Product coding is probably not the sexiest topic in supply chain management, but it is of strategic importance, and current interest, for a variety of reasons. A diversity of coding systems has existed for many years, but each presents difficulties for users, whether buying or selling, in the supply chain.
On the one hand, many are based around the needs of financial accounting or statistical reporting – they may help group finance or a government’s Treasury understand broad flows, but they are too arbitrary and too imprecise to be of much use in procurement.
Alternatively, there are product-specific coding systems, those used by NATO for example, or the UK’s National Health Service, which are specific to the point where new ideas, solutions, or competitors are seriously impeded. The EU has for some years been developing a Common Procurement Vocabulary (CPV) – a 1996 version, now superseded by ‘v1998’ – specifically aimed at the procurement and supply chain needs of public sector procurement.
As readers will be aware, the ‘public sector’ in Europe is a wideranging concept, regulating not only the supply needs of government departments and local authorities but of many ostensibly private- sector activities – transport, utilities, nationalised industries, lottery management – that could be deemed to be providing a public good. All these areas have, for contracts over a certain value, to advertise their requirements in the ‘Official Journal of the European Union’ (OJEU) or its electronic equivalent.
From a date to be determined (depending on the progress of legislation, but almost certainly before the end of the year) all such contracts will have to be coded using the CPV. The CPV system is conceptually simple. It is an eight digit code (actually nine, but the final digit is a check-code to guard against input errors). In the logistics field, for example, 60000000 covers ‘land transport and transport by pipeline’. To be more specific, 60120000 is ‘freight land transport’. 60122000 is ‘freight transport by road’ and you can, in this instance, get as specific as 60122161 – ‘freight transport by armoured car’. By no means all product areas are yet that specific – there are around 6000 codes at present, but the European Commission is formally committed to continuous expansion and updating of the CPV.
Nose to the grindstone
Veterans in the world of coding will have heard that before, and it may be that we need some powerful user groups to keep the EC’s nose to the grindstone. CPV should have a number of benefits. Firstly, since Works, Goods, and Services contracts all have different thresholds (expected contract values above which open competition is in most cases compulsory) it will be easier for the authorities to ensure that the rules are being followed. Second, CPV will mitigate the problems of having a dozen (and soon to be more) official languages.
At present, translating contract details and providing keywords for searching in multiple languages is fraught with difficulties – the story told by procurement consultants Achilles (and I am assured it is true) is of the oil company issuing a tender for well-head blow-out valves. These are known in the industry as ‘Christmas Trees’ and (I’m sure you are ahead of me here), sure enough the oil company was inundated with enquiries from suppliers of forestry products! Uniform use of CPV should eliminate this sort of error and, perhaps more importantly, make it simple for potential suppliers, especially smaller suppliers, to search the OJEU for contract opportunities. If (and it’s a big if) CPV is maintained properly, given the proportion of European economic activity that relates in some way to the public sector, it might well make sense for all firms to adopt CPV as their coding system.
At all events, firms really should have some sort of strategy for procurement and supply chain coding and classification. It is remarkable how often, when things go wrong in a government department or a private business, it emerges that nobody knows how much they spend on any given category of supply – given which, they can’t possibly have been doing those basic things like rationalising the supply base, standardising and rationalising the range of products they buy in, or using their purchasing power to achieve economies of scale.
And if firms really want to reap the benefits of e-commerce, (which like any IT application, eats coded data for breakfast, but tends to throw a sickie when faced with fuzzy human languages) some fairly deep level of coding and classification is really essential. Coding gives meaning to trading information passing through an organisation’s IT system.
But coding/classification can never be an entirely ‘off the shelf’ product – each business needs to work out its own strategy and level of coding for different parts of the business. In sourcing and tendering, you don’t want a coding level so specific that it excludes new suppliers or alternative approaches; on the other hand if you are looking at supplier consolidation or inventory control you may want a level of detail close to line item (this is one of the advantages of a hierarchical coding system such as CPV – it is relatively easy to aggregate or disaggregate areas of spend).
These things need to be thought about, but the benefits of a well thought out, robust, and enforced (there are serious staff and supplier training and compliance issues here) strategy are considerable.
Full details of the CPV system, and how it applies to EU public procurement, are available at www.simap.eu.int. ‘Maximising returns from purchasing data’, an excellent introduction to coding and classification, the options and the business benefits, is available as a free download on the website of the UK’s Chartered Institute of Purchasing & Supply – www.cips.org
- Any buying organisation covered by EU procurement Directives, and any selling organisation looking for public sector business, needs to understand and implement CPV by the end of this year
- All firms ought to be taking a strategic look at their current coding and classification, where it exists, or implement some system where it doesn’t
- Choice of coding system must serve not only internal users but be compatible with the needs of major customers and buyers
- Coding is a dry-as-dust subject, but is too important to be left to the nerds in IT – it has to be applied consistently throughout the organisation if the full benefits are to be reaped, and this will require leadership from the top