Best-Practice MRO Product Classification and Coding

As we’ve discussed in previous blog posts and white papers, MRO and indirect materials often represent one of the single largest cost reduction opportunities within manufacturing and asset-intensive organizations. Specifically, one of the greatest cost savings opportunities from MRO and indirect materials comes from the ability to effectively analyze and leverage MRO spend by product group (commodity). 

In order to take advantage of the savings, MRO purchases must be accurately categorized and visible. But with inconsistent or “corrupt” Material Master data that is incorrectly classified or worse yet, not classified at all, performing an effective spend analysis can be a difficult–or even impossible–task.

Today we’re going to talk about how you can improve your data, make it possible to implement classification systems, and see real savings.

What are classification systems?

To make spend analysis easier and procurement processes more efficient, companies often implement and maintain a product group (commodity) classification system, which is applied to each item that is purchased. The use of such a system ultimately facilitates seamless communication, commerce, and compliance between buyers and suppliers.

There are many classification systems available, from internationally recognized ones like UNSPSC and ECLASS, to industry-specific ones such as Shell MESC designed exclusively for the Oil & Gas industry. In addition, some end users and service providers like IMA have developed their own internal classification system based on industry specifications, business processes, and subject matter expertise. While each system has its own unique structure and advantages, all have been designed for one common purpose: to accurately classify MRO products and services for efficient spend analysis, procurement, and ecommerce.

So what makes up a classification system and which one is best suited for your company? Let’s take a look at a few of the most common industry classification systems.

UNSPSC

The United Nations Standard Products and Services Code® is an open, global, multi-sector standard for efficient and accurate classification of products and services. UNSPSC is one of the most widely used classification systems for MRO products and services, enabling enterprise spend visibility and procurement efficiency. The UNSPSC code structure is comprised of 5 levels:

XX – Segment

XX – Family

XX – Class

XX – Commodity

XX – Business Function

When working with UNSPSC, IMA typically assigns the 8-digit UNSPSC code according to the fourth level (commodity).

ECLASS

ECLASS is another internationally recognized cross-industry product classification system. With 41,000 product classes and roughly 17,000 properties, ECLASS covers the majority of traded goods and services. Much like UNSPSC, ECLASS uses an 8-digit code structure, comprised of the following elements:

XX - Segments

XX - Main Groups

XX - Groups

XX - Commodity Classes

IMA Product Group Classification

The IMA Product Classification System is an internally-developed schema that has been designed as an industry best-practice standard based on project experience and subject matter expertise. Unlike UNSPSC, ECLASS, and other complex, cross-industry classification systems, the IMA Product Group Classification system focuses solely on MRO products and services. As such, the IMA Product Group Classification system provides a high level 4-digit classification code based on a simple category / sub-category schema, which is limited to 7 all-encompassing MRO categories, each having up to 20 sub-categories.

XX – Category

XX – Sub-Category

Using fewer codes that encompass all MRO products and services reduces classification errors, while enabling efficient spend analysis and cost-effective procurement.

Comparing classification systems

How do the most popular classification systems compare? Let’s take a look at an example showcasing a single item with the coding system for UNSPSC, ECLASS, and IMA Product Group.

As you can see, UNSPSC and ECLASS have a very similar code structure where IMA provides a simpler option. Ultimately, the decision of what to use has to come down to your organization and any pre-existing requirements. 

Benefits

Now that you’re more familiar with product classification systems, you’re probably wondering how exactly they can reduce MRO spend. 

In the era of big data and electronic commerce, accurate product classification is no longer a “nice-to-have” ticket item; it has become a requirement. Implementing a common classification system facilitates accurate spend analysis and visibility, while enabling spend leverage and vendor consolidation opportunities. This is because your procurement teams are able to use product classifications to group like items and have a full picture of what exists, what is needed, and what can be purchased together. 

Making larger purchases at once allows you to leverage spend and get a better deal than you otherwise would. This process also makes sure you’re not overbuying or storing more than you should. As a result, procurement teams are able to establish preferred vendor agreements that deliver significant purchase price reductions and overall maintenance cost savings. Plus, it simplifies the process for your procurement team, making their jobs easier and freeing up work hours for other tasks.

Challenges

So if you’re not currently using a classification system, why not?

In most cases companies have neglected to implement and maintain a standard classification system simply because they do not have adequate resources, time, and data quality. While it may seem simple to assign and maintain a basic product code, in reality selecting the correct code from an extensive classification list can be a time-consuming process that requires strong product knowledge. Not to mention, developing an internal classification standard rather than using a pre-existing system can take even more time and resources. 

For most organizations, it’s much more effective and affordable to implement a pre-existing, proven classification system through a third-party service provider. A quality service provider will typically have internal tools and expertise to programmatically classify and validate MRO materials. What that means is that you can spend less time trying to classify items yourself, and more time saving money.

Learn more

To learn more about best-practice product classification systems and services for MRO materials, contact info@imaltd.com or browse through the sources provided below.

UNSPSC - https://www.unspsc.org/

ECLASS - http://www.eclass.eu/

How can IMA help?

Now that you understand the benefits of MRO product classification and coding, you may be wondering how to get started. Is your data a mess? Inconsistent or spread out across multiple tools and sites? Do you not even know where to begin with adding product codes or have the resources for such a project?

IMA is an industry-leading material master data cleansing and governance provider that knows just how to take your data from chaos to world class. We offer the most adaptable service in the industry, including the ability to use whichever product classification coding system that suits your company. Together, we can come up with a custom plan tailored to your situation and how much hands-on assistance you want or need.

For more information on how we can help you with your data cleansing and product classification journey, contact us at info@imaltd.com or check out our website–including a free ROI Calculator and a free, no-obligation Data Evaluation.

We can’t wait to hear from you!