Moving to the Next Level of Contract Management Performance
Are you holding your vendors accountable for their promises and guarantees? Or, are you hoping that the savings they promised or guaranteed will somehow materialize at the end of your contract? Unfortunately, hope is not a strategy!
In fact, based on SVAH’s extensive research, only 46% of estimated contract savings are realized. For instance, a client of SVAH calculated $36,000 in savings at the outset of an agreement on a floor glove contract, and then 18 months later saved $86,000 when he validated the contract savings with our validation power tool.
Lesson Learned: If this supply chain director would have been satisfied with his original glove savings estimate, he would have understated this contract lifecycle savings by $50,000 or 50%. That’s how you improve your savings yields without changing anything else you have been doing. This undisputed fact should be an eye opener for you!
Supply Chain Expense Contracts Need to Have More Than One Savings Measurement
All supply chain expense contracts need to have two measurements; the projected lifecycle savings and verified lifecycle savings. This is because, as mentioned, 46% of the time these two measurements are radically different, as they were in our case study above.
No longer can we rely on estimated contract savings if we want to achieve even greater savings yields in the future. Too often, we are cheating ourselves of hundreds of thousands of dollars (sometimes millions) in reported savings when we depend on just one savings measurement. Don’t continue to lose these savings any longer.
Things Change and People Change
Better yet, you need to track and validate your projected contract savings on every active contract (GPO and local) on a quarterly basis to ensure your savings are on track and on budget. That’s how our case study hospital realized that after one year of a three-year floor glove contract they were only saving $12,000. That’s when their value analysis team reviewed all their floor glove protocols and processes and then discovered to their surprise that there was huge glove waste with their current floor glove dispensers. Once this problem was solved, they realized 50% more savings than they projected. Yes, it pays to measure twice!
Yes, It Pays to Measure Twice
Measuring twice should be your best practice for reporting your supply chain expense contract savings to your direct reports, unless you think it’s a good idea to have 23% to 32%, on average, of your savings to go unreported on every contract you sign. This underreporting of savings can be quickly remedied by measuring twice on every contract and tracking and validating your contract savings at the end of their lifecycle. Doesn’t this make common sense and business sense?