What are taxonomies and why they are an important value to our customers.
First, what is a taxonomy?
The word taxonomy (from Greek taxis meaning arrangement or division and nomos meaning law) is the science of classification according to a pre-determined system, with the resulting catalog used to provide a conceptual framework for discussion, analysis, or information retrieval. In theory, the development of a good taxonomy takes into account the importance of separating elements of a group into subgroups that are mutually exclusive, unambiguous, and taken together, include all possibilities. In practice, a good taxonomy should be simple, easy to remember, and easy to use.
Classifying records to a consistent taxonomy allows sourcing and category managers, as well as the Chief Procurement Officers to identify accurately ‘On what/who are we spending’. This visibility enables procurement organizations to effectively plan the ‘supply market’, and also to associate supply sources with demand sources from supply chain planning.
Spend classification is the process of assigning transactions to an appropriate category in a given taxonomy. Incorrect classification can actually distort spend analysis. A spend taxonomy is based on the potential market for supply of goods and services required by the enterprise.
SAP’s Data Standardization and Enrichment (DSE) uses SAP- AI codes which are a three level hierarchy offering market, industry and purchase levels of aggregation to view spend.
The primary taxonomy used in SAP’s Data Enrichment and Classification (DEC), is referred to as the Concept ID. The Concept ID is based on the Electronic Commerce Code Management Association’s (ECCMA) Open Techinical Dictionary (eOTD). The eOTD is based on the Federal Cataloging System and the NATO Codification System, the systems used to manage the world’s largest shared inventory developed by the Department of Defense of NATO and used today in over 50 countries.
The eOTD allowed the creation and exchange of unambiguous, language independent master data, data that identifies and describes individuals, organizations, locations, goods, services, processes, rules and regulations.
SAP uses the Concept ID code and its corresponding cross-walks to the UNSPSC, CPV, eCl@ss as well as to other taxonomies, such as SAP and customer’s custom codes. Having access to several taxonomies allows greater flexibility for our customers to make business decisions based on spend management.
In Part III, I will discuss the structure of taxonomies.