1

Creating a Lean Supply Chain at Cardinal Health

June 26, 2007

William OwadSVP, Operational ExcellenceCardinal Health

2

Healthcare Supply Chain Services

Operations

Demand PlanningDemand Planning Order ManagementOrder Management

Inventory PlanningInventory PlanningSupply

Execution (distribution)

Supply Execution

(distribution)

PLANNING

PROCESS

EXECUTION

PROCESS

CustomerCustomer

Manufacturer / SupplierManufacturer / Supplier

3

Cardinal Health

Supply chain factsCosts Managed ~ $780mInventory $6bHeadcount 9,000

Warehouses 75; 13m sq. ftTransportation 550 tractors; 680 trailers

SKUs > 400,000Customers > 50,000Daily deliveries 43,000

2 national customer service centers that handle 650,000 calls/month1 pharmaceutical re-packaging facility

4

Supply Chain Operation’s vision

To achieve our goal, we must align our ‘go- to-market’ and supply-side strategies

HSCSOperations

Strategic Vision

Provide category-leading

customer service

Achieve Cost

Leadership

Enhance Organization

Capability

Processes and Systems

5

Strategic alignmentWhat requirements and potential uncertainties must we be prepared for over the next 3-5 years?

Can our existing strategy be used/pushed further to fully meet these requirements, and, if not, where are there gaps?

Beyond our existing strategy, what can be done to better meet these requirements?

How can the existing strategy and new strategic elements be best melded together into a recalibrated operations strategy?

What should Supply Chain operations’ 3-5 year strategy and associated transition path be?

What role does operations need to play in order for the business units to win in the marketplace?

When/where are we willing to trade-off cost for service/ flexibility?

What is the transition path and immediate next steps?

6

Representative customers

7

Source: Cardinal Health surveys – Medical product customer survey, October 2006; Pharmaceutical distribution customer survey, October 2005

41

22

14

Medical products

52

21

19

13

Pharmaceuticals

1. Availability of preferred products

2. Competitiveness of pricing

Voice of the customer consistently points to basic execution as primary supply chain driver of customer satisfaction

Customer expectations

5. Accuracy of shipments

36 28

124. Ease of placing orders

3. Timeliness of deliveries

8

Hospital Supply ChainHealthcare value chain is complex

SupplyInformation Management

MMIS

Healthcare Provider

Item Master

Charge Master

ORIS

HIS

B-D

MedTronic

Pfizer

BristolMyers

BostonScientific

Manufacturers

J&J

Cordis

Tyco

-Parcel-Commercial -3PLs

TransportTransport

GHXGPOs

McKessonO&MABCOthers

Cardinal Health

Transport

Distributors

Transport

Other

Inventory

Pharmacy

ER

ICU

OR

Nursing FloorInventory

Inventory

Inventory

Inventory

Inventory

Special ProceduresInventory

Receiving

Fulfillment

Payables Mgmt.

Disposal

Order Management

Inventory

9

Hospital base (MPS/Rx), surgery centers, and lab

Hospital supplies

Scientific products

Self-manu-facturing/Presource Baxter Sutures Drugs OTC H&B GM

Mostly LUM*24-hour lead timeMostly parcel shipping

Ambulatory care –physician office

Mostly LUM*

12-16-hour lead time

Courier network for Retail Greater variety of SKUs

Less stringent lead time

Alt care Rx, retail chains (non-WH), and retail independents

Mostly case12-14-hour lead timeCourier network

Mail order, retail bulk, and brokerage

Consumer products

99% service levelsMostly LUM*6-hour lead time

ValueLink

Mostly case 15-24-hour lead timeNext day delivery

SlowFast

®

Eight supply chains within the Cardinal Health network

* Low Unit of MeasureSource: Internal CAH interviews; team analysis

10

Overall LSS DC Diagnostic Planning

• DC 1

• DC 5 and 6

• Summary

• DC 4

• DC 3

• DC 2

• Analysis

Main site selection criteria:– Ensure we could view as many of the different processes

(automation, conveyors, etc.)– No labor issues or other disruptions– Good operating practices

11

Summary of key opportunities from DC diagnostic

Productivity• Significant variability in productivity

by day and by employee

Observations

• Share best practices among employees and implement clearer, visual performance management

Opportunity

• Ergonomic differences when picking in the air

• Minimizing in air picks will decrease riskSafety

• Double handling and motion in receiving

• Remove staging step for full pallets and sort by aisle for handstack receiving

Capacity

Quality / Damage• Damage from in air replenishment • Decrease in air picking with proper

profiling

• Annex drives significant additional labor and waiting time at the site (and main site has enough space to take additional volume)

• Move all active inventory out of annex (if necessary move forward buys or excess stock to available annex space)

Inventory

12

Lean receiving will improve service levels and costBlueprint Concepts:• Single-Step Unload, Receipt & Putaway for High Volume Vendors

– Eliminate sorting, staging and excess travel by unloading & receiving directly into case putaway location. (Requires fixed areas in case aisle for high volume vendors)

– Partner with internal suppliers improving both upstream & downstream

• Receivers Receive 100%

– Redesign receiving layout to reduce sorting, walking, bending, and other NVA.

– Successful designs have been implemented in several RX locations.

• Safe, Ergonomic & Undamaged

– Work with internal suppliers to develop high quality inbound loads

13

Receiving example

14

Receivers Receive 100%

• Pallets unloaded directly onto conveyor queue for receiver

• Products scanned and inducted onto conveyors to putaway area

Condensed Sorting

• Increases put-away density when multiple products are sorted onto single pallets that are taken for put-away, reducing the travel time of the case stockers

Receiving example

15

Creating the rollout strategy

Step 1: Establish the facts

Step 2: Build the core story

Step 3: Edit to purpose

Step 4: Road test

• Where are we going?

• Where are we now?

• How did we get here?

• How do we reach our destination?

• What is the overall storyline?

• What are the essential themes?

• How can I use a metaphor or imagery to bring it to life?

• Who are the key readers of the story?

• How do I create a story that works for different audiences?

• Is the content right?

• Is it well written?

• How can we ensure that people own the story?

• What works well?

• What needs changing?

Tell and cascade story

16

Supporting our healthcare customers• Our business operates 24/7 to support healthcare• Cardinal Health employees:

– Distribute life-sustaining medications to healthcare customers

– Manufacture and deliver vital medical supplies

Having the right people in the right place at the right time is critical to our work, our customers’ work, and ultimately, patient care