Operational Excellence G d f h B LiGood for the Bottom Line

Melissa B. HerktApril 6, 2011

PrologueProloguegg May 2010 Conference – PAT Focus

– Proposed ‘EbD’ Excellence by Design– Proposed EbD … Excellence by Design– Called for business leaders to step up– What is your compelling case for change?What is your compelling case for change?

(burning platform or burning ambition)

April 2011 Conference – OpEx Focus– Operational Excellence drives quality– PAT / QbD play a role in OpEx– OpEx yields business results

f ?– What is your compelling case for change?(burning platform or burning ambition)

What MattersWhat MattersBringing new treatments to market quickly to improve or prolong life for patients and to do so safely and with expected quality

HOWEVER …

Companies are in business to make money for their shareholders … rewarded by the market (shareholders) y ( )for predictable, excellent business performance

Operational ExcellenceOperational Excellence

Best in Class Cycle Time

Best in Class COGs Best in

Class Quality

Best in

Quality

Best in Class Compliance

Best in Class ITO?

Best in Class EPS?

Best in Class Best in Class

Best in Class Revenue Growth?

Asset Management?

Best in Class Cash Flow?

OE Impacts the Business OE Impacts the Business Business Metrics OE Contribution

Revenue Manufacturing capacity via improved productivity

Profits / Earnings Lower COGS via cost of quality improvements

$Asset Management Less inventory $, better ITO via reduced cycle time

Generate CashMore $ for R&D

More $ for Capital InvestmentMore $ for Capital InvestmentMore $ for Shareholders

Focus on Inventory … Follow the MoneyFocus on Inventory … Follow the Money Operational Excellence techniques all impact

inventory performance in some way– Lean … improve cycle time and lower COGS– Six Sigma … improve quality, minimize rework,

quicker product release and reduce WIP inventoryquicker product release, and reduce WIP inventory– PAT / QbD … improve quality, quicker product

release, and reduce finished goods inventoryg y

Inventory performance impacts the ‘bottom line’

So … how are our companies doing?

Life Sciences Inventory PerformanceLife Sciences Inventory Performanceyy

Source: Pharmamanufacturing.com & Morningstar.com

Inventory Comparison Inventory Comparison

10.0

Inventory Turns Comparison Across Select Industries

8.0

9.0

6.0

7.0

4.0

5.0

2.0

3.0

001

002

003

004

005

006

007

008

009

20 20 20 20 20 20 20 20 20

Life Sciences Average Beverage Speciality chemical Beer Emerson Electric

So … Let’s Work the IssuesSo … Let’s Work the Issues Lean Manufacturing

– Focus on eliminating all forms of waste … time / motion / reworkg– Consequential benefits in quality– Improves cycle time, can reduce WIP and improve ITO

S d $$$ t th b tt li– Sends $$$ to the bottom line

Six Sigma– Focus on reducing variations … right the first time, predictablyFocus on reducing variations … right the first time, predictably– Improves robustness … eliminate error opportunities– Directly impacts quality … minimizes defects … less rework

and waste (rejected products)and waste (rejected products)– Sends $$$ to the bottom line

PAT for RobustnessPAT for Robustness Deep process understanding, coupled with PAT and

digitized manufacturing, improves quality and reduces variability

Use in continuous manufacturing delivers opportunity for more robust processes and improved qualitymore robust processes and improved quality

Variable Fi ed VariableVariable Input

Fixed Process

Variable Output

Variable Variable Fixed OutputProcessInput Fixed Output

Digitization for Cycle Time ReductionDigitization for Cycle Time Reductiong yg y

EquipmentEquipment Process Controls

Operations Management

AnalysisMaterial Quality

Data

VisualizationAnalytics

Digitization of Quality Data

Shorten Release Times for Better ITOShorten Release Times for Better ITO Lean + PAT + Digitization = Quicker Release Reduced cycle time increases ITO Reduced cycle time increases ITO Imagine >40 days improvement!

Activity Cycle Time(Days)

Work Hours for Task

Manufacturing Review 7 1gQA Routing & Queue 9 0.5QA First Pass Review 2 0.5Mfg Ro ting & Q e e 4 0 5Mfg Routing & Queue 4 0.5Mfg Remediation 4 2QA Routing & Queue #2 4 0.5QA Review #2 26 1Total 56 6

What Benefits Might Be Gained?What Benefits Might Be Gained? Improved product quality Lower cost of goods sold Business Metrics OE Contribution

OE Impacts the Business

Lower cost of goods sold … higher profitability / earnings

Lower inventory $ … frees upki it l f th thi

Revenue

Profits / Earnings

Asset Management

Manufacturing capacity via improved productivity

Lower COGS via cost of quality improvements

Less WIP $, better ITO via reduced cycle time

working capital for other things Increased ITO … generates cash

Generate CashMore $ for R&D

More $ for Capital InvestmentMore $ for Shareholders

RESULT … BETTER RETURN TO SHAREHOLDERS

What’s it worth?What’s it worth?

Reduced Inventory Generates CashReduced Inventory Generates Cash Impact of 1% and 5% reduction in inventory held on Free

Cash Flow … a key business performance metric

1% to Cash2010

5% to Cash20102010 2010

Biotech 1 $20.2M $101.1M

Pharma 1 $60.9M $304.7M$ $

Pharma 2 $84.1M $420.3M

Pharma 3 $25.2M $125.9M

Generic 1 $38.7M $193.3M

Source : Yahoo Finance/Emerson analysis

Heart of the MatterHeart of the Matter Quality for patients is good business … directly impacts

the bottom line

Patient safety, improved profitability AND cash generation are important to shareholders

Operational Excellence directly improves business performance

Lean + Six Sigma + PAT + Digitization = Quality AND business performance

Burning platform or burning ambition … use business metrics to drive organizational change

5 Year Stock Performance5 Year Stock Performance

Steps To Successful ChangeSteps To Successful Change

Vision Resources Skills Incentives Action Plan Change

Resources Skills Incentives Action Plan Confusion

Plan

Action

Vision Skills Incentives Action Plan Frustration

Vision Resources Skills Action Pl No Change

Vision Resources Incentives Action Plan Anxiety

Vision Resources Skills Plan No Change

Vision Resources Skills Incentives False Start

SummarySummary Change is hard and organizational barriers are non-trivial

… identify and address missing elements to drive change

Vision Resources Skills Incentives Action Plan Change

Successful change often begins with a visionary leader with the influence to remove barriers

Technology does have a part to play in all aspects of Technology does have a part to play in all aspects of OpEx

Operational Excellence G d f h B LiGood for the Bottom Line

Melissa B. HerktApril 6, 2011