Supply Chain Transformation Yesterday an Option, Today a Requirement for Survival March 31, 2009

Supply Chain TransformationYesterday an Option, Today a Requirement for Survival

March 31, 2009

Copyright © 2009 Penske. All rights Reserved. Page 2

The Current Environment

The Necessity for Change

An Approach for Achieving Transformation

The Value Proposition

Continuous Improvement – The Journey Never Ends






Agenda


The Global Meltdown

We’re in for a tough couple of years globally and cash is king.We’re in for a tough couple of years globally and cash is king.


Pharma Patent Expirations

So what? You will be asked to do more with So what? You will be asked to do more with less & to challenge the current status quo.less & to challenge the current status quo.


Acquisition & Merger Focus

Everyone is looking to put together the correct pieces to overcome the Everyone is looking to put together the correct pieces to overcome the future revenue shortfall & as a method to reduce costs!future revenue shortfall & as a method to reduce costs!

Pfizer + Wyeth?Or

Sanofi + Medley?Or

Roche + Genentech?or

King + Alpharma?Or

Lilly + ImClone?Or

Teva + Barr?


Increased Regulation

The new administration in Washington & the requirement for solutions like The new administration in Washington & the requirement for solutions like e-Pedigree will only heighten regulatory complexity in the future.e-Pedigree will only heighten regulatory complexity in the future.


Agenda







The World is Flat and Much of Your Future Opportunity is in Emerging Markets

How will you get your products to these markets?How will you get your products to these markets?


The Extended Supply Chain

What are the specific requirements for the extended supply chain?What are the specific requirements for the extended supply chain?

Contract manufacturing, outsourced customer service, long lead-times, supply chain disruptions – all symptoms of of the extended supply chain. All requirements of the new paradigm in global trade.


The level of complexity is heading in one direction – UP! The level of complexity is heading in one direction – UP!

“10 +

2”

C-T

PA

T

NVOCC

TSA

Property Brokers LicenseImporter Self Assessment

American Society of In

dustrial S

ecurity

Harmonized Tariff Schedule

Certificate of Endorsement

Duty Rate

“24 Hour Rule”

Special Duty Programs

Ocean Transportation Intermediary

Customs House Broker PermitUnauthorized Shipper

INCO Terms

Ocean Forwarder License

Secure Freight Initiative

Automated Manifest System

The International Transportation Challenge


Local Conditions

The specific modes of transportation vary from geography to geography

• This only adds additional risk to the management of global supply chains

• Along with risk – complexity is again increased

• Service quality can be compromised if all activity is not closely managed

• Service Providers may also introduce risk by operating illegally in their local markets

• For international shipping, the number of options continues to dwindle due to high acquisition activity


Requirements for Developing a “world class” Supply Chain

• Necessary talent must be in place to establish and maintain activity

• Complex technology needs to be installed to ensure optimized operations

• Constant evaluation of regulatory requirements must be conducted

• Every element of the international supply chain must be monitored

• International supply chain management MUST be a core competency

The full requirements of establishing and maintaining a “world class supply chain” are complex:


The Task is Large – the Opportunity is Larger

Best in ClassBest in Class organizations have organizations have clear competitive clear competitive advantages over advantages over

Industry Average & Industry Average & Laggards.Laggards.

Source: Aberdeen Group, March 2007

Laggards Industry Average Best in Class

Organization

Silo-based supply chain operations with little synchronization and collaboration across departments; moving toward more business unit or regional oversight

Moving toward a more centralized supply chain management organization but most activity is still decentralized into business units and regions

Central supply chain management organization established with executive who has end-to-end supply chain responsibility; strong cross-functional metrics in place

Knowledge

No budgeted projects for visibility improvement

Actively working to improve end-to-end and plant floor to top floor visibility

End-toend supply chain visibility in place with strong strides being made toward plant floor to top floor visibility

Technology

Spreadsheets and home grown Access database solutions are common for supply chain planning; legacy or heavily customized supply chain execution applications

Advanced supply chain technology solutions deployed for a handful of key supply chain management functions; lack closed-looped integration between planning and execution

Extensive use of advanced supply chain technology with closed-loop integration between planning and execution

Performance Metrics

Forecast accuracy at the family product level is below 61%; Perfect Order percentage is 85% or less; Logistics costs as a percent of sales is greater than 10%

Forecast accuracy at the product family level is 61% to 71%; Perfect order percentage is 86%-90%; Logistics costs as a percent of sales is 7%-10%

