Supplier Management – Mystery or Mastery? An Introduction to Supplier Management

1. Brought to you by: Supplier Management – Mystery or Mastery?An Introduction to Supplier Management and panel: Isaac Young IYoung@bmrn.com Jim Latimer Jim.Latimer@elan.com Tim Jordan Tjordan@mappharma.com Mark Buck Mark_Buck@bio-rad.com http://www.biosupplyalliance.com

2. Isaac Young Senior Director, Supply Chain Operations, BioMarin Pharmaceutical Inc.: Isaac has 31 years experience in Biotechnology with roles in Manufacturing, Regulatory Affairs, Information Systems, Ethics, Strategic Sourcing, and Supply Chain. Prior to joining BioMarin, Isaac was a Director of Strategy for the Purchasing & Supplier Management Group at Baxter Healthcare’s BioScience Division. He has worked for small biotech startups and for a supplier to the biotech industry. Isaac has an MBA from Babson College. Senior Director, Purchasing & Supply Management, Elan Pharmaceuticals Inc.: Jim has over 25 years experience in biopharmaceuticals having held positions at Genentech, Tularik, Amgen, and Gilead. A lifetime C.P.M., Jim has served on the Institute for Supply Management (ISM) Pharmaceutical Forum Board of Directors and was a founding member of the Biotechnology Purchasing Association. Jim has an MS in Procurement & Contract Management from St. Mary’s College of California and a BS in Biology from University of South Carolina. Jim Latimer Tim Jordan Associate Director of Supply Chain Management, MAP Pharmaceuticals, Inc.: Tim has over 10 years of Medical Device and Pharmaceutical Supply Chain Management experience with large and small businesses. Tim is a Chartered Engineer with the UK-based IET, and has a Masters degree in Industrial Automation. Tim has worked in manufacturing and R&D groups, as well as a Strategic Sourcing and Supply Chain positions in both corporate and business-unit roles. Mark Buck Global Procurement and Supply Leader, Bio-Rad Laboratories:  Mark brings over 21 years private & public sector experience in supply chain management & global sourcing, Lean manufacturing & operations planning, Six Sigma Quality process improvement, acquisition assimilation,  organizational change management, complex outsourcing & global sourcing initiatives serving in roles of increasing leadership responsibility with global companies such as NCR, Solectron, Asyst Technologies, Apple Computer, & Celerity Group Inc.  Mark holds a BSEE from the University of Illinois in Urbana-Champaign and was commissioned as a Marine Officer.  He attended National University graduating with an MBA.

3. Agenda10:00 – 11:30 • Preamble • Supplier Segmentation • Internal Management Architecture • Strategies • Supplier Performance Monitoring • Total Cost of Ownership (TCO) • Summary • Q & A • Next up? Options for future presentations Process We will pause periodically through the presentation to answer any questions or take your comments. Please type in your questions as you have them or “raise your hand” via the webinar tool when we pause. If we don’t get through the entire presentation we will look to your feedback whether we conduct a “part 2” or move on to other topics. http://www.biosupplyalliance.com

4. Emerging biopharmaceutical companies A reactive business environment characterized as: • Conflicting priorities – getting to market now versus surviving in the market later • Investment is in product development, not infrastructure • Purchasing “inherits” the supplier list • Supply risk is rarely considered • Value of any expertise is in crisis management • Multiple customers • Internal: • R&D • Quality • Finance • Regulatory Affairs • Manufacturing • External: • Patients • Doctors • Regulators • Reimbursement entities • Politicians / Society

5. The External Stage Issues: • Rapidly changing environments - upstream & downstream • Increasing operational & security risk in supply chains • Expanding cost pressures / requirements for capital preservation • Accelerated innovation / accelerated obsolescence • Increasing emphasis on environmental impact & sustainability • More and more data, but not necessarily more and more knowledge Imperatives: • Development of agility as the primary response to continued uncertainty • Tolerance for ambiguity must become preparedness for ambiguity • Design for supply must become an integral part of product and business development – availability / scalability / sustainability • Resilience

6. Purchasing versus Strategic Sourcing Historical Purchasing • Purchase order management • Primarily an Administrative role – little to no involvement in corporate or supply chain strategy development • Little to no involvement in sourcing process • Limited expertise with materials / services procured • Narrow focus on purchase price and delivery • Low consideration of supply risk • Predominantly reactive Strategic Sourcing • Supplier management • Develops and implements long term supply strategies aligned with corporate strategy • Involved in supplier selection and development early on • Value add resource to internal customers • Broad perspective on multiple cost elements • Responsible for managing supply risk • Driven to be proactive

7. Have An Articulated Vision Describe what a world class supplier management function would look like at your company examples: • There is a clear delineation of suppliers based on their strategic importance. • Formal, characterized structures exist that define the relationship with a supplier. • Supply base strategies exist and are based on robust industry intelligence. • Supplier relations are structured around common goals • Opportunities for innovation transfer have been maximized and monitored. • A quality system based supplier performance and development program is in place. • The supplier base reflects a conscious implementation of documented policies in support of diversity and sustainability.

