Harnessing Process Excellence

April 30, 2008

Debra S. Levantrosser

Executive Director, Lean/Business Improvement

DRIVING COMPETITIVE ADVANTAGE

. 2

Objectives• Explain What an Advanced Lean and Six Sigma Organization Looks Like• Share the Strategy and Tools of the Trade• Share the Potential Results• Explain Innovation’s Role• Share Lessons Learned for an Advanced Lean Six Sigma Deployment

. 3

Objectives

• Explain What an Advanced Lean and Six Sigma Organization Looks Like• Share the Strategy and Tools of the Trade• Share the Potential Results• Explain Innovation’s Role• Share Lessons Learned for an Advanced Lean Six Sigma Deployment

• Explain What an Advanced Lean and Six Sigma Organization Looks Like• Explain What an Advanced Lean and Six Sigma Organization Looks Like

. 4

J&J: Diverse and Decentralized

• Most broadly based human health care company• 115,000 employees, $61B revenue, 230+ companies• Medical devices and diagnostics, pharma/biotech, consumer

• Managed for the long term (founded in 1886)• 72 consecutive years of sales increases• 43 consecutive years of dividend increases

• Strong culture of decentralization• Values-based culture (J&J Credo)• Empowered management

. 5

CorporateCenter

J&J Structure

ConsumerComprehensive Care

Surgical Care

Pharm andBiologics

. 6

Evolution of J&J Business Improvement

2008 >

SOQ ProcessExcellence

TQM/Crosby

Va

lue

1980s 1990s 2000s

Tools/ methods• Six Sigma, Lean, DEx

Process focus• Assessment

Measurement• Fact basedLeadership• Involved

PE Leadership/Peters

SOQ/Deming

Measurement• Fact based

Process focus• Assessment

Measurement• Fact based

TQM/Crosby/Ishikawa

Tools/ methods• Six Sigma, Lean, DEx

Process focus• Assessment

Measurement• Fact basedLeadership• Teachers, innovators

?

J&J’s approach to improvement has always evolved and built off of previous learnings and successes.

. 7

Process Excellence Vision

Constantly improving business results using embedded PE principles as a way of running the business

VisionVision

Strategic ObjectivesStrategic Objectives

Deliver ImprovedBusiness Results

Improve Key BusinessProcesses

Develop and Ingrain Improvement Competencies

StructureStructure

1990s: Large corporate group building capabilities in the operating companiesNow: Smaller corporate group providing business solutions

. 8

Objectives

• Explain What an Advanced Lean and Six Sigma Organization Looks Like• Share the Strategy and Tools of the Trade• Share the Potential Results and Success Stories• Explain Innovation’s Role• Share Lessons Learned for an Advanced Lean Six Sigma Deployment

. 9

PE Tools Help Our Businesses to Ingrain the Principles

1. Create and communicate a clear vision and align the organization

2. Understand and focus on the customer

3. Create a process-centered, high performance work environment

4. Manage with facts and data

5. Create a culture of innovation and improvement

6. Relentlessly pursue excellence

Business Management Principles

Internal and External Proven

Practices

Improvement Methodologies

Assessments

Dashboards

PE Capabilities and Tools

Helpenable

. 10

ValuesValues

StrategyStrategy

Evaluation &ImprovementEvaluation &Improvement

RegulatoryComplianceRegulatoryCompliance

Health Care ComplianceHealth Care Compliance

Health,Safety &

Environment

Health,Safety &

Environment

SupplyPlanningSupply

Planning

Supplier Relationship Management

Supplier Relationship Management

ProductionProduction

OrderFulfillment

OrderFulfillment

TechnologyTransfer

TechnologyTransfer

Organization, Workflow, & Job Design

Organization, Workflow, & Job Design

HR PlanningHR Planning

HighPerformance

Culture

HighPerformance

Culture

Strategic Talent

Management

Strategic Talent

Management

BusinessEnabling Services

BusinessEnabling Services

LeadershipResults

ComplianceResults

Org. & PeopleResults

DemandResults

SupplyResults

Prod. Dev.Results

Research Research

PortfolioPlanningPortfolioPlanning

New Product DevelopmentNew Product Development

Licensing &AcquisitionLicensing &Acquisition

ServiceDesignServiceDesign

LeadershipLeadership ProductDevelopment

ProductDevelopment DemandDemand SupplySupply Organization

and PeopleOrganizationand People ComplianceCompliance

1 2 3 4 5 6

MarketInsightsMarket

Insights

Sales & Mktg. Planning

Sales & Mktg. Planning

DemandGeneration

DemandGeneration

New Product IntroductionNew Product Introduction

CustomerSupport Services

CustomerSupport Services

Assessment Criteria

• What are the high level improvements in core and support processes?• How do we compare to appropriate benchmarks ?

