Operational Excellence

1. Operational Excellence Establishing a Culture of Quality Prof. Dr. Thomas Friedli

2. Agenda Models & Patterns of OPEX programs 1 The Cultural Challenge 2 Summary 3

3. 6 New drug approvals are not keeping pace with risingR&D expenditures Number of NMEs first launched onto the world market Global R&D expenditures 50 45 R&D expenditures ($ bn) 40 Number of NMEs 35 +70 % -50 % 30 25 20 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008* 2009* 2010* 2011* Source: CMR Factbook (2008)

4. The New Economics of Innovation Historical revenues Revenues with greater price pressures and shorter cycles Historical margins Dollars Margins in new environment New fixed development and manufacturing costs Historical fixed development and manufacturing costs 6 12 Years from product launch Product introduction Source: Pisano, HBS

5. % Why should you care about manufacturing? – Cost structure on Company level 3% 5% R&D 13% Manufacturing General & Administration 31% Sales & Marketing 53% 63% Margin 22% 20% 4% Brand-name companies Generics manufacturer Contract manufacturer Source: University of St.Gallen, Benchmarking Industry Report (2009)

6. Pharma has no Track Record of Thinking in Process Improvements! • Pharmaceutical Manufacturing has traditionally focused on end-product quality! • The Pharmaceutical Industry has not focused on developing a scientific understanding of their processes. This leads to a high rate of internal failures such as reworks and rejects! • Pharmaceutical manufacturing processes are often complex and include many non-value-added activities! • Pharmaceutical manufacturing tended to view individual sites independently! • The role of leadership and "human effects" had been neglected!

7. A Framework for thinking about Operational Excellence OPEX Framework Preventive Process Customer Set - up time Pull system maintenance management integration reductions JIT TPM TQM Cross - funct. Effective Supplier Planning Layout - Housekeeping product technology quality adherence optimization development usage management Standardized Standardized Standardized equipment processes replenishment Operational Performance Low inventory Stable running machines Stable processes 1 2 3 High continuous Self - directed Low absenteeism & Flexible Low abseentism improvement rates teams fluctuation workforce & fluctuation Effective Management System Direction setting Management commitment and company culture Employee involvement & continuous improvement Functional integration & qualification Source: University of St.Gallen

8. The Evolution of OPEX in the Pharmaceutical Industry Level of Operational Excellence "Integrated Operations System" "Transformation" "Best Practice Transfer" "Pre-OPEX" -199X 200x 201x Source: Friedli et al. - Pathway to Operational Excellence (2010)

9. The current phase of leading companies! • Companywide Initiatives and Programs • Companywide tool-boxes • Common language and holistic view of performance. Different initiatives cooperate with each other • Large Scale Change Process • Large scale transformation processes focusing on organizational set-up • Innovations and changes are driven by Senior Management and Site Leadership Teams • Change pattern: Unfreeze- Transition - Refreeze • Process Understanding • More sufficient techniques like real-time controlling • The foundation of process understanding has reached a reliable level for the first time • Role of Leadership • To solve problems and to improve their daily work • Improvements often struggle to stay sustainable, payoffs are not as high as expected • Discussions about the role function of operations leaders as coaches and teachers got a key issue • Coaching and teaching • Coaching techniques as well as leadership practices such as Gemba are added to OPEX training concepts • HR gets more integrated into OPEX Source: Friedli et al. - Pathway to Operational Excellence (2010)

10. Wyeth: Setting a Focus on Redefining Leader's Role 1 Source: Wyeth; Friedli et al. – The Pathway to Operational Excellence (2010)

11. MerckSerono: Defining a Suitable Deployment Structure Source: MerckSerono; Friedli et al. – The Pathway to Operational Excellence (2010)

12. Example of an operational excellence iniative – Right First Time by Pfizer 2003 The Right First Time (RFT) Strategy is key to achieving the PGM Mission: “We will be the world's leading supply organization and an innovative and powerful competitive advantage for Pfizer.” RFT is a science-based approach that will have a dramatic impact on PGM (Pfizer Global Manufacturing) business performance by transforming our competencies, technologies and ways of working, thereby establishing PGM as the industry benchmark in innovation.RFT will be fully realized when PGM becomes an agile supply organization driven by highly capable processes and a diverse team of highly engaged colleagues The target of Right First Time is to enhance the effectiveness of processes

13. RFT: The 5 priorities Relentless Process Focus colleagues/ culture performance organisational initiatives Behaviourof Leader and Values Communication Method 1 Knowledge Management RFTOrganisation Performance of Suppliers Communities of Practice Performance Measures Automation Value Stream Mapping process understanding paradigmshift ArchivalKnowledge Storage Process Analysis Techniques (PAT) Six Sigma methods IT Systems (CatalystandPharmInvestigator) Launch ofnewproducts RiskAssessment Manufacturing Science ProcessCapability

