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/)