r Performance Metrics for a Wholesaler / Distributor Michael Kody VP, Supply Chain Solutions April 2007

r Michael Kody, Vice President of Supply Chain solutions at AmerisourceBergen Corporation. We are a roughly $70B company that delivers pharmaceuticals and medical supplies to thousands of retail and institutional pharmacy customers on a just-in-time basis. We also provide consulting services to help healthcare providers improve their businesses and focus on their strengths. Introduction

r $300B in pharmaceuticals distributed across the United States 80% through Wholesalers/Distributors (10% to mail order services/government, 10% Large Chains, 1% to hospitals) To Patients – (22% hospitals; 15% independents; 41% chains; 22% mail order; government, doctors, other) 80% of hospital pharmaceuticals received through Wholesalers/Distributors Industry Overview

r Prescription Drugs Flow ($275B 2006) Patients 100% Manufs. 100% Dists. 80% Hospitals/ Clinics 22% Chain Pharmacy 41% Drs. / Mail Gov’t / Other 22% Chain Whses 18% Ind. Pharm. 15% 80% 10% 9% 1% 21% 15% 23% 9% 18% 12% Source: IMS

r ABC provides next day service to the entire United States Our 26 distribution centers are distributed around population centers while ensuring coverage to remote locations More than 90% of the US population is within 100 miles of a distribution center Only the most remote areas are more than a 10 hour drive from a distribution center Physical proximity to people and logistical networks are the drivers for leveraging Wholesalers in a flexible value chain Wholesaler Coverage of US Population

r Typical on hand / on order quantities as well as demand variability Inventory is based upon customers’ expected demand Generally only maintain a few weeks of supply in inventory Demand often fluctuates (we may see orders triple) Events drive customers orders variability Inventory and Sales Considerations

r Understanding The Bull Whip Assume that you are responsible for order product for ABC’s DC: Customer’s order everyday, Unfilled demand remains on-order, Manufacturer’s deliver once a week, Manufacturer’s have a one week lead time, and Demand has been $1B each and every week for years. On OrderInboundInventoryUnmet Need Week 0$1B $0

r Understanding The Bull Whip Assume that your company picks up a new customer and Customer Orders are now $1.5B per week (every week). On OrderInboundInventoryUnmet Need Week 0$1B $0 What do you do?

r Understanding The Bull Whip Assume that your company picks up a new customer and Customer Orders are now $1.5B per week (every week). On OrderInboundInventoryUnmet Need Week 1$1.5B$1B $.5B Week 2$1.5B $1B$1.0B Week 3$1.5B Future$1.5B

r Understanding The Bull Whip Perfect knowledge would result in 3 weeks of disruption (treasury, freight management, DCs, sales, marketing, etc.) and incorrect demand signals to the supplier: On OrderInboundInventoryUnmet Need Week 1$3.0B$1B $.5B Week 2$1.5B$3.0B$1B$1.0B Week 3$1.5B $3.0B$1.5B Week 4$1.5B $0

r A significant change occurred in 2004/2005 in the U.S. Pharmaceutical supply chain with the implementation of the Fee-for- Service model. The traditional role of the “wholesaler” transitioned into a role of a supplier of “distribution services” to both upstream manufacturers and downstream dispensing customers.

r Rx Value (Supply) Chain: Previous State Rx Manufacturer Trade Wholesaler Retail/Health Systems Dispenser No Transparency Buy/Sell Focus on Channel Revenue Speculative Buying Best Price Profit Sharing

r Rx Value (Supply) Chain: Current (Post FFS) State Rx Manufacturer Trade “Supply Chain Services ” Retail/Health Systems Dispenser Transparency /Performance Based Service Fee Expanded Services Focus on Channel Management (Fragmented Channel) Supply Chain Excellence (Service, Inventory & Performance Management) Healthcare Margin Management Total Value

r Supply Chain Management Excellence: Three Levers of Success (MARGIN) Customer/ Shareholder Value  Demand Visibility  Inventory Management Processes  Collaboration  Service Level/Demand Management  Value Added Services  Execution Governance  Capital Investment (D.C.’s)  Core Technologies (PkMS)  3 rd Parties (Transportation)

r Themes for Success  Strong Customer Orientation (Internal/External)  Drive for Internal/External Collaboration  Effective/Efficient Use of Resources  Evolving/Learning Together

r Perfect Order Fill Rate Perfect Transaction Processing No Returns or Waste Minimal Inventory Perfect Demand Information Minimal Lead Time Product Handling / Quality Assurance Typical Performance Goals

r Service Level Tiers Days on Hand Tiers Demand Management Incentives Incentives / Penalties Related to Deductions Return Management Incentives etc. Typical Performance Metrics

r Mutual Understanding of Business Challenges and Opportunities Collaborative Decisions Based Upon Increased Value in the Supply Chain Performance Metrics that are Simple and Motivate Value Added Behavior Knowledge Sharing and SOP Performance Incentives for Value Added Collaborative Projects Opportunities

r Questions?