Supply Chain Transformation

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

2. Agenda The Current Environment The Necessity for Change An Approach for Achieving Transformation The Value Proposition Continuous Improvement – The Journey Never Ends

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

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

5. Acquisition & Merger Focus Pfizer + Wyeth? Or Sanofi + Medley? Or Roche + Genentech? or King + Alpharma? Or Lilly + ImClone? Or Teva + Barr? Everyone is looking to put together the correct pieces to overcome the future revenue shortfall & as a method to reduce costs!

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

7. Agenda The Current Environment The Necessity for Change An Approach for Achieving Transformation The Value Proposition Continuous Improvement – The Journey Never Ends

8. The World is Flat and Much of Your Future Opportunity is in Emerging Markets How will you get your products to these markets?

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

10. The International Transportation Challenge American Society of Industrial Security • “10 + 2” • Property Brokers License • Duty Rate • C-TPAT • Secure Freight Initiative • INCO Terms Importer Self Assessment • Special Duty Programs • Ocean Forwarder License • Automated Manifest System • Certificate of Endorsement • Customs House Broker Permit • Unauthorized Shipper • TSA • Harmonized Tariff Schedule Ocean Transportation Intermediary • NVOCC • “24 Hour Rule” The level of complexity is heading in one direction – UP!

11. 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

12. Requirements for Developing a “world class” Supply Chain • The full requirements of establishing and maintaining a “world class supply chain” are complex: • 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

13. The Task is Large – the Opportunity is Larger Competitive Framework for Process Industries Laggards Industry Average Best in Class Organization Best in Class organizations have clear competitive advantages over Industry Average & Laggards. Knowledge Technology Performance Metrics Source: Aberdeen Group, March 2007

14. Your Supply Chain Can be a Competitive Differentiator Lower performing companies are 3 times more likely to view their supply chains as cost centers. Market strategy competitive differentiator 27% Cost center necessary to conduct business 25% Customer service competitive differentiator 30% Cost savings opportunity area to help fund R&D or business expansion 18% How do you view your supply chain? Source: Supply Chain Cost Cutting Strategies – How Top Process Industry Performers Take Radically Different Actions Aberdeen Group, March 2007

15. Agenda The Current Environment The Necessity for Change An Approach for Achieving Transformation The Value Proposition Continuous Improvement – The Journey Never Ends

16. The Lead Logistics Provider Evolution An 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 & operating more efficiently.

17. Technology • Third 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 ability to deliver value!

18. The Global LLP Service Global visibility Single point of contact Direct the activity Measure the performance Optimize outcomes Provide the technology Manage the network Re-engineer the network Develop “baseline” • Drive out cost • Support future growth • Streamline activities • Manage complexity • Standardize activities • Reduce inventory requirements • Improve flexibility • Ensure compliance LLP Transportation services Warehouse services Transportation services Warehouse services Transportation services (All parties digitally connected to the chosen management technology ) People, processes, technology & continuous improvement make the difference.

19. How to Make Transformation Happen A key component of any LLP activity should be focused on assisting the organizations ability to change. Leadership Plan Leadership Plan • Define behaviors of the leadership • Define behaviors of the Leadership Change Management through Change Acceleration Process (CAP) that will be critical to the success of that will be critical to the success of the change initiative the change initiative Communication Plan Communication Plan • Comprehensive communication plan • Comprehensive Communication Plan to effectively communicate the to effectively communicate the necessary messages to all necessary messages to all Merck associates impacted by the changes associates impacted by the changes Systems and Structures Action Plan Systems and Structures Action Plan • Assessment of organizational • Assessment of Organizational systems & structures to determine Systems & Structures to determine which could help or hurt the project, which could help or hurt the project, and actions needed for each of the and actions needed for each of the systems or structures Systems or Structures Stakeholder Analysis Stakeholder Analysis • Understand the influence key • Understand the influence Key stakeholders have in decision making Stakeholders have in decision making and determine their level of support and determine their level of support or resistance or resistance There is no improvement without sustained change.