14. Right First Time Organization Sponsors Overall Strategy RFT is virtual! RFT directly reports in the line functions! Global Communication & Leadership PGM RFT Leader RFT Area Leaders Local Communication & Leadership RFT Leaderson Site Level BB + GB + YB Local Initiatives Communication Training Local Metrics Implementation

15. RFT Methodology 100% 1% 5%

16. Agenda Models & Patterns of OPEX programs 1 The Cultural Challenge 2 Summary 3

17. The Key influencing Factors for a sustainable Implementation of OE Project Mgt. Linkagetodailyjob Project Selection Project Portfolio Mgt. Sponsor Commitment Plant Identity Training Mgt. Engagement Understanding Interplay General Plant Culture Knowledge Mgt. Site Leader OE leader ImplementationofOEintotheOrganization UsageofOElanguage Understanding of OE initiative Plant Mgt. of OE Problem – MethodMatching Integration of corporate initiatives Identity of OE program Belt Selection Communication

18. Circle of Key InfluencingFactors Heritage Corp. commit- ment & support 1 6 Management Commitment Culture 5 2 Integration Structure 4 3 Processes People

19. Operational Excellence Culture 6 Integration 5 Processes 4 People 3 Structure Management Commitment 2 1

20. Basic Categoriesof Model Corporate Commitment / Support Culture Integration Structure Processes People Management Commitment Site Culture/Background

21. „Tension Lines“ for Evaluation of Sites Extreme 2 Extreme 1 hinders a sustainable OE implementation fosters a sustainable OE implementation

22. I. Site Culture / Background

23. Site Culture / Background Management Style Functional and hierarchical barriers lead to islands/silos Problem orien-tation leads to cross-functional discussions Open, culture of discussion, flat hierarchy, Process Management Command & Control- hierarchical

24. II. Corporate Commitment / Support

25. Corporate/OpU Resources for OE Corp./OpU resources available in case of emergency Corp./OpUresources available on request Corp./OpU resources available- when they are needed No Corporate/OpU resources available OE Aligned/Supportive of Site Objectives Linked, but not always to the most critical objectives Indirectly linked to objectives Linked to main strategic objectives No link

26. Engagement of OpU/Corporate Support People Low numberofsitevisits Averagenumberofsitevisits Highlyengaged, highnumberofsitevisits Not engaged

27. III. Management Commitment

28. Commitment of Site Managing Director Focus on mimimalfulfillment of OE-objectives High Commitment, proactive promotion of OE Shows Support for OE projects Low Commitment OE Site Leader Delivers inputs for Site Strategy Setting Partly involved in Site StrategySetting Fully involved in Site Strategy Setting Not involved in SiteStrategy Setting Relationship between Site MD and OE Leader Different positions on several strategic issues Different positions on several tactical issues Complementary, completly aligned, synergistic Contradictory, Not the same agenda

29. Commitment of Site Leadership Team (SLT) Majority of the SLT engaged and highly commited Minority of the SLT engaged and highly commited Engaged and highly Commited- engaged with projects Not engaged and commited Management of OE Managed as a relevant Initiative Managed as an important initiative Managed as an integrated, strategic initiative Managed as me-too initiative

30. Understanding of Middle Management OE seen as strategic and vital to their success OE seen as important but not necessarily for them OE seen as unrelated to them OE seen as technical- somewhat narrow focus Level of OE Project Sponsors In most cases member of SLT Partially member of the SLT Middle management or lower Member of SLT

31. Communication Structured and well executed communication strategy Communication doesn`t reach shop floor level OE only mentioned at some dedicated events Communication takes place on all levels OE and Plant Objectives Linked to less important objectives Linked to main objectives and part of a clear site vision Indirectly linked to objectives No link

32. Black Belt Selection Criterias Selection criteria is capability Selection Criteria is interest Selection criteria is leadership potential Selection criteria is availability of person Green Belt Selection Criterias Selection Criteria is interest Selection criteria is capability Selection criteria is leadership potential Selection criteria is availability

33. IV. Structure / Organization

34. Available Working Time of Site OE Leader for OE 100% almost 0% less than 50% more than 50% Organizational Integration of OE at Site Created a new dedicated position for OE & also embedded in functions Integrated in existing Function:no site-wide level OE role ...