. 11

Sample of a “Benchmark Process”

. 12

Blended Improvement Methods Aligned With Core Processes

Demand generation “toolkit”

Supply chain “toolkit”

NPD “toolkit”

Enabling processes “toolkit”

Six Sigma Lean DEx

Existing alignment

Proposed alignment

• Blended set of tools across the methodologies which are most relevant to a given area (toolkit)• Examples and real life application of tools in process area• E-enable “toolkit”

Tools Tools Tools

This approach addresses a key request from business leaders – make the toolsmore relevant, easier to apply, focused on the business need.

. 13

Improvement Methods and Tools

Lean

• streamline process to improve work flow and deliver customer value faster• eliminate waste—time/resources• 8 principles

DEx

• design/develop new products or processes that consistently meet or exceed customer requirements• DMADV Roadmap: Define, Measure, Analyze, Design, Validate

Objective Sample Tools

• Project Charter, VOC• Process Maps, Pareto• Control Charts• Cause/Effect, Regression• Standardize, Learnings

• Value-Stream Mapping• Standard Work, 5S• Flow Optimization• Line Balancing• Rapid Changeover

• VOC, Change Mgmt• Quality Function Deploymt• Multi-Gen. Plan • Benefit/Risk Analysis• FMEA, Design for X

• reduce process variability • eliminate defects• DMAIC Roadmap: Define, Measure, Analyze, Innovate/Improve, Control

Six Sigma

. 14

Drill Down to Action and OwnershipAt company meetings and in management’s regular dashboard review s, Janssen people drill down to the data behind specific dashboard components to understand why the company is performing as it is, as gauged by leading and lagging indicators. They then specify who will take what actions, when, to keep the company on track to reach or exceed its most important goals.

Drill Down to Action and OwnershipAt company meetings and in management’s regular dashboard review s, Janssen people drill down to the data behind specific dashboard components to understand why the company is performing as it is, as gauged by leading and lagging indicators. They then specify who will take what actions, when, to keep the company on track to reach or exceed its most important goals.

Dashboards and Hoshin Kanri: Drill Down to Action and Ownership

. 15

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Tools-only Approach

Stop & Go Approach

Toyota Culture and Training Approach

Rate at which companies improve through lean journey

Rat

e of

Im

pro

vem

ent

Th

rou

gh L

ean

Initi

ate

Impl

emen

t

Susta

in

Lean Thinking Companies that invest early in Toyota-style culture improve

dramatically in a short time.

. 16

Lean Enterprise Enablers at J&J

Lean Enterprise: R&D, Supply Chain, Sales, Support

Learning

Lean Maturity

Assessment (LMA)

Lean Deployment

Model (LDM)

• Modular-based training, e.g.:

• Lean Culture• Leadership Standard

Work• Lean Health & Safety• J&J’s Lean Model• Lean Accounting• Kaizen

• E-Learning• Internal and External

Benchmarking

• 8 LMA principles which translate into 45 line items

• Leadership• Change Management• Roles, Responsibilities,

and Culture• Goal Alignment• Value• Flow• Pull• Continuous

Improvement

4 phases of lean deployment

• Stability• Flow• Pull• Integration

. 17

This Is What an Advanced LeanSS Organization Looks Like

Fundamental principles of lean can be described as below. They represent the vision (not what “is” or what will be “tomorrow,” but the vision) for the entire enterprise! These apply to R&D, Commercial Ops, Supply Chain, and support functions.

