“Beware of little expenses; a small leak will sink a great ship.”
– Benjamin Franklin
Demand management is one of the secret tools of the professional cost cutter.
What is Demand Management?
Demand management is about understanding the totality of demand you have for a particular cost or service, organizing the demand by priority, value or “wants and “needs,” and addressing root causes for the demand by enforcing proper controls and reporting.
There are only two main ways to reduce costs. You either reduce the demand for the cost or reduce the per unit cost. Typically, you can reduce the per unit cost, through better purchasing practices and supplier negotiations to provide savings of 5-20%, but often at the sacrifice of quality or service levels. Companies can often yield 20-40% cost savings with demand management.
I’ve seen companies reduce sales team travel expenses by 40% through strong demand management while improving sales team performance. It can be as simple as forcing team members to prioritize their travel by getting sign-off on a simple travel request form, which includes the reason for travel (e.g., relationship building, key decisions), what stage in the pipeline the customer is in, and the potential value of the customer. This type of travel request form forces people to think critically about why they are going on a trip, the value they are going to get from it, and other potential ways (e.g., online or phone conference) to drive to the same or better outcomes.
Demand management is a very simple tool and typically doesn’t take a lot of energy or effort to implement. Though, you do often get grumblings when you first implement it, because people have to change their behavior, and they view the purse strings being tightened.
How do you implement demand management?
To properly implement demand management, follow these steps:
1. Pareto your cost structure
The first step of demand management is to conduct a Pareto analysis on your cost structure, prioritizing your costs from the highest costs to lowest costs. You can also use Pareto analysis and demand management on service or process usage, prioritizing the use of a service or process by customers, internal teams or other users.
2. Get to the root cause of demand
Understand the root cause of what is driving demand for a particular cost through problem solving using tools such as value stream mapping, 5 whys (asking why five times to get to the root cause) or segmenting the top use cases.
3. Build a game plan
Build your demand management game plan, thinking through the proper segmenting of demand, the potential savings goals, the necessary controls, approval and sign-off thresholds, reporting, and change management plan.
Share and problem solve the demand management game plan with all the key stakeholders to improve the plan and get buy-in.
5. Leadership sign-off
In the beginning, have the sign-off of the larger costs be done by someone high up in the organization, so there is proper visibility, accountability, and appreciation for the costs.
6. Reinforce with metrics
Once implemented, provide the team with a readout on the reduction and cost savings of requests. Organizations often fail at demand management, because the vast majority of requests get approved, and the senior leadership is not aligned with the effort.
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Conduct a Pareto analysis on your spend base to prioritize the spend categories. Analyze historical growth and assess the root causes of the spend and growth. Create reduction targets and think through your demand management plan for each category.