Originally published: June 2011
Sorting Out the Sorting Systems
When we received an inquiry from a potential foreign client requesting our ISIC number, I was stumped. I've recorded SIC and NAICS classification codes – but ISIC was a new one on me.
I did some research and discovered there are actually four national, multi-national and global industrial classification systems that finance and credit managers should be aware of. Here's a summary of each of them. There are also some links at the end of the article for those of you who want to dig deeper.
SIC – Standard Industrial Classification
The SIC classification code was established in 1937 by the Central Statistical Board of the United States. The intention was to facilitate U.S. governmental agencies that had begun to collect industrial data for a variety of statistics.
Before the SIC code was put in place, each agency defined industrial categories differently, making statistical comparison impossible. The SIC gave a standardized system of industrial categorization to be used by all government agencies, thus bringing focus and uniformity to the gathering of data and the preparation of statistics.
The SIC groups all forms of industry and services into ten broad divisions (01 to 91). The original code had only four digits: the broad division represented by the first two digits; the industry group and type represented by the last two digits. (Ex. Book printing is classified under SIC 2732. “27” represents Printing and Publishing and “32” represents “Book printing”.)
Over the years, various entities have expanded the standard four digits to six and eight digits. In the 8-digit system used by Dun and Bradstreet:
- first two digits represent major groups within the broad definitions
- digits three and four - specific industries within the major groups
- digits five and six – sub-industries within the specific industries
- digits seven and eight – lines of business within the sub-industries
The Standard Industrial Classification, as developed by the U.S. government, was last updated in 1987 and will receive no further updates, as it has been replaced by the NAICS. The SIC code, however, is still used by some federal departments, state and local governments, as well as credit reporting companies and list providers.
NAICS – North American Industry Classification System
The NAICS, developed by the U.S. Economic Classification Policy Committee, Statistics Canada, and the Mexican Instituto Nacional de Estadistica y Geografia, was adopted and implemented with the U.S. Census Bureau’s 1997 Economic Census. It was created to fill the need for common industry definitions among these three North American nations following the passage of the North American Free Trade Agreement in 1992.
The primary objectives of the NAICS are to:
- classify establishments based on similar production processes (the SIC classified by products and services)
- pay special attention to emerging and service industries and advanced technology
- maintain continuity with existing coding systems, where possible, to enable time-based data comparisons
- conform to the two-digit level of the United Nations’ ISIC classification system
While created for statistical purposes, the NAICS is also used for administrative, regulatory, contracting, taxation and other non-statistical purposes. Some state governments, for example, offer tax incentives to companies classified in specific NAICS industries.
The NAICS classifies all economic activity into twenty industry sectors: five primarily goods-producing sectors and fifteen services sectors. It employs a six-digit code. Digits 1 and 2 designate the largest business sector; digit 3 the subsector; digit 4 the industry group; digit 5 the specific industry; and digit 6 designates national industries.
It groups organizations into industries based on similarity in the processes used to produce goods or services. It is important to note that it is an industry classification system, not a product classification system. Some agencies and organizations, however, have begun using the NAICS as a basis for their procurement programs, a use for which the NAICS is not well suited.
NAPCS – North American Product Classification System
The NAPCS, designed by the statistical agencies of Canada, Mexico and the United States, is intended to be complementary to, but independent from the NAICS.
The purpose of the NAPCS is to develop a comprehensive list of products, product definitions, and product codes that classify goods and services according to how they are used. The long-term objectives are:
- the development of a market-oriented classification system for products and services that is linked to the NAICS industry structure
- to develop a system that is consistent across the three NAICS countries
- to promote improvements in the identification and classification of service products across international classification systems
Development of this classification system was launched in February 1999 and it is still a work in process.
ISIC – International Standard Industrial Classification of All Economic Activities
ISIC, a United Nation’s system for classifying economic data, is described by the U.N. Statistics Division as follows:
“ISIC is a basic tool for studying economic phenomena, fostering international comparability of data, providing guidance for the development of national classifications and for promoting the development of sound national statistical systems.”
The ISIC provides a set of categories (classifications) that can be utilized for the collection and reporting of statistics. It is a basic tool for studying economic phenomena and is widely used (nationally and internationally) in classifying economic data in the areas of population, production, employment and gross domestic product, etc.
Initially adopted in 1948, most countries have either used ISIC as their national classification system or have developed their own national codes based on ISIC.
Revision 4 of the ISIC has 21 major classifications (A through U) which are divided into a total of 99 sub-categories (2-digits 01 through 99), which are further sub-divided (single digits 1-9).
Other Industry Classification Systems
Besides the above-mentioned national and international industry/product classification systems, there are numerous other nation-based and organization-based systems. For instance, the SEMI® Industry Classification System, a product classification system for the suppliers that support the various industry segments represented by the SEMI® Trade Association, and The Global Industry Classification Standard (GICS), which is the industry classification structure used for Standard & Poor’s U.S. industry index calculations.
Further Resources on the above-mentioned Classification Systems
U.S. Census Bureau
United National s Statistics Division – Classifications