Value

Leadership

Pull

Flow

Roles, Responsibilities, and Culture

Goal Alignment

Continuous Improvement

ChangeManagement

Committed, accountable, teachers, in Gemba 50% of the time, reflection time

Servant-leader mentality, engrained, formal, positive attitude toward change

Teams drive improvement, org design is in value streams, hiring is based on values

Goals exist for every individual, accountability is omni-present, common KPIs visible to all

Internal and external customer needs are well known and processes mapped

Cycle time constantly improves for all processes (physical, virtual, and informational)

Action begins at sign of demand, is leveled, inventories replenished on min/max levels

Results continuously improve, CI culture permeates, innovation encouraged (Kaizen)

. 18

Leadership standard work minimizes disruptions in the workplace during leadership changes while holding the organization’s course.

Continuous Improvement

Daily Management

Performance

Without standardized work, there can be no sustained improvement.

STANDARDWORK

Time

Leadership Standard Work

. 19

Critical Success Factors for Change

87%69%

66%54%

46%36%

34%21%20%

19%17%

16%7%

4%4%3%

0%

Executive sponsorship

Understanding of need for change

Multilevel management support

Consistent communications

Compelling need for change

Adequate resources

Structured approach

Clear channels for feedback

Recognizing employees

Preimplementation training

Training for change team members

Communicating w/affected employees

Offering compensation to employees

Personnel changes

Offering savings to employees

Other

Offering small gifts to employees

Top Five

Source : Best Practices, LLC, 2003Source : Best Practices, LLC, 2003

Executives rank people-related issues as the most important driver of successfully implementing and sustaining change.

. 20

Objectives• Explain What an Advanced Lean and Six Sigma Organization Looks Like• Share the Strategy and Tools of the Trade• Share the Potential Results and Success Stories• Explain Innovation’s Role• Share Lessons Learned for an Advanced Lean Six Sigma Deployment

. 21

Putting It All Together—Improvements That Drive Results

2004 2002 2001

$ Billions

$1.00

$0.50

2003

$0.40

$0.98$1.18 $1.10

$0.25

$0.75

J&J business leaders have been able to leverage PE tools and principles to help enable the achievement of business results.

Financial Impact of Improvement Projects

Source: Financial reporting system; Group PE leaders. Value= Balance Sheet + P&L (after tax rate) impact..

$1.11

2005

Value CreationBalance Sheet• Accts. receivable• Inventory reduction• Capital avoidance

P&L (after tax)• Cost reduction• Cost avoidance• Revenue enhancement

2006

$1.10

Our certification results:4000 Green Belts1200 Black Belts700 Master Black Belts

. 22

• Insufficient capacity to meet

strategic plan needs for NPD

• NPD process has a lot of non-value-

added activity

• Numerous handoffs and rework

• Opportunity existed to improve voice

of customer input into development

process

Rationale

Game Changing Improvements in NPD

Outcome: Dramatically improved NPD productivity and effectiveness

Improvements/Deliverables:• Dramatic process improvements:

- Reduce rework- Eliminate non-value- added steps- Improve customer VOC into process

• 1-yr cycle time eliminated• NPD capacity increased 45%

Outcomes:• 2003: 20 NPD projects with 2 launches• 2004: 29 NPD projects with 7 launches• 5 more launches = $211MM incremental revenue

Medical Device Company

. 23

USUS (35 Days)

ItalyItaly (189 Days)

KoreaKorea (109 Days)

ColumbiaColumbia (83 Days)

Argentina (76 Days)

JapanJapan (75 Days)

UKUK (56 Days)

FranceFrance (61 Days)

MexicoMexico (59 Days)

CaribbeanCaribbean (60 Days) ChinaChina (39 Days)

Results to date:

Cost/Benefit to J&J:

Driving Improved Cash Flow Through Better A/R Processes

- Cross business group effort- 24 projects/participants (13MD&D, 6 Pharm, & 5 Consumer)- Invested $1.3 MM in effort to date- A day of DSO globally in 2003 represents ~ $100MM in cash

- Total DSO Black Belt Wave improvement of 2 days vs goal of 1 day (June 2003 – September 2004)

• MD&D 2.1 day improvement• Pharm 1.3 day improvement• Consumer 4.0 day improvement

- Representing over $150MM in additional cash flow for J&J

Examples of improvements:- Understand root cause of issues- Reduce/eliminate invoice discrepancies with customers- Improve electronic funds transfer timing- Provide electronic invoicing to customers- Improve customer satisfaction with billing