20. Agenda The Current Environment The Necessity for Change An Approach for Achieving Transformation The Value Proposition Continuous Improvement – The Journey Never Ends

21. Pharma Industry Benchmarking The best pharmaceutical companies spend approximately 4% of revenue on supply chain – the average company spends over 8%! % of Revenue Pharmaceuticals % Total Logistics Spend 3% 5% 10 18% 9 8 Inbound Transportation 7 23% Outbound Transportation 6 Opportunity 8.63% Warehousing 5 Inventory Carrying Cost 4 Administration 3 26% Customer Service 3.87% 2 1 0 25% Best in Class Average Source: PRTG, “Integrated Supply Chain Benchmarking Study” Source: Herbert W. Davis, “Logistics Cost & Service - 2005” It is critical to know & manage these costs because savings here will contribute directly to the bottom line!

22. The Benefit Equation for LLP Services • Revenue Lift • Customer service enhancements • Product quality improvements • Increased quality availability Revenue Enhancement Profit Enhancement • Reduced Supply Chain Costs by 10 to 15% • Operational efficiencies • Process enhancements • Procurement savings Operating Cost Reduction Shareholder Value Enhancement • Reduced Working Capital Requirements by 20 to 30% • Inventory reductions • Reduced cycle times Working Capital Reduction Invested Capital Reduction • Reduced Supply Chain-Related Capital • Capital asset transfer • Enhanced asset utilization • Capital procurement savings Fixed Capital Reduction Source: Accenture

23. Historical Opportunity – Third Party Transportation Management • Mode Shift • Shipment Consolidation • Shipping Window Flexibility • Sourcing Year 1 6-12% Savings • Network Re-engineering • Continuous Movement • Route Development • Envirotainer Management Year 2 4-6% Savings • Freight Payment • Expedite Management • Returns Process Management • Inventory/Demand Planning Year 3 4-6% Savings

24. The Unseen Value Proposition Providing seamless shipment availability information and supply chain metrics-globally, utilizing proven technical solution. Visibility The concept of global supply chain management enables you to rely on this single point of contact for all international shipping requirements. Accountability Web-based, real-time information provided on an as needed basis with an open book policy to ensure value is being delivered. Transparency Utilize a non-asset approach to supportcustomer agility and adaptability in a rapidly changing world. Flexibility Having a trusted partner who will stay abreast of changing regulations, supply chain trends, and your requirements – at all times. Confidence

25. Agenda The Current Environment The Necessity for Change An Approach for Achieving Transformation The Value Proposition Continuous Improvement – The Journey Never Ends

26. Continuous Improvement – The Journey Never Ends • 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.

27. Comprehensive Measurement Leads to Improvement Measure early and often - what you do not measure will likely not improve!

28. Dynamic and Adaptive Network Design The continuous assessment, analysis and improvement of supply chain and logistics networks to adapt to an increasingly dynamic and global business environment Demand Variability - New product introductions - Seasonality - New Markets/Changing Demand Patterns Supply Chain Design & Re-Design Implement & Deploy the Design Manufacturing Alternatives - Contract Manufacturing - Plant Re-utilization Customer Value Sourcing Alternatives - Global Sourcing (Low Cost Countries) - e-Auctions Identify Opportunities for Re-Design Measuring the Performance of Current Design Execute & Measure Statistical Analysis & Trends Advanced optimization approaches can also have significant impact on today’s complex & global supply chains.

29. What is Lean? Cycle Time LEAN Benefits Work Time (value add) Before Wait Time (non-value add) After Same work completed in less time • Productivity • Customer satisfaction • Profit • Customer responsiveness • Capacity • Quality • Cash flow • On time delivery • Cost • Defects • Lead time • Inventory • Space • Waste! Relentless focus on value adding activities & eliminating activities that do not add value.

30. Focus Efforts on the Seven Wastes

31. Utilize Lean & Six Sigma to Identify & Quantify Opportunities LEAN vs. Six Sigma Six Sigma Eliminate defects in Process Business Improvement LEAN Eliminate waste in/around Process LEAN Helps identify steps that don’t add value and provides tools to eliminate them LEAN Improve steps that add value Six Sigma Improves the capability of steps that add value Six Sigma/LEAN Improving the capability can eliminate additional steps X X Different tools applied in different circumstances or combined for greater effect!

32. Outputs from Measurement, Dynamic Network Design, LEAN & Six Sigma Thinking Business Case Approved Projects Continuous Improvement Mindset = Project Plans Savings Delivered

33. Thank you