Tom van Laar, Head of Global Technical Operations

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2 Introduction In 2003, Novartis Global Technical Operations (TechOps) assumed global ownership of inventory. We are responsible for all inventory held by Chemical and Pharmaceutical Operations, as well as finished products stored at regional warehouse and distribution centers and country pharmaceutical organizations (CPOs). This complete ownership structure puts us in the most effective position to manage the company s inventory around the world. Inventory management is an aspect of our business that contributes to our service levels, our costs and our operating efficiencies. To be successful in our business, inventory should be managed strategically with sound and solid processes, making best use of technology as well as our people to achieve optimal performance. In Global Technical Operations, inventory management is everyone s responsibility; we all have the power to influence this critical part of our business. Our inventory levels are a measure of efficiency in our organization. Lowering our inventory levels improves our costs and grants us a competitive advantage in the pharmaceutical industry. In our first year of focusing on inventory turns, we have seen a savings of approximately $400 million (USD). We now can take these savings and reinvest them in our business. By constantly tracking and measuring our performance and results, we ensure we are on the right path. Tom van Laar, Head of Global Technical Operations Inventory management is about ownership of every step in the whole chain. It s about process, systems and measurement. We all influence inventory, and by working together we can manage and exceed expectations. In conjunction with becoming faster and more flexible, it enables us to adjust quickly and easily for demand and unforeseen changes in the market. Kurt Reber, Head of Global Supply Chain Management

3 Successes: Inventory Development Tracking our progress in inventory management and reduction from 2002 to year-end results of Our goal by 2009 is to lower inventory levels to no more than 7.0 MoH. Pipeline Consistent communication and teamwork is a necessity for proper inventory management. As our teams improve communications and move towards a process oriented and LEAN organization, we will increase inventory transparency, compress lead times, and ultimately reduce inventory levels.

4 Performance What is Inventory Management? Our inventory is a mixed blessing because it counts as an asset on the balance sheet, but it also ties up money that might be used for other purposes. In addition, it requires further expenses for its storage and protection from environmental factors that might affect the active ingredients. While inventory may not get as much attention as sales and profits, it is just as important in our financial performance. Lowering our inventory improves our costs and puts us in a competitive position in the industry. Inventory is also a performance measurement for the efficiency of our supply chain. We measure our inventory by inventory turns or how quickly the inventory is sold. Our inventory coverage is measured in Months on Hand (MoH). MoH translates to the length of time our current inventory can sustain typical demand needs based on our forecasts. In 2003, our inventory coverage was 8.4 MoH, indicating that there is much work to be done in inventory management. TechOps is committed to reducing inventory across the global supply chain. The goal is to trim inventory coverage to 7.0 MoH by the end of 2009, an objective that would free hundreds of millions of dollars in working capital for reinvestment elsewhere in the company. PharmOps U.S. has reduced its MoH from 7.0 in January 2003 to 3.3 in November This was more than a 50 percent reduction in the face of double-digit sales growth in both 2003 and This was achieved through a variety of inventory reduction initiatives including safety stock optimization, lead time reduction, batch size changes, re-engineering processes, and LEAN manufacturing. More importantly, the results were achieved by a cross-functional team, including PharmOps Planning &, U.S. Supply Chain Management, Country Pharma Organization Demand Management, Finance (local and global), and Global Brand Pipeline Management. Process Who is Responsible for the Inventory Management Process? Our Global Supply Chain Management (GSCM) function spearheads the inventory management process within TechOps. GSCM has a global view of inventory, beginning with the initial order of raw materials through chemical synthesis, Pharma production and packaging, all the way to the customer and ultimately, the end user - the patient who uses our products. Overall inventory management responsibility is orchestrated by GSCM together with our colleagues in Purchasing, ChemOps, PharmOps and CPO distribution. The Working Capital Charge helps to integrate the costs of inventory into operational costs and directly links successes in good inventory management to the operational results of each Novartis function. Cross-functional Brand Pipeline Performance (BPP) teams have been created for 17 strategic Pharma brands that accounted for more than 70 percent of worldwide sales and 60 percent of global inventory in By dismantling the traditional silos among functions - and pulling together all knowledge and competitive intelligence - the BPP teams have been able to make increasingly accurate inventory projections. Worldwide inventory for brands covered by BPP teams was reduced on average by more than 15 percent in 2003, compared to average reductions of only 5 percent for brands without BPP teams. We are continually implementing a range of initiatives to streamline our inventory management process, such as LEAN manufacturing processes, and steadily moving toward a Process Oriented Organization (POO).

