2016 supply chain strategy objectives wad 02-12-16

MMD Strategy

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VISIONBe the most-trusted and competitive supplier of pharmaceuticals, vaccines, biologics, and animal health products to the world’s patients and customers, supporting the company’s mission and enabling growth

BUSINESS GOALAchieve world-class manufacturing & supply status by 2020 by delivering uninterrupted, unconstrained, highest-quality supply at the lowest cost and shortest lead times

Supply

Profit Plan People

Compli

ance

StabilityWorld-class supplier and

best in regulatory compliance & safety

BiologicsBuild “large” molecule

capabilities and mindsets

Diverse TalentDevelop new and enhanced

leadership capabilities

InnovationExcellence in key

technologies and approaches to platforms and operations

ResponsivenessAgile end-to-end supply chains and best-in-class

COGS and working capital

Achieveworld-class

manufacturing & supply status

by 2020

MMD Beyond ‘15 StrategyAligned with Enterprise Strategy

2020 – 2025Break Away

Achieve industry leadership position in key technology platforms and operational excellence.

Accelerate world-class manufacturing in key technology platforms, end-to-end supply chain excellence and best-in-class commercialization and integration.

2015 - 2019Accelerate

Accelerate (2015-2019): Strategic ChallengesStability1 Responsiveness2 Innovation Biologics capability

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3 4

Being a true world-class supplier and best in regulatory compliance

Agile supply chains and best-in-class COGS and working capital

Stay ahead of the competition (E2E). Excellence in new product launches

Right capability at the right time; build “large” molecule capabilities and mindsets

2016 – MMD Year 1 Key Focus Areas

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Objectives

1. Ensure compliance2. Assure full supply & revenue (World Class Supplier)3. Top quartile safety performance4. Deliver ZEPATIER launch5. Achieve profit plan & working capital commitments6. Accelerate talent development and enhance people engagement

MMD 2016 Key Focus Areas

PrioritiesOperationalize Quality Improve Supply Chain

PlanningSafety – Cultural

Transformation & EHS Systems Ownership

Biologics CapabilityEnd-to-End Risk Assessment &

MitigationDiverse Talent

Strategy

Compliance Supply People Profit PlanPerformance Metrics

2016 MMD Division Objectives

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Customer

We will create shared value with our key customers

Innovation We will drive Innovation in all facets of our business as the basis of our core strategy and competitive advantage

PeopleWe will create an inclusive and diverse environment where top talent seeks to

build a career and deliver for Merck

Quality/Compliance We will ensure the highest standards of

quality and conduct all activities in an ethical and compliant manner

Operational Excellence We will deliver continuous productivity & operational efficiency with a focus on “One Merck” as an integrated business

Financial Performance We will be a great investment by

delivering on our Financial Plans and Growth Objectives

• World Class Supplier (highest quality, shortest lead time, lowest cost) with top performance on measures focused on:

- Focus 40 Sites (robust supply, iOTIF) - Paced production to takt (Lead Time Reductions) - Create pull from customers to suppliers (Darwin, S&OP) - Minimize Tier 7 repeats• Focus on OTIF (differentiated for top

customers), iOTIF/LIFR (Internal & External)

• Fully embed Executive S&OP process

• Fully deliver & sustain on-time ZEPATIER launch, including upside scenario and lean/flexible supply chain designs

• Ensure excellence in on time filings & launches (4 biologics / 9 small molecules)

• Create long-term blueprint for implementation of variable batch size, rapid turnaround technology platform for oral solid dosage products.

• Build organizational capabilities to support new MMD strategy

• Drive manager accountability for talent management, employee performance and development

• Increase employee engagement• Build a diverse and inclusive workforce• “Safe by Choice”: behavioral, cultural, and

leadership transformation

• Meet or exceed targets in - Reduce Product Recalls - Data Integrity program - Permanent inspection readiness - Prevent major supply interruptions due to quality issues - Achieve RIR/LTIR targets (“Safe by Choice”) - Create/verify effectiveness of high risk work sub-systems - Implement all 37 Safety Standards (HH)

• Improve Supply Reliability - Fully integrated end to end supply chain - Systemically solve cross-network issues (equipment reliability, fundamental data & planning/forecasting, root cause analysis) - Connection of internal & external suppliers - End-to-End Risk Assessment & Mitigation • Lead Time Reductions (90 day)• Optimize product and SKU portfolio• Deliver 2% production efficiencies on a

constant volume basis (ex Network)• Improve utilization of manufacturing facilities

through Network actions• Increase percentage of diverse suppliers

• Deliver P&L Target: $1.6B• Meet or Exceed Working Capital and Cash

Flow goals: - $8B Payable (pull-through) - $5.6B Inventory (year-end) • Achieve Capital spending plan

2016 Supply Chain Objectives

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Customer

We will create shared value with our key customers

• World Class Supplier (highest quality, shortest lead time, lowest cost) with top performance on measures focused on:

- Focus 40 Sites (robust supply, iOTIF) - Paced production to takt (Lead Time Reductions) - Create pull from customers to suppliers (Darwin, S&OP) - Minimize Tier 7 repeats• Focus on OTIF (differentiated for top

customers), iOTIF/LIFR (Internal & External)

• Fully embed Executive S&OP process

MMD SUPPLY CHAIN

Meet this Additional Specifics:

1. Lead Darwin - Business outcome realization for 20162. Lead Master Data Improvement in collaboration with

different MMD functions (KPI: <X>% or greater on MRT score)

3. Accelerate deployment of Integrated S&OP process (Site, Market, Region, Global & IEO)

4. Lead Supplier S&OP – development of a solution for & delivery of aggregated forecasts by 2Q16 & beyond

5. Develop, standardize and implement US E2E import/export processes to drive compliant and reliable flow of info, docs, and materials from supplier to customer. Develop plan for international.

