The Beginning of Wisdom is To Call Things by Their Right Names (Chinese proverb)

A few days ago, I had an interesting meeting with the CFO of a multinational company. He had recently tried to "optimize" his supply chain, or in other words, to cut costs. He knew that some products were causing him a major headache (and hole in his pocket), and had to do something about them. But which? The next step was to locate the products that account for most of the expenses (a kind of Pareto analysis) and then to find out the stock level, stock policy, average consumption, number of suppliers, the annual volume with each supplier, logistics (storage and transport costs) and so on. By doing so, he thought that he would be able to reduce the inventory and number of suppliers, to negotiate and get better purchasing conditions, and reduce the logistics costs. A good plan, indeed! Well, it is the core of Spending Data Management (SDM) and other supply chain optimization practices.

Unfortunately, in spite of the Oracle Application ERP, data warehouses, BI software, and other goodies that that the company had invested in during the last few years, he couldn't get a reliable picture of the company’s spend. I asked him to send us his product data (in a text file, Excel, or something similar), so we could analyze and evaluate the data quality.

I had a pretty good idea of what to expect, since I’ve seen it many times before. But we needed to put the evidence on the table, so to speak.

Let's take valves as a typical example. We found that they were classified under more than 20 different categories. Here are just a few examples:

• Industrial Safety – Breathing Equipment – Valve/Diaphragm
• Control – Control Equipment – Valve
• Lifting – Winch spares - Engine/Clutch/Relay Spares
• Liquid/Gas – Brass/Copper/Bronze Parts – Safety Valve
• Liquid/Gas – Stainless Steel – Pneumatic Valve
• Control – Control/Tubing Equipment – Electrical Valve
• Control – Control/Tubing Equipment – Pneumatic Valve
• Vacuum – Vacuum Installations – Right Angle Valve

In this scenario, ascertaining annual spend on valves, the valve inventory level, valve inventory turnover, and the number of valve suppliers is almost impossible. But, if all valves (irrespective of their usage) were classified under Valve, getting the required information could take a single click.

Most companies have no suitable taxonomy and, as a result, all their product data quality efforts are built on shaky foundations. If exactly the same product is classified under several different categories, decision making regarding spending and supply chain efficiency becomes guesswork.

I’ll talk more about taxonomy in future posts.