Demand Reduction
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Transcript of Demand Reduction
Procurement Management
Project Report
on
Demand Reduction
Submitted By: Abhisht Narain Sinha
IMG 08, 08305
Submitted To: Prof. Vikas Chandra FORE School of Management
DEMAND REDUCTION 1
Table of Contents 1.0 About the Topic ............................................................................................................... 2
2.1 Demand Reduction: Introduction ..................................................................................... 2
2.2 Scope: As a business process ........................................................................................ 3
2.2.1 Demand management and forecasting .................................................................. 3
2.2.2 Planning horizon ................................................................................................... 4
2.3 Application ...................................................................................................................... 5
2.4 Objectives ....................................................................................................................... 6
2.5 Methodology ................................................................................................................... 6
2.5.1 Assess the organization ........................................................................................ 6
2.5.2 Identify improvement opportunities ........................................................................ 6
2.5.3 Determine what drives demand ............................................................................. 7
2.5.4 Influence usage and spending to reduce demand ................................................. 7
2.5.5 Propose demand reduction solutions .................................................................... 8
2.5.6 Implement demand reduction recommendations ................................................... 8
2.6 Case Examples ............................................................................................................... 9
2.6.1 Disney’s demand management ............................................................................. 9
2.6.2 Dell’s demand management ................................................................................ 10
2.6.3 Management challenge ....................................................................................... 11
3.0 Conclusion .................................................................................................................... 11
References ......................................................................................................................... 12
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1.0 About the Topic Most organizations today are stretched too thin. Managers are challenged to do more with
fewer resources and to make cost reduction a strategic priority. Budgets are being cut, time is
short, and companies are out of tools and skills to find new cost-cutting opportunities.
Everyone is looking for new ways to cut costs and increase value within their organizations.
Demand Management is a planning methodology used to forecast, plan for and
manage the demand for products and services. This can be at macro levels as in economics
and at micro levels in public service organizations both governmental and NGO, industries
including energy. Demand Management has a much defined set of processes, capabilities
and recommended behaviours for companies that produce all manner of goods and services.
Consumer electronics and goods companies often lead in the application of demand
management practices to their demand chains; demand management outcomes are a
reflection of policies and programs to influence demand as well as competition and options
available to users and consumers. Effective demand management follows the concept of a
"closed loop" where feedback from the results of the demand plans is fed back into the
planning process to improve the predictability of outcomes. Many practices reflect elements
of the theory of Systems Dynamics. Increasingly volatility is being recognized as significant an
issue as the focus on variance of demand to plans and forecasts.
Demand management is a proven mechanism to take costs out of an organization
without further reducing its capacity to execute. With demand management, organizations
address the underlying drivers of external spending, align their purchases to their business
needs and eliminate unnecessary consumption.
Although many companies use demand management to target their indirect spend
categories, leading companies are now applying demand management to more complex
categories of spend—including travel, technology and direct materials. Demand management
is becoming the tactic of choice across a wide range of companies and industries—from
telecom and financial institutions to manufacturing.
2.1 Demand Reduction: Introduction A demand reduction lever is a proven method to reduce or eliminate spend on goods and
services. There are seven key demand reduction levers. They range from the conservative to
the aggressive. The most conservative lever is to increase cost awareness among employees;
the most aggressive is to eliminate demand altogether. While aggressive levers will
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significantly affect cost levels, conservative levers can usually be applied more quickly and in
more sensitive areas.
When reviewing the seven demand reduction levers, consider all of the alternatives.
Although the levers will vary in their aggressiveness and ease of implementation, at least one
demand reduction lever can be applied to any category or potential opportunity. For example,
a company analysing the use of air travel for internal meetings could choose from any one of
the following levers:
Increase cost awareness among employees by issuing a corporate notification on the
high cost of air travel for non-client purposes
Encourage substitution by requiring employees to substitute videoconferences for
some types of travel
Reduce the frequency of trips by restricting the number of internal meetings that
require air travel
Discourage use by increasing the approval level required for internal travel
Simply speaking, demand management is a key lever in the procurement process for
reducing costs by managing requirements, controlling demand (e.g., policy that limits who can
receive a desktop printer), and distinguishing between "wants" and "needs."
