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Your Basic Guide to Spend Classification

What is Spend classification – It’s a process to determine a purchase code for each spend record (invoice, PO, Contract transactions) from a hirarchical structure (taxonomy).


Why to classify spend ? Once all your transactions are classified with a standard code from a taxonomy – your simple queries like “what are my top 10 spend categories?”, “what is my travel spend?” can be answered quickly. If your classification is done on a consoldiated data across all systems in your organization, you get visibility across all systems with classification.


What is taxonomy ? A simple 3 or 4 level hierarchical coding structure used to classify spend at different levels.


What all taxonomies are available in the market ? Different industry standard taxonomies are available – like UNSPSC, eClass.


Can I use my own taxonomy ? Yes – if your own coding structure is strong enough for your business, or you think your business is more acquainted with your own structure, you can do that. Get that reviewed from your service provider and use that with little modifications.


What are important parameters to determine correct code ? This is an important point –as people tend to think just material description is enough for determining a spend code. That’s not true.

Let me give you example – A Big paper box as a material should be coded as what ? A Box – right ?

  1. What if the company is paper product company ? Then same box may be classified as finished goods.
  2. If the company is material handling – then it may be a material handling equipment
  3. If it’s a service organization the box can be a simple office storage box.



So – it depends on multiple parameter what is a real code for a transaction.

  1. Companies line of business that using that particular product
  2. Business unit which is purchasing the material – A Computer for a server room will be a hardware equipment, a laptop for a CEO office may be a office expense.
  3. Description of a material – Actual description on a invoice
  4. Line of business of a vendor from whom the material is purchased
  5. Chart of accounts assigned for transaction



Is classification a fully automated process ? Yes and No. Engine like SAP BOBJ DEC looks at all such parameters and tries to identify correct code. The reviewing process and making sure it matches with the busines is still with your spend analysts.  


100% “Accurate” classification is a myth – Do I need to look at each and every transaction to make sure all classification is correct ? Now that’s the mistake most people do – when they try to achieve or look for 100% accuracy in classifying spend. That’s impossible. Why ? Because it’s a perception based process. E.g A Laptop strolly – how should that be classified ?

  1. Computer bag
  2. Luggage
  3. Travel equipment
  4. Office equipment
  5. Computer accessories


All of the above options are correct in their own way – based on who is buying for what purspose, fro whom etc. So don’t look for “ACCURACY” – look for “RELEVANCY”. If the code is relevant matching with one of the paremeter mentioned above – you are good.



Prashant Mendki

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