Challenges & Value of Deploying S&OP

Integrated Business Planning SummitMarch 29 & 30, 2012 - The Alexander Hotel - Miami, Florida

Dan Dodd, Vice President of Operations and Supply Chain

My Background

15+ years in operations

• Princeton engineering• Systems Engineer at PB Farradyne• Michigan dual MBA and ME in Manufacturing• Supply chain strategy across Lucent• Two operations turn-arounds, including

– implementing S&OP across $6B Cooper Industries• Operations management at three start-ups

– implemented S&OP at all three

What % here is ops?

Presentation Structure

• The value of S&OP– And operational excellence– At Cooper and OIC

• The challenges– General guidelines– Personal experiences

Please make this interactive

Operational Excellence – Two Keys

5

24 month Demand, Supply, & Inventory

plans

ManagementBusiness Review

DemandReview

SupplyReview

ProductReview

Finance IRReview

Start(Begin Month)

MRP

• Executive led• One plan aligned

with financials

Doing the Routine Routinely

Sales & Operations Planning

Modern operational excellence is 75% lean and 25% S&OP in terms of effort/focus, but

S&OP comes first because it sets the direction

S&OP Lean Six-Sigma

How Well Does It Work?Danaher stock significantly outperforming:• General Electric• Berkshire Hathaway• Dow Jones• Even Microsoft

Cooper Industries prior to Danaher attempted acquisition, underperforming to Dow Jones

Cooper tracking to Danaher since

…significant value creation

Who has heard of Danaher?

Are There Opportunities in Healthcare?

Why wait for the government to deal

with it?

Zimmer

Stryk

er

Medtronic

Smith

& Nephew

Johnson an

d Johnso

n

Integra Lif

escience

s

Synthes

TeleflexDell

Hewlett-Packard

Cooper Industr

ies

Danah

er02468

10

1.1 2.3 2.5 1.1 3.6 1.9 1.2 2.9 42.6 15.3 7.8 5.9

Inventory TurnsThe Opportunity in Med Device

The opportunity for operational excellence is significantMedical device/orthopaedic companies, avg=2.1 ||Other

= =

Stabilizing Technology

80% are commodities

• A screw, is a screw, is a screw

• One 510k after another

The Barriers/Current Focus

Zimmer

Stryk

er

Medtronic

Smith

& Nephew

Johnson an

d Johnso

n

Integra Lif

escience

s

Synthes

Nuvasiv

e0%

20%

40%

60%

80%

Gross Margin

A relationship-driven industry (sales reps)

These great margins are going to SGA (37%) and R&D (6%)

Is the SG&A and R&D paying off?

Market share is stable – is it all hot air?2004 2005 2006 2007 2008 2009 2010

0%10%20%30%40%50%60%70%80%90%

100%

Other(1)ZimmerWrightStrykerSmith&NephewDePuyBiomet

And The Margins Aren’t Sustainable

Historical Key Industry DynamicsCost

Delivery

Quality

Cost is #1 forHigh-tech, CPG, etc

MedDevice

Regulations (FDA) define the industry:• Slow-moving• Not cutting

edge

A Changing Landscape

Operational excellence is coming• 55% of practices are now

hospital owned (up from 30% in 2003)

• IP for 75% of devices expired/ing

• More outpatient and commodity surgeries….don’t need the rep in the OR

Next Steps In Medical Device

S&OP • X 1

Lean Six-

Sigma• X 3

• Significant value

Operational excellence has meant life or death in other

industries

What Is S&OP?

18+ month Demand, Supply, & Inventory

plans (units & $)

Management Business Review

DemandReview

SupplyReview

ProductReview

Finance IRReview

Start(Begin Month)

MRP System

• Executive led• One plan aligned

with financials

Routine and obvious

CompensationS&OP

#1 Reason For Lackluster S&OP

More than one plan!...which is relevant to all industries

Executives not understanding

IBP

#2 Challenge

Routine=boring

• The right amount of relevance/detail• The plan for the business should be of great interest

A Quick Point

Sales

Marketing

Two significantly different demand communities:– Require different processes and systems– Sales is about targets and confidence levels– Marketing is more of a model– The assumptions are always the key: you can only guarantee the plans will

be wrong

How to deal with

optimism?

Cooper Industries

• Cooper: $6B diversified retail/industrial• Drove S&OP across all nine divisions

– Developed Cooper S&OP playbook– Inventory, forecast accuracy, delivery improved– Interesting differences by industry:

• In the S&OP process• Importance of high forecast accuracy

• Never added up all nine divisions

TranS1• Spine startup that reached a high of $35M• Hired after supply chain was established• Implemented S&OP

– Too much push with lead times ~ 12 weeks– Sales input too optimistic, and not used– Developed a good marketing plan (sales rep model)

• Put implants on kanban• Significant sales downturn was foreseeable and hit hard

– Reacted far too slowly in the plans -> too much inventory– Implants fared best

Orthopaedic Implant Company

• Progress to date:– Decent input from sales (50% accurate)– Fully comprehensive monthly Integrated Business

Planning (will we run out of cash?)– Shared every month with suppliers

• Enabling – Consignment and kanban across the board– Raising funding

Inventory Inventory Inventory

CUSTOMERSOICSUPPLIERS

ALL PLANNED (NOT PUSHED)

VIA S&OP

KANBAN & CONSIGNMENT

Operational excellence

Thank you!

Dan DoddVice President of Operations and Supply Chainp: 775-636-8281 x105e: dan.dodd@orthoimplantcompany.com

Questions?