1. Zero in on demand management opportunities.
2. Identify the stakeholders — all of them — and their concerns regarding the changes.
3. Communicate with stakeholders to get "buy in" from the beginning.
4. Adapt policies and processes to realize demand-driven efficiencies.
5. Install demand management in the culture so it becomes self-sustaining and automatic
over time
2.2 Scope: As a business process Demand Management can be applied to various field such as business process and in IT field.
2.2.1 Demand management and forecasting Demand management and forecasting is recognizing all demand for goods and services to
support the marketplace. Demand is prioritized when supply is lacking. Proper demand
management facilitates the planning and use of resources for positive and profitable results
and may involve marketing programs designed to increase or reduce demand in a relatively
short time.
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2.2.2 Planning horizon The planning horizon is how far a plan extends into the future and is dictated by tactical and
strategic degrees of uncertainty. The tactical horizon may be based on the cumulative lead
time needed to procure or produce low-level components. The strategic horizon is based on
the time needed to adjust capacity. A greater degree of uncertainty requires a longer planning
horizon.
Demand Management is both a standalone process and one that is integrated into
Sales and Operations Planning (S&OP) or Integrated Business Planning (IBP). The definition
of the process and components covered in this section describe the current best practices
encompassing the methods and competencies that have a track record of success with
leading companies today. Much effort is put into more esoteric financial or academic
approaches; however their practical value is limited by the ability of business practitioners to
use on a regular basis. As those methods become more accessible and part of regular use
they join the best practices, "predictive forecasting" covered in this section is a great example.
Demand Management in its most effective form has a broad definition well beyond just
developing a "forecast" based on history supplemented by "market" or customer intelligence,
and often left to the supply chain organization to interpret. Philip Kotler, a noted expert and
professor of marketing management notes two key points:
1. Demand management is the responsibility of the marketing organization (in his
definition sales is subset of marketing);
2. The demand "forecast" is the result of planned marketing efforts. Those planned
efforts, not only should focus on stimulating demand, more importantly influencing
demand so that a company's [business'] objectives are achieved. George Palmatier a
noted expert on the practical approach to demand management calls this "Marketing
with a Big M".
The components of effective demand management are:
1. Planning Demand;
2. Communicating Demand;
3. Influencing Demand and
4. Prioritizing Demand.
Most supply management organizations recognize the value of demand management
in theory as a key lever for driving efficiency and reducing total costs. But they also know that
realizing the value of demand management in reality is hard work. It requires patience and a
willingness on the part of internal customers to change.
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Too often, demand management strategies falter or fail — or are never pursued to
begin with — even though the payoff can be substantial. Companies can reduce spend by 10-
20 percent through demand management. But realizing those savings can be daunting indeed.
2.3 Application
Demand Reduction
Levers Travel Examples Technology Examples
Eliminate demand Cancel non-essential meetings
Eliminate purchases of
non-essential PC
peripherals
Reduce quantity Restrict travel for all
nonessential internal meetings
Reduce purchases of
network servers through
consolidation
Simplify specifications
Establish market-based
maximum hotel rate for
frequent destinations and
restrict use of luxury hotels
Create distinct user tiers
with hardware and
software guidelines and
restrict variations
Reduce frequency Reduce number of internal
meetings requiring travel
Eliminate automatic
purchase of monitor with
each new PC
Encourage substitution
Encourage use of video-
conferencing as an alternative
to in-person meetings
Shift users who do not
need to be mobile from a
laptop to a desktop
Impose tighter process
and tracking
Enforce non-reimbursement for
travel booked outside of
preferred agency
Elevate the approval level
required for technology
purchases
Increase cost
awareness and tighten
policies
Publish cost differences
incurred by not booking 14
days in advance
Raise awareness of
hardware and
maintenance costs within
the business units
Table: Companies can choose from a variety of methods to reduce demand
(Source: A. T. Kearney, Demand Management- Changing the way organizations
acquire Goods and Services)
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2.4 Objectives The objectives of Demand Management are:
Characterizing and codifying business activities into specific and recognizable patterns
that have a common service consumption profile
Characterizing the usage of services by users into user profiles
Encouraging the use of services at less busy times, for example by offering discounts
at these times.
