Why you must have methods to monitor and control every penny you report as saved
(In our rush to save money for our healthcare organizations, we often overlook one critical success factor in supply chain management – having “cost controls” on the millions of dollars of purchases that flow through the supply chain department annually. It’s not enough for supply chain managers to just save money to be successful, it is even more important for them to control their gains or they will lose those gains as quickly as they have achieved them. That’s the paradox of “only” paying attention to the uppermost end of your savings funnel and not the bottommost end!
From an accounting point of view, cost controls are methods used by supply chain managers to ensure that the savings being reported is actually reflected in their healthcare organization’s financial statement. Those methods could include observations, benchmarks and predetermined measurements. For example, one of our clients reported to their senior management that they saved $162,932 on cardiovascular stents. However, when we tracked this savings over a three-month period with our value analysis analytics we discovered that only $62,943 (annualized) hit our client’s financial statement. There were various reasons why this happened, but the point I want to make is that without having cost controls in place this client would have erroneously reported this savings as a fact to their senior management. Naturally, this client adjusted their savings report to reflect the slippage in their original savings estimate on these cardiovascular stents.
I remember another client whose CFO wanted to know where the savings were on the I.V. set contract his supply chain manager told him would save tens-of-thousands of dollars for his system, since the CFO was seeing an increase, not decrease in this category of purchase. After some investigation, this supply chain manager uncovered that his hospitals were buying the highest priced feature rich I.V. sets, now that they thought they had the best price on I.V. sets in their region. This supply chain manager could have saved himself a lot of grief and embarrassment if he would have established benchmarks (before and after the changeover) and then measured the cost impact of his new I.V. set contract.
What we have observed over the last six years with our value analysis analytics practice is that a savings isn’t a savings until it is confirmed, verified and certified through observation, benchmarking or predetermined measurement, that it is hitting our client’s financial statement. We now recommend our clients report projected savings and then certified savings separately to their senior management. This way there is no confusion or doubt on what is actually saved by supply chain management in any given period. That’s why you need methods to monitor and control every penny that you report as saved, so that your healthcare organization’s financial statement is always as accurate as possible. Remember: your credibility is at stake, so make sure the savings you are reporting to your senior management is not an illusion, misrepresentation or wishful thinking. It is negligent and irresponsible to do otherwise!
Robert T. Yokl is president and chief value strategist of Strategic Value Analysis® In Healthcare, which is the acknowledged healthcare authority in value analysis and utilization management. Yokl has nearly 38 years of experience as a healthcare materials manager and supply chain consultant, and also is the co-creator of the new Utilizer® Dashboard that moves beyond price for even deeper and broader utilization savings. For more information, visit www.strategicva.com. For questions or comments, e-mail Yokl at email@example.com.