Forecast accuracy in the product family level is 71% or better; Perfect order percentage is 91% or better; Logistics costs as a percentage of sales 6% or less

Competitive Framework for Process Industries

LaggardsLaggards Industry AverageIndustry Average Best in ClassBest in Class

OrganizationOrganization

KnowledgeKnowledge

TechnologyTechnology

Performance Metrics

Performance Metrics


Your Supply Chain Can be a Competitive Differentiator

Source: Supply Chain Cost Cutting Strategies – How Top Process Industry Performers Take Radically Different Actions Aberdeen Group, March 2007

Market strategy competitive differentiator

27%

Cost center necessary to conduct business

25%

Cost savings opportunity area to helpfund R&D or business expansion

18%

Customer servicecompetitive differentiator

30%

How do you view your supply chain?How do you view your supply chain?

Lower performing companies are 3 times more likely to view their supply chains as cost centers.


Agenda







The Lead Logistics Provider EvolutionAn LLP is a business partner who assists in the development and implementation of strategies that drive improvement throughout a customer’s supply chain.

It is not just about obtaining the lowest rate, it is about developing solutions It is not just about obtaining the lowest rate, it is about developing solutions & operating more efficiently. & operating more efficiently.


TechnologyThird Party Logistics providers have developed technology that enables optimization, supports consistent process management, and provides transparency for all modes of shipping.

The use of the appropriate technology is critical to the LLP model & the The use of the appropriate technology is critical to the LLP model & the ability to deliver value!ability to deliver value!


The Global LLP Service

Global visibilitySingle point of contactDirect the activity

Transportation services Warehouse servicesTransportation services

Warehouse servicesTransportation services

Manage the networkRe-engineer the networkDevelop “baseline”

Measure the performanceOptimize outcomesProvide the technology

• Drive out cost• Support future growth• Streamline activities• Manage complexity• Standardize activities• Reduce inventory

requirements• Improve flexibility• Ensure compliance

(All parties digitally connected to the chosen management technology )

LLPLLP

People, processes, technology & continuous improvement make the difference. People, processes, technology & continuous improvement make the difference.


Creating A Shared NeedCreating A Shared Need

Shaping A VisionShaping A Vision

Mobilizing CommitmentMobilizing Commitment

Monitoring ProgressMonitoring Progress

Making Change LastMaking Change Last

TransitionState

CurrentState

ImprovedState

Leading Change

Changing Systems & Structures

How to Make Transformation Happen

There is no improvement without sustained change.There is no improvement without sustained change.

Change Management through Change Acceleration Process (CAP)

A key component of any LLP activity should be focused on assisting the organizations ability to change.

Leadership Plan• Define behaviors of the Leadership

that will be critical to the success of the change initiative

Leadership PlanLeadership Plan• Define behaviors of the leadership

that will be critical to the success of the change initiative

Communication Plan• Comprehensive Communication Plan

to effectively communicate the necessary messages to all Merck associates impacted by the changes

Communication PlanCommunication Plan• Comprehensive communication plan

to effectively communicate the necessary messages to allassociates impacted by the changes

Systems and Structures Action Plan• Assessment of Organizational

Systems & Structures to determine which could help or hurt the project, and actions needed for each of the Systems or Structures

Systems and Structures Action PlanSystems and Structures Action Plan• Assessment of organizational

systems & structures to determine which could help or hurt the project, and actions needed for each of the systems or structures

Stakeholder Analysis• Understand the influence Key

Stakeholders have in decision making and determine their level of support or resistance

Stakeholder AnalysisStakeholder Analysis• Understand the influence key

stakeholders have in decision making and determine their level of support or resistance


Agenda







Pharma Industry Benchmarking

% Total Logistics Spend

18%

26%

25%

23%

5% 3%

Inbound Transportation

Outbound Transportation

Warehousing

Inventory Carrying Cost

Administration

Customer Service

Source: Herbert W. Davis, “Logistics Cost & Service - 2005”

% of Revenue Pharmaceuticals

0

1

2

3

4

5

6

7

8

9

10

Best in Class Average

Source: PRTG, “Integrated Supply Chain Benchmarking Study”

3.87%3.87%

8.63%8.63%Opportu

nity

It is critical to know & manage these costs because savings here will It is critical to know & manage these costs because savings here will contribute directly to the bottom line!contribute directly to the bottom line!

The best pharmaceutical companies spend approximately 4% of revenue on supply chain – the average company spends over 8%!