8. Document What You Do What: • Policies, procedures, operational design, operational strategies, goals & achievements, points to consider, supplier performance, total cost evaluations, category strategies, meeting minutes, etc. Why: • Documents build equity in the form of a knowledgebase, not just short term value adds • Documents provide the when and why of the lessons learned so the wheel doesn’t get invented again • Documents articulate the value added and facilitates the communication of that value to the rest of the organization • Makes it “official” – they’re required to stand up in a financial audit How: • Start thin – it’s better to have a document that is weak than to have no document at all • Consider leaving out of quality documentation system (no FDA review, no deviations if not followed to the letter, etc.) • Do have revision control, revision history, reviewer signoff

9. Supplier Segmentation Isaac Young IYoung@bmrn.com Jim Latimer Jim.Latimer@elan.com Tim Jordan Tjordan@mappharma.com Mark Buck Mark_Buck@bio-rad.com http://www.biosupplyalliance.com

10. Defining a Supplier Base Formally stratify or categorize your Supplier base to focus resources where they are most valuable • Manage total cost of acquisition • Increase operating efficiencies • Foster better communication • Better leverage the knowledgebase of all parties • Minimize risk • Nurture opportunities for transfer of innovation

11. How to characterize the Suppliers Considerations for classification • Category of spend • Which commodities are involved • Amount of spend • Direct vs. Indirect classification • Single source / sole source status • Criticality to operations • Strategic importance • Level of perceived risk • Bandwidth of your resources • How many can actually be managed with the resources available

12. Example Worksheet

13. Types of Relationships Example: Consider how the relationship can be defined and what that means to available resources and the ROI on the effort involved.

14. Segmentation Profile Example Commodity based, cost only focus Commodity, higher impact on operating environment High importance, widely available, readily changed Critical impact, high cost of change Characteristics Office Supply Janitorial Services Computer software suppliers Lab Supply Freight forwarders Employee benefits providers Clean room garments Testing Laboratories Critical raw materials Contract Manufacturers Examples • eTools • Price / Service Agreements • RFP’s • Annual reviews • Service agreement • Internal surveys • Benchmarking • Risk mgmt plan • Scorecards • Category Teams • Bi-annual Business Reviews • Bi-annual audits • Risk profiles • BC / DR Plans • Inventory Plan • Change Control Agreement • Scorecards • Technical Category Teams • Qtrly Business Reviews • Bi-annual audits • Financial monitoring • Risk profiles • BC / DR Plans • Inventory Plan • Supply Agreement Mechanisms Collaboration Continuum Transactional Engaged

15. Defining a Supplier Base • Goals: • More engagement for suppliers that play a higher value role in your operations • More expedient development of management strategies based on “where a supplier fits” • Be cautious in the use of terms such as preferred supplier / key supplier / primary supplier as descriptors / labels without considering the ramifications of existing connotations • Repeat periodically (defined) to re-class Suppliers as appropriate • Pre-screen the vendor master • It is probably populated with every payee the company has ever written a check to – not a good starting point • Available resources may influence tier volume – work with what you have

16. End of: Supplier Segmentation pause for questions Next: Internal Management Architecture Isaac Young IYoung@bmrn.com Jim Latimer Jim.Latimer@elan.com Tim Jordan Tjordan@mappharma.com Mark Buck Mark_Buck@bio-rad.com http://www.biosupplyalliance.com

17. Selecting An Operating Model Define how procurement activity and supplier interaction across the entire organization is structured both now and where it could / should be in the future: • Decentralized • Procurement activity, including any policy or other governance, is disbursed across the organization without any centralized oversight (typically just financial controls) • Centralized • All procurement activity / third party interaction occurs in a single group • Hybrid • A significant, defined subset of procurement activity is centralized to a single group with the balance being fully decentralized • Center-Led • A single group is responsible for policy and oversight of any decentralized activity, setting standards, consolidating volumes, driving compliance, etc. with decentralized transactional activity across the organization

18. Supplier Management Mechanisms • Category Managers (sometimes referred to as Commodity Managers) • Category Management Teams • Business Reviews • Category Strategies • Performance Monitoring / Supplier Scorecards • Executive Oversight • Corporate Strategy Development Process • Process / Technology • Sourcing tools (i.eRFx, planning forecasting tools, iRFx, eProcurement engines, reverse auctions, etc.) • Data sources (D&B, ISM, CAPS, CPI, Web, Suppliers, etc.) • Supplier portals

