What Drives UNSPSC Coding and Why Is It Needed?

Although UNSPSC may be a mouthful to say, this internationally known acronym represents one of the most commonly used product and service classification systems in the world. These five little letters stand for the United Nations Standard Productsand Services Code, which is a hierarchical system that is an open, global multi-sector standard for accurate classification of products and services.

While many people are familiar with UNSPSC, one of the most frequently asked questions that we hear at IMA is “what drives UNSPSC coding and why is it needed?” Well, to answer the question, the UNSPSC code is comprised of four levels, which include Segment, Family, Class, and Commodity. In some cases, companies will choose only a select group of UNSPSC codes for all of their products and services to fall under, whereas others will take full advantage of the entire code set, right down to the fourth level. In any case, when IMA completes a coding project, each item must first be assigned a proper Noun-Modifier pair using the IMA Noun-Modifier Dictionary. By assigning a Noun-Modifier, IMA has the key characteristics to properly identify Segment, Family, Class and Commodity for each individual item.

For example:

Raw Client Data: 6205-2rs BRG, Ball, SKF

IMA Noun-Modifier: BEARING, BALL

31000000 – Manufacturing Components and Supplies

31170000 – Bearings and Bushing and Wheels and Gears

31171500 – Bearings

31171504 – Ball Bearings

Without a strategic classification system, companies are basically managing inventory blindly, without any accurate statistics to support their business decisions. As a result, excess inventory continues to grow, parts are sourced from a multitude of suppliers, and items are purchased at a premium price. However, when items are properly classified and UNSPSC codes are used to their full potential, companies can reap significant cost savings benefits through accurate spend analysis, inventory reduction and procurement optimization.

Regardless of whether you choose to use UNSPSC or your own custom coding system, it is important to establish and maintain some type of classification schema throughout your item master in order to conduct an efficient and accurate spend analysis. Although it may seem like just another number attached to each item, this little number can provide a lot of insight when making critical business decisions.

For more information, please visit www.imaltd.com or contact info@imaltd.com.

Show Me the Money: MRO Analysis and Inventory Optimization

There is no question that a lot of money is tied up in MRO inventory but the common question companies ask is how to turn that unnecessary evil into cost savings.

The answer – Inventory Optimization.

Inventory Optimization can be defined as an action of balancing capital investment, service-level objectives and ROI, over a large number of stock-keeping units (SKUs), while taking demand and supply volatility into account.

As a service, Inventory Optimization is a method of analyzing historical data, identifying unnecessary expenses, disposing of excess inventory, and adjusting stock levels for maximum asset efficiency.

When a formal inventory optimization project is undertaken it is often found that many item descriptions are inconsistent with spelling errors and missing information such as manufacturer name and/or part number. When the part description is unrecognizable to maintenance workers, it leads to part duplication, false stock-outs, equipment downtime and overall maintenance inefficiency.

Before an inventory analysis can take place, all inventory data must first be cleansed to ensure that it is accurate, complete, and properly categorized.

Once the original data has been cleansed, we typically find that duplicate items range from 5-15% within a given site and the percentage of commonality across multi-site organizations can sometimes range as high as 25%.

Next, the inventory can be sorted into typical commodity groups, including: Bearing & PT, Industrial Supplies, Electrical, Instrumentation, Fluid Power, and Pipes, Valves & Fittings. Commodity groups can then be segmented into categories based on usage, such as: Required Active, Excess-Active and Inactive. Required Active parts are those which are used commonly and must be stocked at all times. Excess-Active parts are simply overstock of Required Active items.

Inactive parts can be further segmented into Critical Spares, Slow-moving or Obsolete Materials. Critical Spares include items that are essential for the business to operate and stocking out would significantly impact production, quality, safety or cost. Slow-moving items include parts with long lead times which may affect plant efficiency, or recommended spare parts which are kept to satisfy risk aversion.

Optimization and rationalization of the above mentioned categories requires a very strategic approach but can return significant cost savings.

Typically we find that Required Active items range from 25-30%, Excess Active items range from 10-20% and Inactive items range from 50-60% of all inventories. Furthermore, we consistently find that within all Inactive inventories, Critical Spares represent 15-20%, Slow-moving items represent 20-25%, and Obsolete items represent 15%.

The opportunity for cost savings predominantly comes through the elimination of duplicate items and the rationalization of Excess-Active and Slow-Moving inventory. These items can be used down through attrition, sold back to the supplier for credit towards future purchases, or sold to a third part for cash. In many cases obsolete items can also offer some opportunity for generating cash.

To take the process even further, an inventory analysis will reveal spend by commodity and spend by supplier, often resulting in a multitude or suppliers and a large range in pricing. With this information, procurement can now leverage spend to establish preferred supplier programs and receive reduced MRO item pricing.

For more information on Inventory Optimization and other services provided by I.M.A. Ltd., please visit www.imaltd.com or contact info@imaltd.com.