend category – Bearing & PT. In doing so, they were able to establish new preferred vendor agreements, while converting costly OEM items to generic equivalents. Based on the newly established vendor relationships and re-enforced buyer compliance, the Customer was able to reduce annual MRO & Indirect spend by over 10% in the first year, while significantly improving purchasing and procurement efficiency.

 

Learn more about IMA’s Product Classification and Data Cleansing services at www.imaltd.com or contact info@imaltd.com to discuss your business requirements.

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