In a world in which growth is an obsession, reducing demand seems to be a counterintuitive approach in most places. However, it is, perhaps, the category team’s super power when looking for additional value. And, for the sceptics at the back, in this article we’ll also have a look at how to account for this demand reduction in ‘savings’ reporting.
It is worth reflecting that, in an environment in which sustainability is increasing in acceptance, demand reduction fits right in with that overall agenda.
The challenge in any category is to be open about the question of how demand reduction could be achieved. The interesting aspect is that there are a host of ways to address this. The obvious one is not to buy something, which instantly reduces demand. However, the underlying trick in the approach is to consider how a reduction in demand will work in practice.
Additional areas for consideration
There are a small number of subsidiary areas to consider. Firstly, we might avoid buying something because we already have enough of them already. Understanding stock management, draw down and usage patterns can give a sense of how much stock of a thing actually exists (and this can include areas like HR resource). Understanding stock turns – the length of time it would take to use all the items in stock – gives a sense of whether we have enough already. Once a client had 40 years of stock of a particular item. Buying more was clearly necessary and finding ways to sell stock became an additional stream of value.
Secondly, we may be able to avoid buying something because we are not using the ones we already have to capacity. Imagine buying some equipment which is able to work 24 hours a day, but the existing equipment only works 2 hours a day. By some measures, there is already 12 times the currently available capacity, just by changing usage patterns. In the real example behind this illustration, several million dollars were saved by not buying equipment, and restructuring usage patterns.
Third, we can avoid buying something because we don’t need it. This has a couple of subcategories – where we don’t need the specification to the level it is at currently, or where we can do without the thing at all. This has been a rich area for packaging over many years, seeking to reduce or remove elements of packaging until the barest minimum is left. This hasn’t hit the world of perfume packaging yet.
Lastly, we might avoid buying something because we will never use it. One example of this is the regular purchase of consultancy advice which is then ignored. this happens in all disciplines, at all levels of business. Evidently, buying advice and using it makes sense, but the Return on Investment of ignored advice is challenging.
There is an issue for many procurement organisations when looking at demand management – how to capture the value which is developed, when we are avoiding a cost. This, for many, is the killer argument – why do something if no credit can be gained from it.
Reducing demand is a great example to work with finance departments on. There is a level of activity needed to create the environment in which demand reduction can be achieved. If that effort didn’t happen, demand would remain the same. So, the challenge for the finance team is how to account for something which isn’t spent, which may be about a budget reduction. Of course, this brings about specific challenges when dealing with the budget holder, who may either not want to have a budget reduction, or doesn’t want to implement a plan for reduction. As ever, the answer here is about stakeholder management and co-creation, and showing the business how a concerted category management approach can help realize a range of value opportunities and their own super powers!
Working in this space is a regular approach for Future Purchasing and we’d be happy to help you with Value Lever workshops to explore demand reduction, and all the other value levers.