Spend taxonomy is the system of classification, from general to specific, of the spending in an organization. Spend taxonomy helps organizations gain a deep understanding of their spending.
The hierarchy usually ranges from 3 to 5 levels depending on the complexity of their spend. They are usually classified as: Level 1 (Group), Level 2 (Family), Level 3 (Category), Level 4 (Commodity); where Level 1 is the highest level which is broken down in Families, and Families in turn are further divided into various categories, and categories are divided into commodities. The last level (commodities) encompasses the unique set of suppliers with similar core competencies.
Organizations need a customized spend taxonomy for their procurement and sourcing teams, to have a full understanding of organizational spending. Organizations can get further customization by choosing the categories they require to make their spending decisions.
An Organization’s Spend Analysis Consists of Three Critical Steps:
Spend taxonomies come into play in the data processing step, where the organization’s spend items are categorized into a customized taxonomy. In the absence of a defined taxonomy, the classification of spending becomes inaccurate. It’s not possible to get any useful insights through the reporting and analysis that follows.
Every company, depending on its spend, is free to choose its taxonomy. Most spend analysis tools can categorize spend to UNSPSC, along with providing an enterprise with the flexibility to classify according to its customized taxonomy. Advanced software platforms can even classify your data into multiple taxonomies, in parallel, giving you any view of the spend data that best suits your business needs at any particular time.