When contracts come due or if you are sourcing a new contract, there are opportunities to apply value analysis methods to your process to wring out more savings, dial in better quality, and improve reliability all while meeting your customers’ requirements exactly. You see, many product and service contracts have a life of their own in your organization which intertwines with your policy and procedures as well as your unique functional requirements.
The best way to get major and minor savings as well as quality improvements is to delve into your existing contracts and a great time to do this is when they are being renewed or changed altogether. I know the conversion process is a tough thing in many contracts but there is always going to be some level of change that needs to happen, and the results should be better than before. These next steps that I am going to outline for you are simple, straightforward, and if followed correctly can uncover hidden gems of savings that you may not have found if you did not apply value analysis methods to your contracting process.
1. Look for Lower Cost Alternatives Within Your Existing Contracts – When you break down all the line items in most contracts, you will find that the top five products normally represent about 50% to 85% of the total contract spending. If you look for products that meet the functional requirements of your incumbent product at a lower cost within the renewed or newly sourced contract, then you can find some hidden opportunities you didn’t realize were there.
2. Ask Your VA Team(s) to Review Utilization – If you spend a lot of money on your top line items, it is wise to review any over-consumption, waste, and inefficient use in these areas. Also consider whether all the bells and whistles (features) of these products are being used. A simple review using the value analysis functional approach in conjunction with your key users, stakeholders, and resident experts on these products could quickly reveal savings opportunities.
3. Focus on Customization Vs. Standardization – Standardization in the supply chain is the goal for consolidating vendors to gain better pricing tier levels, which we agree with. One of the biggest mistakes that we see organizations make with their contracting is to go further in the standardization process into the contracts themselves and try to standardize the products that each of the end users use. This can be detrimental and costly as requirements are different in the surgical suite versus nursing floors, for example, and thus you will no doubt set standards that will cause waste or inefficient use. Instead, you want to match each of your major customers’ product requirements to the respective product that meets their functional needs. This way you don’t overshoot or undershoot but meet their requirements exactly.
By meeting the customers’ requirements exactly, you know with certainty that you are not wasting a dime on any product. This will not add too many new line items to your supply chain purchases but will dramatically reduce costs and improve reliability as well as overall life cycle value.
It’s easy to just renew a contract when everyone is happy with the existing product or service and check that off your list. But if you don’t question or delve further into your line items of these contracts, you will never know for sure whether you have wrung the towel dry on savings, thus leaving big dollars on the table. We all like to trust our gut when it comes to our contracting, consumption levels, and pricing, but you still must challenge the status quo. If you think that you are just going to bump into major savings, think again. You need to be proactive in drilling down into your new and existing contracts to dial in your products to your internal customers’ requirements using the value analysis functional approach.
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