SCREAM: We all need to do it! Implementing a supply chain risk assessment program in a small pharmaceutical business

1. SCREAM: We all need to do it!Implementing a supply chain risk assessment program in a small pharmaceutical business Tim Jordan Manager, Supplier Engineering Intuitive Surgical

2. What is SCREAM? - SUPPLY - CHAIN • S • C • R • E • A • M - RISK - EVALUATION - AND - MANAGEMENT

3. Why Implement a Supply ChainRisk Assessment Program? • When evaluating risk in a supply chain, it is not IF a disruption will happen, it is WHAT will occur and WHEN • Research(1) shows that firms with supply chain disruptions have between 33% and 40% lower stock returns • Having a plan for identified risks enables a faster response to supply chain issues • There will always be an event you DIDN’T plan for! (1) Kevin B. Hendricks and Vinod R. Singhal - An Empirical Analysis of the Effect of Supply Chain Disruptions on Long-Run Stock Price Performance and Equity Risk of the Firm

4. Why Implement a Supply ChainRisk Assessment Program? • Global Events • Natural • Japan Earthquake/Tsunami/Fukushima Nuclear incident (2011) • Eyjafjallajökull volcano in Iceland (2010) • Hurricane Katrina and Rita (2005) • Man-made • Economic/Political • Terrorist incidents (Domestic or International) • War • Global warming

5. Why Implement a Supply ChainRisk Assessment Program? • Local events • Accidents • Supplier bankruptcy • Supply Chain visibility • Where do your suppliers get their materials from? • Local weather (flooding, tornadoes) • Regulatory issues • Production issues • Process failures • Lack of capacity • Unplanned demand • OR A COMBINATION OF LOCAL AND GLOBAL EVENTS!

6. Example - Acetonitrile(2) • Acetonitrile is a by-product of acrylonitrile, used to make plastic parts, and is used by pharma in small quantities to measure impurities • 2008 Olympics • August - China shut a plant making acetonitrile to reduce pollution in Beijing • September – Hurricane Ike shut down an acetonitrile facility in Texas • September – Start of the Financial markets collapse • Lehman Brothers failed, Merrill Lynch sold • Economic downturn caused significant reduction in plastic part demand • Demand for acrylonitrile dropped (plastic parts) • Production of acetonitrile dropped • Supply decreased • Price increased (2) http://www.zurichna.com/internet/zna/SiteCollectionDocuments/en/corporatebusiness/Supply%20Chain/Insights%20Final%201%2024%2011.pdf

7. Japan Earthquake/Tsunami/Nuclear incident • Sendai quake in 2011 was 178 times bigger than Kobe in 1995 • Major automakers Toyota, Nissan, Honda, Mitsubishi and Suzuki temporarily suspended production • Toyota had parts supply issues for several months • Disrupted the global supply chain of semiconductor equipment and materials • Japan manufactures 20% of the world's semiconductor products • World Bank estimated the cost between $100-$235 billion, and take five years to rebuild

8. Global Earthquake Statistics(3) • Number of 8.0 or greater earthquakes in the last 10 years? • Number of earthquakes from 7.0 to 7.9? • Number of earthquakes from 6.0 to 6.9? • The SF Loma Prieta earthquake in 1989 was 6.9 - 15 - 151 - 1597 Are you prepared? (3) USGS - http://earthquake.usgs.gov/earthquakes/eqarchives/year/eqstats.php

9. Typical Small Pharma Situation • Mostly pre-NDA environments • Virtual manufacturing business • No internal manufacturing • Focus on R&D and introducing a drug to the market • Supply Chain Management (SCM) not an established function • Supplier management led by scientists/engineers in virtual silos • Lack of resources for SCM • Everything scheduled for “post-approval” • Complicated supply chain flow in place • Geographically and economically

10. Step 1: Management Buy-in • ISSUE: Company focus on submitting the NDA/resolving technical issues, not on Supply Chain • Low priority for Supply Chain activities • Obtain approval from senior management to carry out a risk evaluation • Ensure they approve the use of the existing in-house process experts

11. Step 2: Brainstorming • Brainstorming - 4 hour session • Ground rules • 5 minute introduction to the supply chain • 5 minutes introduction to each supplier and their process • Idea generation • Clustering of Ideas • Evaluation of ideas • Prioritization • Summary of brainstorming results

12. Risk Evaluation – Method 1 Low Probability High Probability High Impact 3 2 1 4 Low Impact

13. Risk Evaluation – Method 2 Created from a presentation by Craig Malzahn – Human Genome Sciences Risk Evaluation – Alternative Method

14. Brainstorming Results – Supplier 1 Low Probability High Probability Nuclear accident at local nuclear reactor FDA citation on a different product Measurement delta between MFR and CRO results in multiple lot rejection High Impact Flood at facility Products overheat during shipment Damage to injection mold Tool crashes Line stop – unable to store temp sensitive product A/C failure in summer Resin supply interruption Test equipment breakdown Data entry and verification errors Presses not available MFG equipment breakdown Low Impact Lot failure Inabliity to retain trained employees Contamination in injection molding presses 14

15. Brainstorming Results – Other Low Probability High Probability Yellowstone/ Yosemite volcanic eruption ‘Force majeure’ event Global economic collapse Strategic inventory planning High Impact IP positions not upheld Single source suppliers Terrorist attack in the USA Capacity constraints SME to specific process quits Low Impact

16. Step 4: Develop Risk Mitigation Plans

17. Step 4: Develop Risk Mitigation Plans

18. Senior Management Approval • Important step! • Summarize results and present to senior management • Plans include all risk evaluation levels 1 and 2 with their mitigation plans • Manage risk evaluation levels 3 and 4 through supplier managers, with SCM oversight

19. Senior Management Approval • Management approve and resource plans for the highest impact/highest probability risks identified. • Create inventory and production plans to reduce impact of other identified risks • Should be a good, educational experience for the team • Start the business thinking to be longer-term than just the NDA/Approval/launch of the product

20. Continual Review • Implement periodic internal review of risks and the mitigation plans • Use the same core project team as the initial Supply Chain Risk assessment • Quality teams have taken a similar approach to quality risks, and implemented a similar program for quality risks and mitigation • Once business is in commercial production, program should be reviewed and take a larger role in the Supply Chain organization

21. SCREAM: We all need to do it! REMEMBER: If you aren’t doing the “sniff test” on your supply chain……. …. you won’t be prepared for the outcome!!

22. SCREAM: We all need to do it! Questions or Comments??