Implementing Procurement Efficiency / Cost Reduction Programmes – Demand Management

As we said here, we are in a period of considerable economic and political uncertainty for many businesses and indeed public sector organisations too. Uncertainty can be good if it leads to positive outcomes, but we suspect many organisations will now be taking a cautious approach to planning and risk management. They may also be asking procurement functions to look at how an efficiency or cost reduction programme can be implemented.

We are big supporters of procurement playing a strategic role and helping to drive growth and revenue; but at times, our focus will inevitably be on those cost issues. So how can procurement deliver benefits, without resorting to the rarely effective (and frankly embarrassing) approach of “asking all our suppliers to reduce their prices by 5%”.

There are, when it comes down to it, only a relatively small number of ways in which the end goal of cost reduction can be achieved. We’re open to discussion here and being proved wrong, but we described six here in the first article in this series which we think pretty much covers it. Today, we will talk about the first - Demand Management.

That flows from the obvious statement that “the easiest way to make a procurement saving is by not buying something!” In its simplest form, that is what we mean by demand management – stopping, reducing or delaying third-party expenditure that would otherwise have been made.

Successful demand management requires either good stakeholder management skills or a very strong imperative from the top. Effective demand management is rarely a strategy that procurement can execute without top management support and cover, as most budgets sit outside procurement itself.

So, here are some thoughts and tips:

  • Setting policies that enable a reduction in the quantity purchased rather than stopping it altogether is often sensible; an approval hurdle or some sort of challenge process for consulting projects rather than a 100% ‘ban’ for instance is likely to be more achievable, realistic and acceptable.
  • Indeed, requiring a business case – of a complexity appropriate to the size of the spend - for any external spend outside direct materials, and the most basic other categories like energy, is a good discipline when times are tough.
  • Increasing the cycle time for replacement of capital equipment is another option that may not be too unattractive for the business and can save money at least in the short term. But watch out for whole-life cost issues (e.g. additional maintenance costs on ageing equipment).
  • Look for different ways to achieve the same end – so a ban on travel might be considered, but putting in place effective alternatives such as tele-conferencing or use of technology platforms to assist communications can make such demand management more palatable to users.
  • Watch out for the “whack-a-mole” effect! Bearing down on spend in one area simply makes more spend pop up in another. A classic example is banning consulting spend – only to see “contingent labour” or “managed services” cost lines mysteriously increase. Training and development can be re-classified as travel; or vice versa.

Finally, in our experience, any serious demand management programme requires considerable tenacity, as well as clear thinking and top management support. Whilst procurement skills do come into it in some cases, good business sense, a touch of creative thinking and a lot of persistence are probably more important qualities needed for anyone who wants to drive a successful programme.

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