19. Category Management Teams • Cross-functional (and cross site if applicable) teams are the standard, and for good reason: • Increases breadth of expertise applied to the category • Provides deeper visibility into current and future spend • Instills a greater awareness of the internal customer requirements • Improves acceptance / compliance of agreements • Fosters credibility internally and with Suppliers • Creates greater access for Suppliers to focused areas in the company to improve collaboration and understanding of the customer’s requirements • Facilitates greater opportunity for management of innovation transfer from the Supplier • Promotes more awareness of the complexity and magnitude of other team members roles, aiding in the breakdown of organizational silos

20. Category Management Teams • Output is the articulated category & supplier strategies & tactics • Team constituency should bring the technical knowledge base together for current and future activity but also get upstream sufficiently to impact product and process design for supply risk reduction within that category – Design for Supply • Stakeholders are not necessarily the Subject Matter Experts (SME’s) – SME’s may be found in some unlikely places • Team constituency can be dynamic – an opportunity to broaden skill sets, increase the diversity of input, and adapt current category strategy • Remain sensitive to conflicting priorities • Diversity in function to function focus and priorities • Transparency – no hidden agendas • Supplier councils (steering committees) – when a Supplier has multiple inroads into your organization

21. Business Reviews Periodic, formal, proactive engagement for review of the relationship to assure alignment and optimization. Agenda Example: • Company Updates  • Commodity Review • Sales History Review • Business Forecast Updates • Supplier Performance (Scorecard Presentation) • Quality Issues • Delivery Issues • Service Issues • Pricing Issues • Project Updates • Opportunities And document the meeting minutes as well as any pre-meetings and / or debriefs

22. Business Reviews

23. End of: Internal Management Architecture pause for questions Next: Strategies Isaac Young IYoung@bmrn.com Jim Latimer Jim.Latimer@elan.com Tim Jordan Tjordan@mappharma.com Mark Buck Mark_Buck@bio-rad.com http://www.biosupplyalliance.com

24. Supplier Tactics and Responses – Examples: • Going direct to end user – excluding Purchasing • Include end user on Category Teams • Establish “facilitation” policies with guidelines • Focus on upstream product development to get into hard-to-change regulatory filings • Get involved in Product Development process, involve Product Development on Category Teams • Establish contractual agreements early on in relationship • Make prolific use of the term “or equivalent” in regulatory filings • Getting “sticky”, getting into multiple areas / categories making it more difficult to switch supplier out • Manage supplier within one Category team but monitor / report on all category involvements • Rolled up scorecard (all areas) is basis for business reviews

25. Response: Category Management Best-in-class strategic sourcing organizations add value in numerous areas, not just in lowering prices: • Policy development and monitoring • Guidance for non-procurement related interactions • Reduced time to market • Standardization of specifications • Working capital reduction • Reduced inventories, vendor managed inventories • Extended payment terms • Demand reduction / management • Promoting alternatives • Matching procurement to requirements • Process optimization across the Supply Chain • Facilitating innovation transfer from suppliers • Risk reduction / change control / continuity of supply

26. Category Management Process There are multiple models that have been published supporting endless academic discussions. All work towards the same goals. Example of a 5 step model: Example of a 8 step model:

27. Category Assessment Category Strategy Category Sourcing Supplier Management Supply Management Monitor, Measure and Communicate • Supplier Development Program • Negotiations and Contracts • Supplier Evaluation • Supply Chain improvement • Risk Assessment • Risk Mitigation • Supplier Review Meeting • Supplier Improvement • Stakeholder Feedback Category Management Process Strategy Development • Perform Strategic Analysis • Generate and Evaluate Options • Generate Source Plan • Obtain Strategy Approval Strategy Realization • Implementation Plan • Communication plan • Sourcing plan RFP Supplier Selection Evaluate Quotation Negotiation plan / perform Agreement Implement Manage + Maintain Spend Analysis Material/Service Analysis Utilization/Dissemination Market / Industry Analysis

28. Supporting elements of the process • Demand analysis / spend analysis • Current • Future • Use category / commodity codes to support future analyses • Material / Service analysis • Origin • Competing demand • Technology direction • Market / industry knowledge – must think global • Fragmented / concentrated / side line or strategic focus • Regulatory concerns • Benchmarking • Company culture • Appetite for change • The curse of success - If it ain’t broke don’t fix it • Supplier cultures

29. Strategic statements - examples • Consolidate number of suppliers to increase leverage & reduce costs • Increase number of suppliers to increase competition • Leverage Group Purchasing Organizations • Collaborate to reduce supply risk • Facilitate innovation transfer / Integrate suppliers into product development process • Improve sustainability profile • Focus on other total cost elements • Manage demand • Standardize specifications • Outsource / in-source material or service • Invest in key suppliers • Become customer of choice for supplier • Expand the currency of the business

