Enterprise Inventory Optimization by

SmartOps - SCM Summit Tony Verbeck

Sr. Director, Supply Chain Process & Strategy

Medical Devices & Diagnostics

Agenda

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J&J Overview

J&J SmartOps Implementation in Consumer North America

Overview of J&J’s Enterprise Inventory Optimization by SmartOps

Journey

Project Highlights

Implementation Approach

Process Overview

Lessons Learned

Preview of Implementation in Medical Devices

Q&A

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Global Presence

• Global Leader in Health Care

• More than 250

Operating Companies

• Selling Products

in more than

175 Countries

• 128,000 Employees

Worldwide

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Organizational Structure

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• Johnson & Johnson is a diversied health care company

organized into three sectors:

– Consumer Products

– Regionally organized

– Medical Devices and Diagnostics

– Globally organized

– Pharmaceuticals

– Globally organized

Twelve Months 2012 Sales by Segment

2012 Twelve Month Sales: $67.2 Billion

$ US Billions

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Pharmaceuticals

38%

Medical Devices

& Diagnostics

41%

Consumer

21%

$25.4B

6.8%*

$27.4B

8.7%*

$14.4B

0.5%*

*Operational YOY change

Note: Excluding the net impact of the Synthes acquisition, MD&D Operational change = 0.8%

Consumer Sector

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Medical Devices & Diagnostics

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Ethicon Surgical Care

Global Energy

Janssen Pharmaceutical Companies Brand Logos

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Consumer Products

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• Focus on North America ($8b):

Organized into four business units:

• Skincare: Neutrogena, Clean and Clear, Aveeno

• Consumer Health Care: BandAids, Listerine, Carefree

• Over the Counter: Tylenol, Motrin, Pepcid

• Canada: all brands, one market

Technology Overview

• SAP platform (ECC, APO, SNC, BW) implemented from 2006-2010.

Project name: “Mercury”

• SmartOps is integrated into the Mercury platform and business units

leverage the solution as they are added.

Overview of J&J’s SmartOps Journey

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• Inventory Management process structure:

Inventory

Management

Goal

Creation

Tactical

Execution

Reporting &

Analysis

The process by which inventory “budgets”

are set for fiscal periods in support of the

financial cycles (BP, MU, JU, OE).

The day to day processes to set inventory

parameters at the material/location/period

level such that service level is maximized

while delivering the financial targets set in

“Goal Creation”.

The process by which actual results are

calculated, variance to targets is

understood and explained, and analysis

is performed to drive actions as

required.

SAP E

nte

rprise

Inve

nto

ry Optim

iation b

y SmartO

ps

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J&J Consumer Products “current state” 2000-2008:

• Goal Creation

• Business plan targets handed down from above based on arbitrary incremental

improvements

• Tactical Execution

• Safety stock values used in actual planning generated from spreadsheets with

various textbook formulas refreshed annually.

• Reporting and Analysis

• Reporting executed via financial standards

• No analysis capability to determine why the results what they were.

The J&J / SmartOps relationship began in 2002:

• Multiple “Proof of Value” pilots led to the business case to implement a

fully integrated solution in 2009.

Overview of J&J’s SmartOps Journey

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Proof of Value Findings: 2004-2006

• For two business units, supply chain data was provided to SmartOps and analyzed. The

results were similar:

• The same customer service level could be supported with appx 15-20% less inventory.

• While 2/3 of the sku’s should have less inventory, 1/3 of the sku’s should have more.

Based on the Proof of Value, plus other factors, the business case for a fully integrated

solution was approved in late 2009:

• Business Case based on working capital and P&L benefits resulting from the net inventory

reduction.

• A strategic benefit noted for improved customer service.

J&J’s journey has been long only due to our decision to implement SAP-APO prior to

SAP Enterprise Inventory Optimization by SmartOps.