6. Develop & install a horizontal Tier Process (rebuild Tiers 3- 7)

• Develop a process for identifying instability in the supply chain

7. Meet Customer Centricity Objectives : Customer-focused initiative (e.g., incorporated into existing Tier process) to hit customer targets, S&OP, Innovation etc


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MMD SUPPLY CHAIN


1. ZEPATIER- • Reduce LT 585 d -> 260 d to enable 10MM tab

production by EOY• Drive the 50+ projects that reduce Lead Time

2. E2E Global Launch Process: Complete the design of the E2E launch process & deploy (IDST interface, Value Chain, Planning) with performance measures

3. Supply Chain Design Process (Hoshin Challenge # 1): Install the standard supply chain design process (new supply chain design) by Q1, 2016 & integrate w/other processes

4. Supply Chain Innovation Forum– Install a process to proactively ID, Experiment with Innovative/ New ideas, Tools, Methods across SCM

5. Integration Capability: Create capability (team & process) to effectively integrate and achieve business value in acquisitions

6. Lead/ Co-Lead creation & execution in partnership with LOB (to ensure value creation) of Small Molecule, Vaccine and Bio-Sterile Manufacturing & Packaging strategy/ hoshins

Innovation We will drive Innovation in all facets of our business as the basis of our core strategy and competitive advantage

• Fully deliver & sustain on-time ZEPATIER launch, including upside scenario and lean/flexible supply chain designs

• Ensure excellence in on time filings & launches (4 biologics / 9 small molecules)

• Create long-term blueprint for implementation of variable batch size, rapid turnaround technology platform for oral solid dosage products.


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MMD SUPPLY CHAIN


1. Improve Supply Reliability- Drive Integrated S&OP (see “Customer” objective

2. Lead Time Reduction: • Lead the lane work for the 11 lanes. Renew (9) and

Kick Off (2)• Set targets in collaboration with LOB• Inventory by nodeAccomplish the above through Standard Work (E2E Planner), MPS, VSM/ Line Design and Site alignment with priorities

3. Lead the SKU rationalization project Lead Supplier S&OP – development of a solution for & delivery of aggregated forecasts by 2Q16 & beyond

4. Improve Utilization through:• Design and Implementing strategic asset

management process • Partner on sourcing strategies

5. Risk Management: Develop & execute Supply Chain Risk Management process – connect to enterprise risk process

Operational Excellence We will deliver continuous productivity & operational efficiency with a focus on “One Merck” as an integrated business• Improve Supply Reliability - Fully integrated end to end supply chain - Systemically solve cross-network issues (equipment reliability, fundamental data & planning/forecasting, root cause analysis) - Connection of internal & external suppliers - End-to-End Risk Assessment & Mitigation • Lead Time Reductions (90 day)• Optimize product and SKU portfolio• Deliver 2% production efficiencies on a

constant volume basis (ex Network)• Improve utilization of manufacturing facilities

through Network actions• Increase percentage of diverse suppliers


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MMD SUPPLY CHAIN


1. Ensure to be in compliance with the serialization requirements for SC

2. Process standardization and optimization of Trade Operations. Internal Audit process

3. QMS revision and implementation. Permanent inspection readiness

4. Artwork Center Excellence 5. Develop the discipline on inventory control by setting

the governance, infrastructure and interdependencies needed. (IQV process)

6. Keep Improving Security, Safety and EHS posture (Sponsor Safe by Choice Program/Culture). All compliance Training completion. Ensure no supply issues due to quality issues.

7. Maintain and enhance Compliance Councils8. 100% Safe by Choice training attendance and 0

RIR/LTIR target for SCM





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MMD SUPPLY CHAIN


1. Ensure to be in compliance with the serialization requirements for SC

2. Process standardization and optimization of Trade Operations. Internal Audit process

3. QMS revision and implementation. Permanent inspection readiness

4. Artwork Center Excellence 5. Develop the discipline on inventory control by setting

the governance, infrastructure and interdependencies needed. (IQV process)

6. Keep Improving Security, Safety and EHS posture (Sponsor Safe by Choice Program/Culture). All compliance Training completion. Ensure no supply issues due to quality issues.