30. Gap Analysis Example Set strategies over interim time periods (i.e. 1 year, 3 years, 5 years) and measure progress to close the gaps

31. Secure the relationship and leverage the value Supplier Relationships Category strategies and supplier strategies drive each other in an iterative process Buyer Dominant Relationship Interdependent Relationship Buyer Strength  Independent Relationship Supplier Dominant Relationship Supplier Strength  Structure towards Collaboration / Alliance Value of relationship  Commoditize Remedy or replace Complexity / Effort of relationship 

32. Culture Internal culture / Supplier culture alignment • Focus horizon (short versus long term) • Similarity of values • Over focus on select, key staff • Concomitant sensitivity to all stakeholder challenges • Ethics • Commitment to corporate reputations • Awareness / approach to risk • “Far Side” versus “Dilbert”

33. Relationship Sophistication • Alignment of goals - Shared vision • Common definition of success and the path to get there • Shared customer focus • Cooperation / collaboration • Trust • performance to commitment • Predictability • Consistency • Open & effective communication • Leverage competencies of both parties • Long term focus on mutual benefits • Dedication to innovation and continuous improvement • Acknowledgement of external pressures

34. Optimize Supplier Relationships Deliver Operational Excellence across the partnership / across the supply chain

35. Notes • Category strategies, if authored by appropriate cross-functional teams, are more readily implemented and refined as the stakeholders have already been involved and continue to be the champions • How much money are you going to spend in trying to save money? • Remember the zero-sum game concept • If your gain is your supplier’s or customer’s loss, it may not be sustainable • Shifting costs to other areas does not represent value add for the Company • Even if it can’t be measured, it still can be improved and reported • Beware going after measurable dollars by taking on immeasurable risk • Fundamental change across the supply chain is real legacy value • Standardization of specifications • Economies of scale • Leveraging core competencies wherever they are • Lean processes • Cost of Quality • Resilience

36. End of: Strategies pause for questions Next: Supplier Performance Monitoring Isaac Young IYoung@bmrn.com Jim Latimer Jim.Latimer@elan.com Tim Jordan Tjordan@mappharma.com Mark Buck Mark_Buck@bio-rad.com http://www.biosupplyalliance.com

37. Supplier Performance Measurements A common tool for most environments with demonstrated results

38. Supplier Performance Measurements Why & What

39. Measurements • Measurement Needs of CEOs/Presidents • The CEOs/presidents of the 1,000 largest firms (500 manufacturing and 500 service) and 200 best small firms, when surveyed on their need for purchasing measures, said the most-needed measures primarily were non-financial in nature. The five most-needed measures, in order, were: • Quality of purchased items • Key supplier problems that could affect supply • Supplier delivery performance • Internal customer satisfaction • Purchase inventory dollars Center for Advanced Purchasing Studies

40. Example 1:

41. Example 1:

42. What has worked and what hasn’t • Suppliers took notice and some even used the scorecards internally for communication and improvements • It did (sometimes) drive focus to areas that needed it • Measurements were rather easy to generate, and generally, looked pretty good • It played well with the wave of Six Sigma and Lean initiatives that were sweeping business • Some Suppliers waved their high scores around like some victory banner • Some Buyers did the same • The scorecard frequently did not reflect how either party looked at the relationship – a good scorecard sometimes did not mean a good relationship • A (too precious) few saw an opportunity for a deeper dialog and a vision of real improvement for the Supply Chain

43. Misuse of Supplier Metrics • Worse than no metric? Not knowing what to do with the tool and its results before implementing it • Does the metric matter (i.e. 3/1 window on delivery)? • Ease of creation useable value • Does the metric reflect what it implies (Quality)? • Precision accuracy • The metric, unto itself, cannot be the sole deciding factor in formulating action, as numbers do not yet tell all • Be careful attempting to “formulate” a significant element of your responsibility – If your job could be automated…. • Einstein’s theorem: “Not everything that can be counted counts, and not everything that counts can be counted.”

44. The Role of Supplier Performance Metrics • Education • Performance visibility / improvement guidance • Identify inefficiencies / continuous improvement • A language for communication • Revelations • Set & communicate standards / goals • Alignment • Objective evidence for contrasting against subjective perspectives • Decision support – guidance, not mandate • Risk mitigation • Supplier selection – competitive evaluations

45. Example 2:

46. Example 2:

47. Example 2:

48. Risk of Rolled Up Scores • An aggregate score masks the issues – you’re looking for the low numbers, not the weighted mean

49. Example 3: BioU, Inc. BioSupplier

50. Example 3: Comparing Suppliers Supplier X Supplier X