August 16

How To Lose Money Fast: Ignore Savings Validation


We are all too quick to report our so-called supply chain expense savings in our monthly savings reports to our direct reports, but will these savings that we have recorded, in fact, materialize? Based on audits we have conducted at hundreds of healthcare organizations, we can say emphatically that there is no way you can know for sure if your savings materialize without savings validation. We call this fuzzy math!

Savings Validation: Trust But Verify

How many times have you been promised or guaranteed by vendors/GPOs that you would save X amount of money with their product, service, or technology, and then never took the time or effort to verify that the projected savings target had been met? Our estimate is that this happens 92% of the time. Unfortunately, this practice too often leads to understated or overstated savings which isn’t a good thing.

For example, we documented how a client of ours signed a new three-year exam glove contract with a projected savings of $30,000 per year or $90,000 over the lifecycle of the contract. However, we audited our client’s contract after year one and discovered that our client only realized $12,000 in savings on this contract.

After an extensive investigation by supply chain on what was causing this shortfall, it was found that their hospital’s glove dispensers were wasting as much as 30% of their exam gloves. After purchasing new dispensers, a total of $94,000 was saved in the remaining two years of their contract (or $106,000 in total for the new contract).

It is our contention that without savings validation this client would have only saved $36,000 over the term of their contract, which represents a loss of $54,000 on this contract’s promise. Trust when we say that this same or similar scenario is happening at your healthcare organization too.

Curb Losses From Non-Verified Savings

As the above example demonstrates, you can curb your losses if you audit your savings projections at least quarterly over the life of your contract or initiative like our client did. A large university teaching hospital booked an $820,000 contrast media savings opportunity over three years only to discover through a savings audit that this projected savings never happened. After some procedural adjustments, the savings did materialize in year two and three of their contract.

Just think how embarrassed this supply chain manager would have been if he didn’t catch this anomaly before it was questioned by his CFO as always happens. So, curb your losses with savings audits before they damage your healthcare organization’s bottom line. This should be a best practice that is built into your compliance procedures.

Savings Validation Protects Your Integrity

From personal experience, the worst thing that can happen with your savings reporting is that you overstate or understate your supply chain expenses or initiatives savings to your bosses. This is because exaggerated or minimized savings will be discovered by your CFO and then your savings projections won’t be believed in the future.

Don’t be caught off guard! Things change and people change over the term of a contract or initiative. So, to get the numbers right you need to audit your savings projections quarterly. Thus, ensuring that you’re getting the savings that were promised or guaranteed before you lose these hard-earned savings forever!

Below are some similar articles that you may find interesting. 

5 Ways KPIs Can Make Your Healthcare Supply Chain Operations Better Than Just Good

Value Analysis Software Can Help You Strengthen and Optimize Your VA Program

Podcast 71 – Healthcare Value Analysis Software Mistakes That Can Be Costly

Request Demo of SVAH’s Value Analysis and Utilization Tools


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