Demand Management: The overlooked cost-savings key for sustainable impact
Picture the scenario: A large multinational company with tens of thousands of employees experiences a difficult quarter, and executives order their departments to tighten belts – and fast.
Even the most profitable companies faced significant challenges amidst the volatility of the last couple of years. While the reasons for these challenges vary, the reaction is frequently the same: deep spending cuts across the organization, with each department head determining what, or who, is expendable. Too often, there are disagreements over how to achieve the savings targets demanded by the C-Suite – particularly from finance teams.
However, there is a more effective, yet often unrealized, method to achieve cost savings and improve efficiencies: demand management.
Demand management is an outcome-focused planning methodology to ensure that the right product reaches the right recipient, where and when they need it, and at the best possible cost. Efficio approaches demand management by presenting business cases to review and approve spend against budget, rather than simply running a sourcing process to achieve savings.
While strategic sourcing – the traditional approach to managing procurement – is essential, utilizing our extensive forecasting methods and analyzing the potential returns on indirect spending can uncover opportunities to reduce costs by as much as 40 percent. To achieve these savings, we recommend an end-to-end strategic sourcing process that includes spend analysis, capacity planning, RFP development, and recommendations on improving the operational process for businesses.
The key? It's all about containing spend by doing more work up front. That means anticipating spend both before and during the budgeting process, in order to run effective sourcing procedures in a preemptive versus a reactive manner. With the right set-up, you can expect to save an additional 5-10%.
Aligning with Finance to trim the budget
The first step is to set a goal for the savings you would like to achieve. Setting the target up front allows you to manage to it – and we help businesses get that done rather than seeing the process get stuck in Finance.
To ensure success, initiatives require strong top-down sponsorship and ideally will have the procurement team present during the budgeting and planning phases. We suggest establishing a steering committee that tracks and reviews spend against the budget, enabling procurement to assume a proactive role. It is particularly important to build the cadence, communication, and executive support with the steerco.
During budget season, Finance works across the business to create and agree the following year’s budget. Procurement can effectively support the budgeting process by sharing spend trends and contract commitments from previous years and working collaboratively with the business to determine what’s new for the coming year. This includes adding initiatives to reduce costs, making decisions on which goods/services are no longer needed, and then aligning with Finance to reduce the budget before the fiscal year begins.
Why demand management-based sourcing is more, more, more …
Next, Procurement builds a preferred supplier list for any outsourcing needed, with an eye to determine which projects can be taken on internally. A thorough knowledge of historical and current market trends is necessary to create a realistic savings target, enabling you to make cost reductions up front and increasing your chances of success.
Compared to typical sourcing projects, demand management-based initiatives require more data, more focus on implementation, and more scope for different suppliers to propose alternate approaches.
- More data – This enables you to have a deeper understanding of the demand for the goods and/or services that you plan to source, and that knowledge is crucial to determine where an RFP is necessary and for successful supplier negotiations.
- More focus on implementation – The majority of the savings will derive from successful implementation. That means that the objectives need to be realistic, reliable, repeatable … they need to land for them to count.
- Expanded scope for suppliers – Give space to your suppliers to show their creativity while still focusing on your objectives. For example, a supplier might have an alternative solution that you haven’t previously considered.
Reaping the rewards
This is where your analysis to anticipate different savings and implementation scenarios really pays off. Because of the extensive data gathering and focus on an implementation plan is reflected in your supplier questions, your responses will yield a full view in terms of how realistic the savings are. You can then compare embedded implementation costs, range of difficulty to implement, fees, timeframes … all scenarios are factored in, including alternative options that could potentially yield additional savings and/or product improvements.
Now, you know your savings potential over the long term, and factoring in these metrics makes the savings repeatable and sustainable.
Our clients have experienced successful outcomes of the demand management process, and they’re sharing their stories with us.
Demand forecasting helps to deliver €12m annualized savings at Permanent TSB
As the head of procurement and supplier relationship management at Permanent TSB, one of the oldest banks in Ireland, Rachel Dolan says her company’s ability to use demand forecasting and other Efficio analytics helped persuade executives of the soundness of the strategy to include the procurement team early in the budget process.
“Before, nobody really talked to the procurement team – they’re the “fun police,” so best to avoid them,” Rachel says. “This is kind of a new path. The CFO was heavily involved, and that's so important in any transformation, to have that executive sponsorship and buy-in. He knew that Procurement could be a real driver of our cost agenda.”
People who work in procurement tend to be adept project managers, Rachel says, because driving cost optimization is such a big part of running a large organization.
“They get masses of variety because the stakeholder changes every day,” she says. “When I go to our executive team and they're happy – the numbers speak for themselves – and everyone is shaking hands and celebrating, it's a really great place to be. Procurement is the business enabler. And when you got really great deals for the business and they're happy, there's no better place to be.”
“Demand management is a key driver, and it's not just about cost and value realization, it's about managing strategic partnerships and helping your organization innovate around your suppliers,” Rachel says. “We're focusing a lot on risk – and not just on the Bank’s risk exposure – risk profiles around our suppliers.
“This isn't something that you can just buy, and magic will happen – it's very much a team effort. The consultants don't just take the work and sprinkle magic back on the organization. It's hard work.”
Demand management sourcing strategy delivered 12% annual savings on fuel costs
A top North American environmental services client experienced rapid organic and acquisition-based growth between 2019 and 2022. As new business units were acquired, spend became increasingly fragmented across the U.S. and Canada, resulting in high fuel costs. While 40% of fuel was purchased from preferred suppliers, 25% was purchased on fuel cards, and 35% was spread across more than 100 tail suppliers. Despite internal efforts to shift towards preferred suppliers, growth was outpacing implementation, and costs were increasing rapidly.
Efficio was engaged to drive savings that would immediately impact the bottom line, and direct negotiations was an important first step. The fuel market was extremely volatile at the time of negotiations, with diesel prices hitting record highs. Due to earlier implementation challenges, incumbent suppliers were skeptical that new volumes would be transitioned, so they did not offer material discounts.
Next, we evaluated how each business unit was purchasing fuel to seek ways to optimize purchasing habits. We soon discovered that they were collectively paying up to a 20% premium for retail purchases, despite annual volumes that justified bulk purchases or on-site refueling (OSR) installations. We then built a model to determine optimal fuel delivery methodology at the site-level, based on annual volume, truck/driver counts, cost of capital for tank installation, labor costs, and more. That established a target for business units to transition from retail to bulk or OSR services … and it ultimately revealed an alternative solution at a lower cost beyond the company’s existing A, B, or C options.
This careful approach to demand optimization combined with direct negotiations generated savings of USD $4m, with an annual impact of 12% savings for our client.