. 24

Lean Culture Change Example: Cordis de Mexico—Shingo Prize Winner 2007

Rewards and Recognitions –•Cell of the Month•Employee Suggestion System•Team Excellence Award

Communication – •Wall of Excellence – shows improvements, major events, recognition and awards, Credo, vision, and mission•Wall of Shame – shows complaints, the top 10 most wanted defects, and negative events• Wall of Metrics, Safety, and Environmental – displays business metrics and state of the company to all associates

Continuously Exercise Improvement – •Enhance new orientation training•Improve training curriculum – training with a purpose•Everyone is in gemba being active

Training – • Developed training modules with a purpose (classroom training and application)

•5S, waste identification, basic continuous improvement tools, mistake-proofing•PDCA and 5 Whys; Policy management strategic deployment

5S System –•59 teams participated in the annual 5S competition• A successful approach is to engage workforce in learning and executing• Leadership participation and involvement

Kaizen Workshops and Circles – •Manufacturing and nonmanufacturing areas involved•Cross-functional teams, Leadership involvement•Results focused on eliminating defects and improving productivity, safety, and environment

Suppliers –•Share lean and Six Sigma knowledge •PE projects •Kaizen workshops

. 25

Objectives

• Explain What an Advanced Lean and Six Sigma Organization Looks Like• Share the Strategy and Tools of the Trade• Share the Potential Results and Success Stories• Explain Innovation’s Role• Share Lessons Learned for an Advanced Lean Six Sigma Deployment

. 26

Innovation Explained

List as many innovative organizations as you can………GO!

Exercise

. 27

Innovation Explained (cont.)

Why isn’t your organization up here?

. 28

Product Innovation at J&J: Tip of the Iceberg

. 29

Innovation at J&J

• Commitment: Innovation SME Team, training, external relationships

• Passion: Intense focus on health care and improving peoples’ lives

• Drive: The Credo per R.W. Johnson• Culture: Decentralization allows it• Follow-through: Process Excellence (lean, six

sigma, design excellence)

. 30

Failure at J&J

“Failure is our most important product.”

- R. W. Johnson Jr., 1954

Part of the J&J Credo:

“We must experiment with new ideas.Research must be carried on, innovative programs developedand mistakes paid for.”

. 31

J&J Sources of Innovative Ideas

“Crowdsourcing” Examples

. 32

J&J Sources of Innovative Ideas (cont.)

“Crowdsourcing” Examples

Once an idea has received enough votes and has passed a threshold score, it is sent on to the relevant department for review. If that department likes the idea, it will put it forward for testing and then into Development. Centovation is a tool designed to help all employees input their ideas and get fast feedback on their ideas. It is also a chance for all employees to participate in Idea Development to find new ways to help Centocor grow faster by rating other people's ideas as well.

Everyone can play a role in generating the ideas that will make this company even more successful! Whether it is rating or submitting ideas - the more people that get involved the more we are likely to get innovative ideas.

. 33

Objectives

• Explain What an Advanced Lean and Six Sigma Organization Looks Like• Share the Strategy and Tools of the Trade• Share the Potential Results and Success Stories• Explain Innovation’s Role• Share Lessons Learned for an Advanced Lean Six Sigma Deployment

. 34

Implementing Process Excellence: Key Considerations/Lessons Learned

• Not a substitute for strategic thinking• Not a replacement for business acumen• Not a replacement for or inhibitor of innovation

What it isn’t

• People become more focused on tools/ methods than the business, “zealots”• Making improvement more complicated than it needs to be, “jargon”• Not reaching all levels of the organization

Watch out for

• Your competition is making dramatic improvements and is improving at a much faster rate than you

What to be afraid of

. 35

JJPE in TransitionFrom… To…

Mission: Identify, enable, and accelerate high-impact business solutions in Product Development, Commercial Operations, and Supply Chain

by collaborating with the businesses to:deliver strategic initiatives, deploy best practices, and

strengthen their improvement capability

• Corp. Program Office – “push”• PE Community

• Cost savings focused • “Operations” mindset• Tool-focused approach• Improvement identification

• Bus. Improvement Services – “pull”• Business Unit Leader

• Top- and bottom-line benefits• Commercial, R&D, Supply Chain• Customized, focused solutions• Deployed best practices

