Governments worldwide manage trillions of dollars in public spending every year, and this is only possible because of complex public procurement systems that utilize coding methods to enable the categorizing of products and services with exceptionally high accuracy.

From the EU-native CPV to North America's NAICS, these coding systems function as a means of communication within public procurement. They define how governments interact with markets, influence supplier strategies, and drive procurement efficiency.

In this article, we will examine the most common coding/classification systems used in three major procurement markets – the U.S., the European Union, and Canada.

A (very) brief intro into classification systems

Classification systems are an exceptionally old tool that humans have used for approximately 5,000 years. Their earliest documented use dates back to Egyptian scribes who used rudimentary forms of these systems to manage materials and labor during the building of the pyramids.

Modern-day classifications, as we know them now, began to be used during the Industrial Revolution in the mid-18th century when supply chains became much more complex and demanded a more structured and coherent approach to organizing work.

The first properly formalized system for procurement classification was introduced in the 19th century by North American railway companies, which allowed them to create a more precise and intelligent framework for buying and managing the products and services they purchased. 

Fundamentally, contemporary procurement languages strive to achieve the same goals – to ensure a more streamlined spend analysis, reduce costs, better manage supplies, and make more informed strategic decisions.

As computers and digital technology started to become more widely used in the early 1980s, procurement languages also became more complex and began to utilize hierarchical, multi-tier structures, which led to better data management. 

Different parts of the world started to develop their own procurement coding systems that could operate locally, such as the NAICS in North America, CPV in Europe, and GSIN in Canada. The problem, however, is that achieving a global so-called harmonized system is much more complicated than could have been anticipated, considering how diverse international procurement is with varying regulatory requirements, different requirements across industries and states, and the sheer complexity of the data involved.

Common Procurement Vocabulary (CPV)

The CPV has proved vital to the European Union and the United Kingdom since its inception in 1998 and it became mandatory in the EU in 2006 thus making it an important milestone in procurement standardization. This 9-digit coding system has revolutionized how goods and services are categorized across EU member states. 

Read more: Looking into CPV: EU’s standard language for government contracts 

CPV is a relatively complex system that employs a hierarchical structure comprising a main vocabulary and supplements to this. The main vocabulary has a tree structure that moves from broader to narrower categories with every digit in the sequence.

Here's how it works:

  • The first two digits identify divisions (XX000000-Y)
  • The first three digits identify groups (XXX00000-Y)
  • The first four digits identify classes (XXXX0000-Y)
  • The first five digits identify categories (XXXXX000-Y)

This supplementary classification allows much more complexity and granularity to be added to procurement processes by adding qualitative details and precise requirement specifications such as delivery timeframes and environmental standards.

Looking for more information about the EU’s CPV? Check out this article:  Current and future trends in the EU’s Common Procurement Vocabulary.

North American Industry Classification System (NAICS)

NAICS was established in 1997 as a collaboration between the U.S., Canada, and Mexico. This replaced SIC, an older, outdated system, which had a more rigid structure and was predominantly intended for traditional manufacturing industries rather than service-based economies. 

NAICS organizes economic activities into 20 sectors and 1,170 industries compared to CPV, which uses nine digits and a six-digit code structure. 

Similarly to CPV, NAICS also has a hierarchical structure and sorts codes into the following categories: sector, subsectors, industry groups, industries, and national industries. 

To remain up to date with changes in the market, this system undergoes a regular five-year update, yet it does have some limitations. Compared to its product-focused counterparts, such as UNSPSC or CPV, NAICS classifies entire business establishments, which basically involves assigning a single code to a business based on its primary field of activity.

The Goods and Services Identification Number (GSIN)

The GSIN system served as the backbone of Canadian federal purchasing activities until the country's transition to the United Nations Standard Products and Services Code (UNSPSC) in 2021. GSIN had just over 5,000 unique codes and was reasonably comprehensive, with the majority of procurement data able to be connected.

While 5,000 codes was not necessarily a small number, this system lacked the flexibility to adapt to continuously evolving procurement needs. However, the most significant shortcoming of GSIN was its domestic isolation, meaning that Canada was unable to use it to communicate with international partners.

The transition from GSIN to UNSPSC was very gradual and cautious to allow any potential disruption in operations to be minimized. Both systems ran concurrently during the changeover period, a pragmatic choice that reflects the complex reality of modernizing government procurement systems since a quick flick of a switch is not possible when billions in public spending hang in the balance.

While this transition may appear inefficient to some, it actually represented a masterclass in public sector transformation. It allowed the Canadian authorities to maintain operational continuity while carefully transitioning towards international standards.

Wrap-up

The evolution of procurement coding systems reflects a broader shift in how governments and businesses approach public spending. From CPV's structured approach in Europe to NAICS's industry focus in North America, and from GSIN's localization to UNSPSC's global reach, each system represents a step towards more efficient, transparent, and strategic procurement.

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