Over the last few decades, GPOs have been the driving force on price and standardization savings for healthcare organizations. However, as Isaac Newton’s third law states, “With every action there is a reaction.” The reaction or result of taking your GPO’s price and standardization at face value is that you are missing three things you must know about savings to make them stick:
1. Most GPO Savings Projections Are Guesstimates. In general, the GPO savings reports supply chain professionals are reporting to their senior management are projections (or guesstimates), not a number you want to use for budgeting purposes. This is because things change (e.g., volumes, policies, use patterns, procedures, etc.) and people change over the term of the contract. Unless you take these variable factors into account on each and every GPO contract, your GPO savings are only a projection – not a reality!
2. Most GPO Savings Are Overstated or Understated. SVAH’s studies have demonstrated that only 64% of supply chain expense savings reported to senior management by supply chain leaders are correct. Again, because things change and people change over the term of your GPO contract. For example, one of our clients projected a $90,000 savings (over three years) on a new exam glove contract, only to be surprised that after the first year there was only a savings of $12,000, not $30,000 as projected. This was because of faulty glove box holders, which then were replaced. Their actual savings that was verified after three years (after the glove box holders were replaced) was $132,000, not $90,000 as planned. Because they were tracking/validating their exact savings on this contract, they were able to make a mid-course correction to not only achieve their planned savings but exceed it. This would not have been the case if our client did not make this correction. Instead, they would have only achieved about $36,000 or 40% of the projected total savings.
3. Most GPO Savings Projections Are Suspect. Once more, SVAH’s studies show that GPO savings projections can be off by as much as 33%. How can this be? It’s simple. GPO’s automated pricing systems and faulty auditing of savings projections are not careful to eliminate outliers, correct unit of measure issues, or understand how a product is employed by its members. Therefore, we recommend a trust but verify approach to all of your GPO savings projections to ensure they are error free. These are great savings opportunities that your GPOs are bringing to you, but they all need fine tuning and tracking before, during, and after the contract has been implemented.
The answer to this challenge is savings validation to ensure that all of your GPO and other savings reporting is accurate, verified, and not understated or overstated. We call this “closed-loop” savings validation, which ensures that your savings reports are correct the first time.
Below are some similar articles that you may find interesting.
Targeting Supply Chain Expense Waste and Inefficiency in a Turbulent Economy