Source: Accenture

Revenue Lift• Customer service enhancements• Product quality improvements• Increased quality availability

Reduced Supply Chain Costs by 10 to 15%• Operational efficiencies• Process enhancements• Procurement savings

Reduced Working Capital Requirements by 20 to 30%• Inventory reductions• Reduced cycle times

Reduced Supply Chain-Related Capital• Capital asset transfer• Enhanced asset utilization• Capital procurement savings

Revenue Revenue EnhancementEnhancement

Operating Operating Cost Cost

ReductionReduction

Working Working Capital Capital

ReductionReduction

Fixed Capital Fixed Capital ReductionReduction

Invested Invested Capital Capital

ReductionReduction

Profit Profit EnhancementEnhancement

Shareholder Shareholder Value Value

EnhancementEnhancement

Shareholder Shareholder Value Value

EnhancementEnhancement

The Benefit Equation for LLP Services


Year 1Year 16-12% Savings6-12% Savings






• Mode ShiftMode Shift• Shipment ConsolidationShipment Consolidation• Shipping Window FlexibilityShipping Window Flexibility• SourcingSourcing

• Mode ShiftMode Shift• Shipment ConsolidationShipment Consolidation• Shipping Window FlexibilityShipping Window Flexibility• SourcingSourcing

• Network Re-engineeringNetwork Re-engineering• Continuous MovementContinuous Movement• Route DevelopmentRoute Development• Envirotainer ManagementEnvirotainer Management

• Network Re-engineeringNetwork Re-engineering• Continuous MovementContinuous Movement• Route DevelopmentRoute Development• Envirotainer ManagementEnvirotainer Management

• Freight PaymentFreight Payment• Expedite ManagementExpedite Management• Returns Process ManagementReturns Process Management• Inventory/Demand PlanningInventory/Demand Planning

• Freight PaymentFreight Payment• Expedite ManagementExpedite Management• Returns Process ManagementReturns Process Management• Inventory/Demand PlanningInventory/Demand Planning

Historical Opportunity – Third Party Transportation Management


The Unseen Value Proposition

VisibilityVisibilityVisibilityVisibility

AccountabilityAccountabilityAccountabilityAccountability

TransparencyTransparencyTransparencyTransparency

FlexibilityFlexibilityFlexibilityFlexibility

ConfidenceConfidenceConfidenceConfidence

Web-based, real-time information provided on an as needed basis with an open book policy to ensure value is being delivered.

Utilize a non-asset approach to support customer agility and adaptability in a rapidly changing world.

The concept of global supply chain management enables you to rely on this single point of contact for all international shipping requirements.

Providing seamless shipment availability information and supply chain metrics-globally, utilizing proven technical solution.

Having a trusted partner who will stay abreast of changing regulations, supply chain trends, and your requirements – at all times.


Agenda








Supply Chains change daily

• How quickly they are adjusted to this change can impact the overall cost

• Comprehensive measurement is a necessity

• Current technology is necessary in order to monitor the various nodes within a given supply chain

Continuous measurement & adjustment will lead to cost improvement.Continuous measurement & adjustment will lead to cost improvement.


Comprehensive Measurement Leads to Improvement

Process Improvement

Lean & Productivity Improvement

Billing

Statistical Analysis

Forecasting

Multivariate analysisModel week selectionSensitivity analysis

Time series analysisSimple linear Regression Logistics regression

Billing

Reporting

Automated weekly MIS reportDevelopment of repetitive standard operating procedure

Pre Sales Support

Network Optimization

Development of Tools

R & D

Data cleaningData validationData analysis & summarization

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3.0SL=13.08

-3.0SL=0.00E+00

I and MR Chart for RSD

Data analysis and summary toolDepot MilerData cleansing tool

Dynamic Network Design – a tool to monitor structural and operational change of logistics network

Routing Resource schedulingDepot analysis

Freight Dollars By Company

89.1%

1.2%1.3%

7.1%

1.0% 0.2%0.1%

HON/ASE HHT Paoli Gunlocke Maxon Holga Edward George

Digitization

Productivity improvement through lean and digitization

Once the data is prepared, choose the option “Generate TSP”


StopStop

Pull down the menu bar TSP on top of the screen and choose the

option “Prepare data for TSP”