The first two objectives help to understand and predict the demand for resources
better. This makes it easier for the service provider to match the services and resources to the
identified needs of each user profile. Ultimately, this leads to improved value for both
customers and suppliers by minimizing costs and poor performance.
2.5 Methodology Demand management approach is based on a structured, well-defined six-step methodology
that is rooted in fact-based analysis.
2.5.1 Assess the organization The first phase of a demand management program is to perform a high-level assessment of
all spending categories. This assessment focuses primarily (but not solely) on obtaining data
from internal and external sources to gain an improved understanding of the company’s buying
process and usage. By understanding how the company spends money across categories,
executives are better able to set priorities and to measure the potential impact of demand
management on the entire organization.
In the supplier dimension, the organization’s total spend with individual firms is determined—
thus allowing for insight into which suppliers are being used and the level of compliance to
preferred supplier deals. Finally, by categorizing information by business group, a company
can identify its total spending by line of business. This is important information to have when
it comes to making improvements and tracking results. Together, these dimensions offer new
insight into a company’s spending patterns.
2.5.2 Identify improvement opportunities Armed with an organizational assessment, the next step is to identify improvement
opportunities— these are the spend categories in which costs can be reduced or demand can
be eliminated. There are three elements to this identification process:
2.5.2.1 Review current practices A prerequisite for analysing demand is to gain a thorough
understanding of current practices. Information on current initiatives, buying practices as well
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as existing policies and controls provides valuable insight into how a company is managing its
spend in a given category.
2.5.2.2 Understand the opportunities Once information is collected, it is then analysed to
determine what impact a demand management program might have on the organization as a
whole. In this scoping exercise, the firm compares internal processes, policies, buying
practices and external benchmarks. The comparison is used to estimate potential savings for
each spending category and to determine the potential savings for the overall demand
management initiative.
2.5.2.3 Prioritize categories Demand management programs are usually performed in waves,
beginning with categories that will provide the largest impact for the time invested. The first
set of categories should have a significant chance at success because strong results here will
pave the way for success in future categories. And although the more categories undertaken,
the higher the potential savings, most organizations will be limited (by a lack of available
resources) in the number of categories they can take on at one time.
2.5.3 Determine what drives demand With all potential opportunities on the table, the focus of the demand management program
turns to developing the most viable cost-saving opportunities. This step requires a thorough
analysis of the company’s “demand drivers” to figure out exactly what drives consumption
within the company. Demand drivers are the underlying factors that influence the quantity and
specification of purchases. For example, the demand drivers behind a computer purchase
might include the predetermined replacement cycle or the hiring of new employees. If
computers are replaced every three years, the replacement cycle is a demand driver. If every
new employee is issued a new computer, the hiring of a new employee is the demand driver.
Understanding these drivers can be a complex task, particularly because they will vary across
the organization. Different business groups may have different requirements or business
practices, which lead to different drivers or levels of demand.
2.5.4 Influence usage and spending to reduce demand The fourth step in the demand management approach is to determine the best ways to
influence usage and spending and thereby reduce demand. This is typically accomplished
using two tools: demand reduction levers and benchmarks.
2.5.4.1 Demand reduction levers A demand reduction lever is a proven method to reduce or
eliminate spend on goods and services.