. 36

JJPE/Business Improvement Services

Old Paradigm – Blocking/Tackling New Paradigm – Leading/Coaching

Deploy Best Practices

• Collaborate w/WW Ops, R&D Councils, Regional Councils to

share best practices for key issues

• Scan external environment foridentification of relevant best practices

Foster Global PE Community

• Leverage our investment in the improvement community

Expertise for High Impact Areas

• Rapid Response – implement action plans for strategic initiatives

• Dedicated consulting for strategic initiatives

Talent Development

• Identify/accelerate top PE talent for critical positions

Provide Expertise to High Impact

Areas

DeployBest Practices

Foster Global PE

Community

Develop

Talent

Building Capability

• Broad-based Training

• Curriculum Development/Update

• Maintain Certification Standards

• Business Assessments

• Leadership Orientation

• Tool Deployment

BuildingCapability

Talent Mgmt

BusinessSupport

WHQ Support

Global PE

Council

(Blocking &Tackling)

. 37

Mission Improve business results, improve processes that drive the results,

ingrain the business management principles

• Identify targeted businesses and help BU leader build capability

• 40% at “fully capable” for self-improvement

• Sustain the value of assessment• 90% business leaders at

Top 2 Box• % coverage plan attained

• Improve PE talent mgmt process• 80% PEL competent• 80% ready now for

replacement of critical positions

• Evaluate business solutions consulting capability

• % plan attained

Build Improvement Competencies

PE Objectives – Strategic Areas of Focus PE Objectives – Strategic Areas of Focus

• Conduct systematic reviews of key business process capability - NPD, Supply Chain, Demand Gen

• Processes reviewed using appropriate dashboard?

• Opportunities identified?• Action plan in place?

• Target specific process improvement opportunities for key businesses

• 50% of targeted companies at benchmark levels (> 70%)

Continue to Strengthen Key

Business Processes

Target Top Business Growth Opportunities

• Identify and execute projects in GOC Growth & Leadership agenda

• Measured progress of projects by GPEL

• $ Impact of projects• Accelerate leveraging of “best”

practices in key growth areas• Link best practices with

Business Assmt feedback – VOC rating

• Deploy Mktg/Sales Diag. Tool – VOC rating

• Conduct initiatives/events focused on key GOC priorities

. 38

Link the Change to the Current

We believe our first responsibility is to the doctors, nurses and patients,to mothers and fathers and all others who use our products and services.

In meeting their needs everything we do must be of high quality.We must constantly strive to reduce our costs

in order to maintain reasonable prices.Customers' orders must be serviced promptly and accurately.

Our suppliers and distributors must have an opportunityto make a fair profit.

We are responsible to our employees,the men and women who work with us throughout the world.

Everyone must be considered as an individual.We must respect their dignity and recognize their merit.

They must have a sense of security in their jobs.Compensation must be fair and adequate,

and working conditions clean, orderly and safe.We must be mindful of ways to help our employees fulfill

their family responsibilities.Employees must feel free to make suggestions and complaints.There must be equal opportunity for employment, development

and advancement for those qualified.We must provide competent management,and their actions must be just and ethical.

We are responsible to the communities in which we live and workand to the world community as well.

We must be good citizens – support good works and charitiesand bear our fair share of taxes.

We must encourage civic improvements and better health and education.We must maintain in good order

the property we are privileged to use,protecting the environment and natural resources.

Our final responsibility is to our stockholders.Business must make a sound profit.

We must experiment with new ideas.Research must be carried on, innovative programs developed

and mistakes paid for.New equipment must be purchased, new facilities provided

and new products launched.Reserves must be created to provide for adverse times.

When we operate according to these principles,the stockholders should realize a fair return.

Puts customers

first

Highly values

employees

Focuses on continuous

improvement in our

communities

Measures business results

Supports continual learning

Focuses on continuous

improvement and supplier integration

Supports innovatio

n

Lean Enterprise: R&D, Supply Chain, Sales, Support

. 39

Thank You!

Danke (German)

Gracias (Spanish)

Spasibo (Russian)

Obrigado (Portuguese)

Terima Kasih (Malay)

Merci (French)

Tak (Danish)

Grazie (Italian)

Do Jeh (Cantonese)

Arigato (Japanese)