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What is taxonomy & Why do I need it for Spend Analysis?

What is taxonomy? If you look at the dictionary, it says taxonomy means” the science or technique of classification”. Wikipedia gives much broader information about it – “Taxonomies, or taxonomic schemes, are composed of taxonomic units known as taxa (singular taxon), or kinds of things that are arranged frequently in a hierarchical structure. Typically they are related by subtype-super type relationships, also called parent-child relationships. In such a subtype-super type relationship the subtype kind of thing has by definition the same constraints as the super type kind of thing plus one or more additional constraints. For example, car is a subtype of vehicle. So any car is also a vehicle, but not every vehicle is a car. Therefore, a thing needs to satisfy more constraints to be a car than to be a vehicle.”

So now we know basics – it’s a hierarchical structure, with a description at each level. So if I create taxonomy of say 5 levels, then my level 1 would be high level description of the thing and my 5th level would provide me required granularity.

If you talk to technical guy, one would say its a flat table structure for me – which is a schema – yes he is correct. There are different terms you can use to understand this – Taxonomy, Schema, Classification hierarchy…..

Why do I need taxonomy? So you can classify your spend data correctly up to most granular level, so you know what you are spend on, how much, to whom and whether there is any scope for savings or negotiations.

Does your ERP system not taking care of it? – Not at the level where you may want it. So you may have text description, category details for each transactions in your PO and invoices – I agree – but does it tells you that in all – you are spending $120,000 in office supplies – and in that $20,000 on writing instruments in that $10,000 on ball pens? This is 3 level taxonomy for you. So now you know 10K on ball pens – does your system tells you which department or business unit is actually getting those – on the same dashboard? So now if taxonomy is linked with your chart of accounts, material data or organizational structures, you can get a better view of your own data and then you can actually think about making sourcing your focus to save more. Your ERP is capable of maintaining the data, and we are talking about information. They are different.

I have so many transactions, is it possible to create a taxonomy that covers all transactions? – Yes and No. Yes, its a one time big effort and then you can keep on appending it whenever you want to introduce a new level or new category in that. No – because if you have vendors with whom you only spend say $5000 in a year – you may want to skip them as that might be non negotiable. Basically depending on size and spend in your organization you may want to decide on $ slab where you want to actually look for savings and catch the low hanging fruits first.

Do I really need to create a taxonomy or I can just buy one – You can create or you can buy. There are organizations like UNSPSC, or You can go with International Codes likes HTS & ECCN or EAR-99 [for US], NIC[Indian], SITC, CAS, CCL /BIS etc. Generating own taxonomy is a time consuming efforts, but that might also give you your information in your own interpretation rather than somebody else. My personal view prefers the custom taxonomy – which is hybrid mechanism of both industry & your own version.

To create own taxonomy – decide following things – your coding structure – length, numbers, series and standardized description for each level. Spend more time on this as its going to play a key role when you try to expand or change the taxonomy.

So whats the net result – you got all your supplier data normalized (I am sure I will write an article on that too), you got spend data extracted and created a hierarchical structure to classify it. Boom. What you need next is dashboard to look at the data – lets talk about it sometime this week.

SAP DEC – Data Enrichment and Classification engine provides the most optimal way in the industry to achieve classification of your huge transactional data – correctly, repeatedly (as you need it again and again – monthly, quarterly), and in a quickest possible time. Once the data goes to SPM – Spend Performance Management system which is a highly capable dashboarding mechanism based on SAP BW technology – you have best possible visibility, intelligence around your data.

Keep sending me your feedback.


Prashant Mendki

Follow me on twitter – @pmendki

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