Baxter Health Care: Strategic Alliance Background Business Process Redesign: Process, IT Lessons Learned

- 2 - XXXXX / Gemini Innovation Workshop 11/13/ :27 Baxter Health Care Baxter Is a World Leader in the Production and Distribution of Health Care Products Sales exceeded $7 billion in 1990: -Manufacturing plants all over North America -Strategy to be “low cost producer” -Supplier alliance programs since early 80’s Purchases over $50 million in corrugated material: -Quality packaging critical to distribution -Considered a “strategic material”

- 3 - XXXXX / Gemini Innovation Workshop 11/13/ :27 Baxter Health Care Baxter Corrugated Strategic Alliance Was a Multi-Year Commitment Objectives : Reduce the supplier base to a minimum number Develop a long term strategic alliance Have a continuous improvement program

- 4 - XXXXX / Gemini Innovation Workshop 11/13/ :27 Baxter Health Care The First Step Was to Select Suppliers for Partnerships 1990 Corrugated Purchases Georgia-Pacific/GNN Temple Inland JSC/CCA Wabash Fibre Weyerhaeuser Green Bay Stone Western Kraft Boise Cascade MacMillian Bloedel JSC/CCA Temple Inland Weslvaco Temple Inland Weyerhaeuser Stone MacMillan Bioedel JSC/CCA Longview Temple Inland Miller Container International Paper PCA Green Bay JSC/CCA Temple Inland GP/GNN 30 Others3 OthersSt. Joe Westvaco GP/GNN Boise Cascade Stone Union Camp Weyerhaeuser Plant EPlant CPlant BPlant APlant D Percent of Total 1990 Purchases

- 5 - XXXXX / Gemini Innovation Workshop 11/13/ :27 Baxter Health Care A Target Was Established to Reduce the Supply Chain Cost by 16 to 24 Percent Targeted savings ranged from $8 to $12 million. Box redesign Volume discount/ price reduction System cost Spec consolidation Source reduction (tray substitution) High performance linerboard Reusable containers Suppliers: -Production planning -Shipping logistics -Fewer customer/products Buyer: -Packaging line downtime -Receiving inspection -Accounts payable -JIT delivery Capacity utilization Long-term committed volumes Singular opportunity for competitive bid Percent of Savings %

- 6 - XXXXX / Gemini Innovation Workshop 11/13/ :27 Baxter Health Care Baxter and the Supplier Identified 34 Major Steps in the Supply Chain Process Forecast Master Scheduling (MRP) Planned Purchase Orders Obtain Quotes Select Supplier Initiated Purchase Orders (MRP) Issue Purchase Order Received and Matched Order Inspected Transfer to Inventory Cycle Counted Held and Tracked as Inventory Workorder Issued (MRP) Picklist Generated Picked and Sent to Production Floor Issues to Workorder Inventory Reconciled (MRP) Matched in Accounts Payable Check Issued Baxter Process Before Redesign: Current Baxter Process: Checked Issued Issues to Workorder Electronic Matching Forecast Sent to Production Floor

- 7 - XXXXX / Gemini Innovation Workshop 11/13/ :27 Baxter Health Care The Value Improvement Process Reduced the Effort to Eight Major Steps Current Corrugated Supplier Process: Forecast Receive Check Order Shipped Receive “Request for Quote” Prepare Quote Forecast Receive Order Build to Inventory Pick Order Prepare Shipping Invoice Order Shipped Prepare Invoice Match to Accounts Receivable Acct. Send Docu- ments to Baxter Receive Check Corrugated Supplier Process Before Redesign: (1) (1) Does not include internal plant manufacturing systems Receive Plant Request

- 8 - XXXXX / Gemini Innovation Workshop 11/13/ :27 Baxter Health Care The New Procurement Process Is a Whole New Way of Doing Business Selected two suppliers in stategic alliance - they invest and share in program Price base on published corrugated plus convesion Taken off MRP and inventroy systems Decision-making responsibility at the lowest possible level Pre-released at supplier and process monitoring/validation to ensure quality Electronic process with high IT utilization; matching of purchase order with goods(electronic funds transfer Rules established for partnering continuious improvement with revenue sharing NewOld Multiple suppliers: 68 in United States Each purchase was priced All planning through Forecase and MRP system Low employee empowerment—lack of decision- making authority and responsibility at the execution level Inspection on each lot at receiving Payments to suppliers are made upon receipt of the invoice Improvement projects managed seperate at Baxter and suppliers

- 9 - XXXXX / Gemini Innovation Workshop 11/13/ :27 Baxter Health Care Baxter Achieved Many benefits from the Corrugated Strategic Alliance Cost Reduction Benefits Savings exceede $12 M by year three Reduced inventories by $17M Reduced accounts payable staff Reduced receiving staff Streamlined administrative functions— practically eliminated paperwork and indirect overhead Increased Quality Supplier Benefits Improved profit margins Increased plant capacity Used program with other customers More effective use of capital Early involvement in new design Joint problem solving Staff Benefits Allowed Buyers to pursue other area Plant staff actively involved in programs More interesting work Quality improved 34 percent “0” defects rather that % acceptance

XXXXX / Gemini Innovation Workshop 11/13/ :27 Baxter Health Care Key Lessons Learned A Strategic Alliance takes over two years to fully realize: -Requires continuous involvement of management (champions) and employees -Always establish financial/quality targets Information technology is not always the answer: -System justifications are critical -Not a solution looking for a problem