7. Maintain and enhance Compliance Councils8. 100% Safe by Choice training attendance and 0

RIR/LTIR target for SCM





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MMD SUPPLY CHAIN


1. Meet or exceed (if additional stretch targets given) Supply Chain budget of 427 MM

• Each budget owner measured on monthly performance & Qtr update to forecast

2. Meet Inventory target of 5.8B (EY). Measure risks and track monthly through:

• E2E Planner standard work• Value Chain Management improvements tracking• Process Indicators established by COE

Financial Performance We will be a great investment by

delivering on our Financial Plans and Growth Objectives

• Deliver P&L Target: $1.6B• Meet or Exceed Working Capital and Cash

Flow goals: - $8B Payable (pull-through) - $5.6B Inventory (year-end) • Achieve Capital spending plan


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MMD SUPPLY CHAIN


1. Build organizational capabilities to support new MMD strategy1. Darwin, Lean, CorpU Supply Chain Leader Training, Safe by

Choice, SCM Training Academy2. Drive manager accountability for talent management, employee

performance and development1. Succession adherence >95% ; Band 400 key talent movement

>10%2. Quick survey in April/May:

1. My manager gives me regular feedback on my performance

2. I’ve discussed development with my manager in 20163. Increase employee engagement

1. Engagement index 77% (SCM 2014: 78%)2. Innovation 63% (SCM 2014: 61%)

1. SCM 2014: Merck is more action oriented than bureaucratic: 38%

2. Action – ask team what is in the way of getting their job done? Take actions

3. Immediate Manager 80% (SCM 2014: 81%) – quick survey (above)

4. Development 65% (SCM 2014: 64%) – quick survey (above)4. Build a diverse and inclusive workforce

PeopleWe will create an inclusive and diverse environment where top talent seeks to

build a career and deliver for Merck

• Build organizational capabilities to support new MMD strategy

• Drive manager accountability for talent management, employee performance and development

• Increase employee engagement• Build a diverse and inclusive workforce• “Safe by Choice”: behavioral, cultural, and

leadership transformation

MMD Key Performance Indicators (KPIs) 2016 Key Outcome Metrics

Profit Plan:• Total P&L vs. Plan (ex-FX)• Discards vs. Plan (ex-FX)• Working Capital (Payables &

Inventory)• Capital Spending 1

Compliance (Incl. Safety): • Recalls• Inspection Outcomes• Recordable Injury Rate / Lost Time

Injury Rate (RIR / LTIR)• Corporate/Division Compliance

Goals 1

People: • Development of Key Talent 1

• Retention of Key Talent 1

• Diversity 1

• Engagement 2

Supply: On Time in Full (OTIF) – Overall & Top

10 Customers• Line Item Fill Rate (LIFR)• First Pass Quality (FPQ)• Product/SKU Optimization 1

• New Product File and Launch 1

Note 1: Updated QuarterlyNote 2: Updated at Year-End

Color Code Legend

150% of target

100% of target

75% of target

75% of target

To Be Updated / Defined

2016 MMD Key Performance Indicators (KPI’s) TargetsKey Outcome Metrics

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StrategyCompliance (incl. Safety) Target Supply Target

• Recalls (Number & Index)HH: 9 +/-2 recalls,

130 indexAH: 10 +/-2 recalls,

120 index

• On Time in Full (OTIF) Overall & Top 10 Customers

Overall 90% (FY)Top 10 90% (Q4)

• Inspection Outcomes 0 Unfavorable Outcomes* • Line Item Fill Rate (LIFR) 96% (FY)

• Recordable Injury Rate / Lost Time Injury Rate (RIR / LTIR)

.42/.16 ex-WP, .82/.26 WP • First Pass Quality (FPQ) 92% (FY)

• Corporate & Division Compliance Goals

Meet all Requirements • Product/SKU Optimization 15 Brand Reviews / 90%

Approved Work Complete

• New Product File and Launch 90%

Profit Plan Target People Target

• Total P&L vs. Plan (ex-FX) -3% Favorable • Development of Key Talent ≥ 10%

• Discards vs. Plan (ex-FX) On Plan • Retention of Key Talent ≤ 5% Turnover

• Working Capital (Payables & Inventory)

Payables: $8.0BInventory: $5.6B

(Year-End)• Diversity

Female: ≥ 29.3%(Band 500)

US UEG: ≥ 22.8% (Band 600)

• Capital Spending On Plan • Engagement ≥ 77%

* # of inspection outcomes that lead to a stock out or failure to launch a product on time.

2016 MMD Key Performance Indicators (KPI’s) TargetsAdditional Enabling / Supporting Metrics

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StrategyCompliance (incl. Safety) Target Supply Target

• Total Deviations -20% vs. ‘15 • Internal On Time in Full (iOTIF) 90% (FY)

• “Safe by Choice” Program All Sites Implemented* • Inventory Replenishment Level (IRL) 80% (FY)

• Implement EHS Safety Standards

Implement 37 Standards (HH) • Master Data Accuracy (MRT-SCOR) 97% (Q4)

• Lead Time Reductions TBD

• MMD Supplier Diversity $274MM

Profit Plan Target People Target

• People (11 metrics, max 22 pts.) 14 points

* Excluding announced network actions and inactive sites

2016 supply chain strategy objectives wad 02-12-16

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