2.5.4.2 Benchmarks Although there are many tools to reduce demand, one of the most
effective is benchmarking. Benchmarking your company’s performance against others (both
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internally and externally) can help determine appropriate types of purchases and control
policies.
2.5.5 Propose demand reduction solutions In step five, the demand management team proposes its recommendations. Each
recommendation should be based on a sound fact base and solid, supportable analysis. The
reason is understandable: When a recommendation is based on sufficient data it allows for
more reliable analysis and provides transparency into the value of each recommendation. In
other words, the right data gives decision-makers the information they need to make the best
decision. Many well-intentioned demand management efforts fail to realize identified savings
simply because the ideas underlying the recommendations are not sufficiently developed or
supported.
2.5.6 Implement demand reduction recommendations Demand management is won or lost in the implementation. A successful implementation
requires continuous monitoring to ensure change is embedded throughout the organization. It
calls for upfront planning to force the organization to fully analyse the feasibility of
recommendations and constant supervision to keep actual results in line with identified
opportunities. Savings from demand management are not real until budgets have been
reduced to reflect the savings.
The most successful demand management programs feature the following characteristics:
2.5.6.1 Strong partnerships Effective partnering allows the demand management team to
integrate with diverse business units and help them meet their cost-reduction objectives. The
level of partnership will vary depending on the category, or even by the recommendation, but
should be based on accurate, regular reporting, and tracking of key information.
2.5.6.2 Performance measures Performance measures are a crucial part of the
implementation. Effective measures do two things: track performance, and provide detailed
feedback to resolve problems quickly and build on successes more efficiently. Also, the insight
provided by performance measures must reach the highest levels of the organization. High-
level oversight will ensure that the recommendations are being adopted as planned and that
business units are progressing on track.
2.5.6.3 Solid infrastructure Top companies build a robust infrastructure to support their
demand management initiatives. They create compliance mechanisms — tools and processes
to control usage both internally and externally—and assign clear ownership and responsibility.
For example, to increase compliance in the office supplies category, companies work with
their vendors to ensure that only approved items are in the corporate catalogue and restrict
purchases of unapproved items.
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2.5.6.4 No cost creep Finally, every good idea, even demand management, can be taken
down by cost creep. As recommendations are implemented, the company’s focus should shift
to maintaining the level of savings achieved. Close monitoring of usage and zero-based
budgeting will ensure that costs are contained throughout the implementation.
2.5.6.5 Provide a broader context Because all companies in all industries are searching for
ways to cut costs, simply explaining demand management changes as part of “cost cutting”
will not convey the importance of the initiative nor its ability to dramatically drive savings.
Leading firms incorporate demand management into larger, more visible savings programs —
recommendations are often easier to accept when positioned as the centrepiece of a larger
plan. Also, senior leaders who provide a broader context for the changes—announcing and
com-mitting to well-defined savings targets—obtain the most support and acceptance.
2.5.6.6 Explain why The key declaration in every communiqué should answer the implicit
“why.”
2.6 Case Examples 2.6.1 Disney’s demand management Disney has a long history of effective demand management. Several years ago at MIT, they
developed a workshop for executives of their affiliated companies on state-of-the-art customer
service. The head of customer service at Disney World was among those presenting to the
group. She described in detail how Disney has perfected both the art and science of customers
service and effective demand management.
For example, Disney has done many careful studies of how long people will wait in line
before they need to be distracted. Through these studies, they have determined exactly when
to engage the waiting guests with wandering characters, videos, mirrors, and other measures.
They also lay out their lines in a serpentine fashion so the guests can’t see how long the line
really is, and so that they experience a feeling of constant progress.
A fascinating New York Times article published in December 2010 explained how
Disney has
continued to develop its techniques for demand management. Here are some of the key
points:
Disney World has outfitted an underground nerve center with state of the art video
cameras, computer programs, digital park maps, and other tools to detect waiting
problems and deploy countermeasures in real time.