Review the output report consolidated automatically in a

new excel workbook


new excel workbook

Start

Time Taken

Prepare data for TSP miles calculation


3 Min

Process Improvement

Lean & Productivity Improvement

Billing

Statistical Analysis

Forecasting

Multivariate analysisModel week selectionSensitivity analysis

Time series analysisSimple linear Regression Logistics regression

Billing

Reporting

Automated weekly MIS reportDevelopment of repetitive standard operating procedure

Pre Sales Support



R & D


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-3.0SL=0.00E+00






89.1%

1.2%1.3%

7.1%

1.0% 0.2%0.1%


Pre Sales Support



R & D


0Subgroup 10 20 30 40 50 60 70 80

30

40

50

60

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3.0SL=13.08

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89.1%

1.2%1.3%

7.1%

1.0% 0.2%0.1%


Digitization

Productivity improvement through lean and digitization



StopStop






new excel workbook


new excel workbook

Start

Time Taken



3 Min



StopStop






new excel workbook


new excel workbook

Start

Time Taken



3 Min

Measure early and often - what you do not measure will likely not improve!Measure early and often - what you do not measure will likely not improve!


Dynamic and Adaptive Network DesignThe continuous assessment, analysis and improvement of supply chain and logistics networks to adapt to an increasingly dynamic and global business environment

Advanced optimization approaches can also have significant impact on Advanced optimization approaches can also have significant impact on today’s complex & global supply chains.today’s complex & global supply chains.

Supply Chain Design & Re-Design

Supply Chain Design & Re-Design Implement &

Deploy the Design

Implement & Deploy the Design

Execute & Measure

Execute & Measure

Statistical Analysis & Trends

CustomerValue

Sourcing Alternatives - Global Sourcing (Low Cost Countries) - e-Auctions Measuring the

Performance of Current Design

Identify Opportunities

for Re-Design

Identify Opportunities

for Re-Design

Manufacturing Alternatives - Contract Manufacturing - Plant Re-utilization

Demand Variability - New product introductions - Seasonality - New Markets/Changing Demand Patterns


Relentless focus on value adding activities & eliminating activities that Relentless focus on value adding activities & eliminating activities that do not add value.do not add value.

Cost

Defects

Lead time

Inventory

Space

Waste!

Productivity

Customer satisfaction

Profit

Customer responsiveness

Capacity

Quality

Cash flow

On time delivery

Work Time (value add)

Cycle Time

Before

AfterWait Time (non-value add)

Same Same work work

completed completed in less in less timetime

Same Same work work

completed completed in less in less timetime

LEAN Benefits

What is Lean?


Focus Efforts on the Seven Wastes

7 WastesKnowledge Flow Knowledge Flow

Office EnvironmentOffice Environment

Product Flow

Manufacturing Environment

Overproduction• Processing before next operation is ready

• Making decisions too early

• Sub assemblies and components between feeder and main lines

Inventory• Multiple applications awaiting approval

• Unnecessary document/data storage

• Material between operations and process steps

• Inventory stored in warehouses

• Buffer & safety stock inventory

Extra Processing

• Navigating multiple screens to input data

• Multiple ways to do the same task

• Duplicate entries

• Planned/Un-planned Rework

• Handwork—polishing, deburring

Motion• Navigating multiple screens to input data

• Looking for data/information

• Operators bending, turning, twisting, reaching, walking

• Robotic motion—”getting back to home”

Defects

• Rework

• Missed customer due dates

• Data entry errors

• Poor Quality

• Equipment failures

• Missing customer due dates

Waiting

• System downtime/response time

• Manual decisions

• Documents awaiting signoff/approval

• Operators, machines, or customers waiting

Transportation• Delivering reports/hardcopies

• Shipping hardcopies requiring signature• Conveyance of materials, tooling


Utilize Lean & Six Sigma to Identify & Quantify Opportunities

Different tools applied in different circumstances or combined for Different tools applied in different circumstances or combined for greater effect!greater effect!

Six Sigma

Eliminate waste in/around Process LEAN

Eliminate defects in Process Business

Improvement

X X

LEANImprove steps that add value

Six SigmaImproves the capability of steps that add value

LEANHelps identify steps that don’t add value and provides tools to eliminate them

Six Sigma/LEANImproving the capability can eliminate additional steps

LEAN vs. Six Sigma


Outputs from Measurement, Dynamic Network Design, LEAN & Six Sigma Thinking

Business Case

Business Case

=Project Plans

Project Plans

Approved Projects

Approved Projects

SavingsDeliveredSavings

Delivered

ContinuousContinuous

ImprovementImprovement

MindsetMindset

Thank youThank you