35. OE Steering Committee Single members of SLT are engaged in the SC Only formal existence of SC no SC SLT leads SC OE Achievements There is a team event for each successful closure of a project Achievements are communicated with posters There is no celebration of achievements at all Achievements are celebrated systematically

36. V. People

37. Understanding of OE on Shop Floor Level Technical methodology not seen as applicable at shop floor Makes daily work easier and more efficient helps to solve single problems focus on support ofcompetitiveness Spread of Projects over Organization Spread to most functions Limited to one function Limited to few functions Spread to all functions

38. Training (1) Workforce Knowledge of OE No OE specific trainings Adequatenumber of green and black belts 50% trained in basic under-standing of OE 100% trained in basic understanding of OE Training (2) Roleof Training Seen as means to start a change of mindset Seen as an enabler for engagement Mainly seen as technical, but also engagement related Seen as technical and project related

39. VI. Process

40. OE Project Engagement projects are regularly started from inside and finished in most cases projects are only started with pressure from outside projects are started regularly from inside and get finished on time projects are regularly started, but often lose momentum Standardization of Project Management- Include capture of business benefits not explictly defined process- some benefits identified Key Projects chartered & benefits captured Disciplined project management across Site- advanced benefits captured No defined process

41. Project Selection Awareness of business needs drives most projects, project pipeline is well filled Most projects started reactive, in single cases they were generated proactive Proactive by real business needs Reactive Knowledge Exchange Systematic use of Know How Exchange UnsystematicuseofKnowHowexchange Re-invent the Wheel Replicate & improve is our DNA Team Work Results are achieved because of a real team effort Resultsareachievedbecauseoftheeffortsof a few Results are achievedbecause of a real team effort and excellent coaching There’s no realteam work in our OE activities

42. VII. Integration

43. Link to Daily Job neutral towards daily job OE as support of daily job OE as improvement of daily job OE as burden to daily job Aligment of OE with other operations initiatives Managed as comple- mentary activities Managedas separate activities Managed as contra- dicting activities Managed -fully integrated Sense of responsibility Black Belts feelresponsible foroutcomes Black Belts andGreen Belts feel responsible People closest tothe job take overresponsibility for improvement There is no senseof responsibility

44. Two sites compared Site A Site B Corporate Commitment / Support Corporate Commitment / Support Culture Culture Integration Integration Structure Processes People Structure Processes People Management Commitment Management Commitment Site Culture / Background Site Culture / Background Good level for sustainable OE implementation achieved On the way Room for improvement Low level

45. Agenda Models & Patterns 1 Example 2 Summary 3

46. Some generalized conclusions concerning OE! For the initialization of OE an outside (e.g. corporate) support and pressure is mandatory! Next will be to gain the management commitment to OE at eachsite! Project Selection has to be aligned to real needs from the beginning to ensure acceptance for OE! To make OE sustainable a broad engagement of people has to take place – OE can‘t be ordered! Structural/organizational measures can enforce the impact and help to communicate the importance of OE! Make use of quick wins to bring in actively more people! Communication is key – but communicate the right things! Training is not only enabling people on the tool side of OE but also an important means to gain understanding and to implement a common language throughout the organization!

47. Future State: The „Integrated Operations System“ phase • Beyond the Tools • Bundled under one umbrella program Continuous improvement is seen as a specific mindset to challenge daily routines on every level of the company • Continuous Improvement • Innovations and changes occur continuously on different level. • Senior Management and Site Leadership Teams give direction and ensure the conditions. • Change pattern: • Freeze – Rebalance - Unfreeze • QbD and CoDevelopment • Upstream integration • CoDevelopmentproducts, processes, and equipment are developed simultaneously and linkages are addressed to gain further improvements • Decentralized brain, and leaders become teachers • Leaders become coaches and teachers • Work line operators are expected to run reactive root cause analysis and to pro-active challenge their standardized work routines • The decentralized brain starts to spread its impact • New Training Concepts • Focus on understanding, but also on applying, leading and teaching. • New concepts like "Learn Factories" and "Study Tours" partially replace older lecture sessions Source: Friedli et al. - Pathway to Operational Excellence (2010)

48. The need for integration in next-level OPEX approaches • Align all intended initiatives with your corporate strategy and communicate the “why” of the initiative ! • Establish a comprehensive reference model of your production system ! • Establish a support structure on site level ! • Establish a comprehensive management system for the improvement activities ! • Establish a standardized process for the selection of improvement projects ! • Establish a high level committee at the site ! • Be precise about what kind of "Management Commitment" is needed ! • Form a community of practices for Operational Excellence with outside experts and corporate management personnel ! • Make sure that most of the available time of the people with responsibilities is spend where the action is and not behind their desks !

49. Our 2nd OPEX Book "Pathway to Operational Excellence" • Visit:www.opexbenchmarking.com • The follow-up to our first OPEX Book in 2006 • Bringing together academia's research and companies' experiences in one book • Leading company representatives describe and explain their OPEX programs in-depth, discuss successful practices and challenges • For example: • Pfizer • Wyeth • Novartis • Genentech • MerckSerono • Book Structure: • Introduction • Starting Point of Our Journey • Maps and Experiences • Exploring the Landscape • Redefining the Destination

50. Prof. Dr. Thomas Friedli Managing Director Chair of Production Management Dufourstrasse 40a CH - 9000 St. Gallen www.tectem.unisg.ch www.globalmanufacturingnetworks.com