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In an insightful move, the company outfitted the flat screen TVs in the nerve center
with devices that depict the various attractions with green, yellow, and red outlines to
represent wait time gradations.
If wait time is mounting, the center can alert the attraction to increase capacity (e.g.
launch more boats), or dispatch a character to entertain the people waiting in line.
Alternatively, the operations center can route participatory mini-parades that guests
can join toward attractions with shorter lines to siphon guests and balance capacity.
Through these measures, Disney has significantly increased the average number of
rides per visitor.
Underpinning Disney’s capacity management is a complex, computerized system that
projects demand based on an analysis of hotel reservations, flight bookings, historical
data, and even satellite weather information.
Disney is currently experimenting with smartphone aps that give directions to
attractions and characters, and soon to the nearest restaurant with the shortest wait.
The company has also started adding video games to wait areas to further increase
guest tolerance for long lines.
Disney managers have combined careful research, creative insight, and tailored
technology to develop, deploy, and perfect measures like these. Through this process, they
have met their primary objective of maximizing customer enjoyment, while at the same time
fitting demand to their supply without the guests ever knowing it.
2.6.2 Dell’s demand management Dell catapulted to prominence as a PC producer with its well-known direct model. This
business model enabled Dell to effectively manage demand and fit it to its supply dynamically
and in real time. Here are a few of the demand management techniques Dell developed.
Dell purposely selected customers with relatively predictable demand, especially
corporate accounts, and avoided first-time buyers.
The company instituted a series of monthly and weekly meetings to match supply and
demand, bringing these into alignment on an ongoing basis.
Dell’s managers developed daily processes to manage demand dynamically, and align
it with supply. For example, if demand increased unexpectedly, purchasing could
quickly shift to alternative suppliers. In addition, Dell’s sales managers gave the order
takers incentives to shift customers to the makeable set of products (which were shown
on their screens); the order takers also were encouraged to bundle available products
with an attractive umbrella price.
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The company changed its pricing on particular configurations daily to steer demand
toward the available models.
Suppliers were selected based only 30% on cost, with the other 70% based on quality,
service, and flexibility.
When in doubt, Dell’s managers over-forecast high-end products, because it was much
easier to sell up, and high-end products had a higher shelf life.
These measures, and others, allowed Dell to systematically manage demand, and
relentlessly fit it to its supply. (I describe Dell’s business model in more detail in my new
book, Islands of Profit in a Sea of Red Ink.)
2.6.3 Management challenge Note that Disney provides services, while Dell produces physical products. But both
companies developed extremely effective processes that combined research, creative
insights, and targeted technology to dynamically manage demand at a very granular level, and
fit it to their supply. In the process, they maximized customer satisfaction
while also maximizing their capacity utilization, asset productivity, and profitability.
Dynamic demand management at a granular level is one of the most powerful ways
for a company to expand its islands of profitability, and to turn around the marginal business
that constitutes its sea of red ink.
The challenge for all managers is to develop as a core business process the systematic
knowledge, creative insights, and targeted technology that will enable them to constantly
monitor their demand and fit it to their supply.
Those who do so will realize the twin objectives that mark the highest-performing
companies: high levels of customer satisfaction along with sustained and growing profitability.
3.0 Conclusion Demand management is far more than writing a new policy or establishing new rules.
Successful demand management programs are based on a solid fact base, rooted in a
thorough understanding of current practices and built on a foundation of practical
recommendations. The rewards—both financial and organizational—are earned through
structural changes, increased communications to embed new behaviour, and performance
tracking and oversight to ensure that targets are being realized.
For organizations that want to reach the next level of the cost-cutting equation, a strong
demand management program can lead the way.
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References 1. Demand Management- Changing the way organizations acquire Goods and Services
by A. T. Kearney
2. Demand Management Disney Style, Island Portfolio Book, Posted on January 10,
2011 by Jonathan Byrnes (http://islandsofprofitbook.com/2011/01/10/demand-
management-disney-style/)