Jan

2010

SmartOps

Phase 1 - Project

Oct

2010

SmartOps

Phase 2 - Rollout

June

2011

Dec

2011

Mercury

Release 6

SmartOps

Phase 3 - Rollout

Overview of J&J’s SmartOps Journey

Project Highlights

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People

• Organizational changes made to support the new processes

• New, specialized skillsets are required

Process

• Process changes made in all three areas: Goal Creation, Tactical Execution, and Results & Analysis (more to come)

Technology

• SmartOps model: building and optimizing

• Master Data: New fields, redefined fields, integration

• APO: SmartOps integration, SNP configuration

Project Success Factors

• Co-leads: J&J internal process expert with a SmartOps project manager

• Strong executive sponsorship - VP of NA Supply Chain

• Champions from each business unit engaged early

• Focus on Process

Process Overview

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Goal Creation

The SmartOps output is used as the basis for all business planning and updates throughout

our financial cycles.

Focuses the conversation and targets on our actual capabilities and improvement plans.

For planned process or supply chain changes (eg, product resitings), SmartOps scenario

analysis provides the conversion of those activities into resulting inventory increases or

decreases.

Cycle

Stock

Pipeline

Stock

Safety

Stock Events SLOB

Plant

Stock

Definitions Inventory held

at our plants Buffer inventory

needed for

uncertainties

(e.g., supply lead

times, demand)

Inventory in

transit from

suppliers

Inventory used

to fill expected

demand in a

period

Inventory built

for planned

events

Slow and

obsolete

inventory held

until sold or

destroyed Drivers

MOQ

Period Between

Review (PBR)

– Review and

production

frequency

(weekly,

monthly)

Transit Time

QA Release

Pay on Ship Supply

Variability

Demand

Variability

Customer

Service Level

Exposure

Period

Raw Material and

WIP inventory in

each plant

Cycle Stock

Pipeline Stock

Safety Stock

Planned supply

builds / bleeds for

Business Events

such as: Promos / NPI

Seasonality

Re-Siting / Risk

Mgmt

Quality NC

NPI Forecasting

Demand

Changes

Other

Drivers

Process Overview

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Tactical Execution

The inventory management process, supported by SAP Enterprise Inventory Optimization by SmartOps, has been integrated into our monthly planning cycle which supports our monthly S&OP process.

Business units will be on a cycle whereby they can accept results from a new model each month if they choose but quarterly at a minimum.

Extract Master Data from ECC – Supply Lead Time &

Variability, BOM

Extract Shipment History, Forecast History & Future

Forecast from BW

SmartOps

DIM, MIPO

Data Store

APO: Strategic Inventory Review (inactive view)

BW: Optimization results, Scenario comparison

(thresholds), Scenario trend

Supply Planner utilizes reports to identify

material/plant exceptions; takes action in SIR book

& new safety stock targets are promoted to active

planning

Supply Planner

Batch

Week 1 – extract data, model in SmartOps & review results

Week 2 – Planner reviews results Week 3: results in SNP Book aligned with Tactical Supply cycle

APO SNP Planning

Book

(active planning)

Wk 4

Tactical

Supply mtg.

Process Overview

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Existing

SmartOps

• A key element of the SAP Enterprise Inventory Optimization by

SmartOps/APO integration is the ability to evaluate the results prior to using

them in active planning.

Consumer NA - Lessons Learned

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The SmartOps engine delivers what it advertises

Multi-echelon and robust mathematics

Don’t call your project “SmartOps”

The technology was less than half of the project effort.

The process and people work was more than half…and continues.

The “guts” of the process requires a specialized skillset not required for all

supply planners.

Consider a small yet powerful centralized department.

To achieve the value, the SmartOps recommendations must be used and the

resulting supply signals executed.

Planning processes are generally well ingrained - the inventory

management process must fit.

If manufacturing execution is bad, better plans won’t help.

Up Next………..Medical Devices

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MD&D will begin with EIO as a service

• No standard IT platform to integrate into

• Underlying demand and drivers more static

• Faster time to benefits

• Change Management - lower level of maturity than Consumer

Deployment Path Description Benefits Process

Enablement

EIO as a Service EIO processes delivered

to each business as a

service.

Time to benefit

Fit to business

need and maturity

Foundations

Standalone System integrated to

underlying infrastructure.

Limited to finished

goods.

Infrastructure

sustainability,

support, attrition

Foundations /

Essentials

Integrated Processes fully integrated

into planned state.

Time to benefit Foundations /

Essentials /

Differentiation

Thank You!

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