5 Technology Inventory parameter setting Actual Inventory simulation Control Other systems (global) Targets Projections NPMR Projection What Tools do we Have to Help With Inventory Management? In TechOps, a technology loop is used to regulate our inventory and help us best manage the inventory process. This loop begins in SAP, the transactional system used by CPOs, PharmOps, ChemOps and Suppliers to conduct daily business. Sales forecasting CPOs Demand PharmaOps Procurement PEP SAP R/3 (local) ChemOps Procurement Supplier Glossary NPMR Novartis Product Management Reporting PEP Pharma Enterprise Resource Planning Program SAP R/3 Systems, Application, Products (Software Suite Release 3) CPO Country Pharma Organization PharmOps Pharmaceutical Operations ChemOps Chemical Operations The inventory information generated in SAP is stored in NPMR, a data warehouse that consolidates this information and provides a report on existing inventory in a variety of ways, such as by brand, product level (Finished Product, Drug Substance, etc.) and location. Using this data, NPMR enables us to determine projections and actual inventory levels. Various global systems can be used to simulate different inventory scenarios and set parameters (inventory targets). These are supplied to the CPOs, PharmOps, ChemOps and Suppliers for their transactional systems (SAP). With everyone using the same system, all information used for making decisions is consistent and current. The technology loop, where we Define-Report-Control-Revise, helps to better manage inventory levels. People We all Make a Difference The efforts of TechOps employees in Japan are one example of how changing the way we work together will help us reduce inventory. The implementation of LEAN in Diovan production at the Sasayama site began with team leader workshops; however, the truly innovative ideas for working faster, smarter and leaner, came from front line employees. Through implementing LEAN as a team, our colleagues in Japan are becoming more proactive, and demonstrating increasing cross-functional collaboration proving we all make a difference. Communication is the Key Discipline in operations throughout TechOps is very important in keeping inventory levels low. It is a necessity to have good information flow among all involved functions. Aside from the data exchange, active communication on changes in demand or supply between all the partners is key. Too often, inventory build-ups are caused by internally generated demand and lack of communication rather than genuine fluctuations of customer demand in the market. We all need to be involved and continue to improve our communications. Ultimately teamwork is what will get the job done well and reduce inventory levels, making us a leader in the pharmaceutical industry.

6 Glossary of Inventory-Related Terms Allocation The division and assignment of goods, activities, capacity, costs and production resources to customers, suppliers, factory, department or products. Available Inventory The on-hand inventory balance less allocations, reservations, backorders, and quantities held for quality problems. Often called beginning available balance. Backlog All the customer orders received but not yet shipped on time. Back Order Customer orders still current but which have not been fulfilled because of a shortage of stock. Capacity Planning The of the scope of resources required for carrying out activities such as storage, transportation and production. Capacity Requirements The resource amount required. In, it is the process of determining in detail the amount of labor and machine resources required to accomplish the tasks of production. Customer Order A requisition from a customer internal or external for delivery of goods or services. Cycle Time The time between completion of two units of production or the length of time from when the material enters a production facility until it exits. Also referred to as Throughput Time. Lead Time The time from the receipt of a customer order to the delivery of the product. Also known as Cycle. Demand A need for a particular product or component. Demand Management The control and coordination of the function when directly affected by customer demand. This includes the calculation of forecasts and safety stocks, the day-to-day management of the sales order processing system and replenishment of the distribution network. Demand Planning Demand Planning allows you to make accurate customer demand predictions, leverage historical product performance, manage inventory replenishment with forecasting, and see how price changes affect product gross margins. Distribution Center A warehouse with finished goods or service items responsible for the delivery of the supplies to customers. Drug Substance Also known as API Active Pharmaceutical Ingredient. Is the material used to produce pharmaceutical products. Finished Goods A product after its final stage of manufacture has been completed. Forecast An estimate of future demand. Forecasts are often determined through statistical data analysis using historical data and estimates of future growth and usage. Inventory Inventory is synonymous with stock. Formal counting of stock and property in possession being stored. Inventory Management The production and storing of inventory and the determination of the levels, or quantities. Inventory Turnover This value measures how quickly the Inventory is sold. It is defined as Cost of Goods Sold for the trailing 12 months divided by average inventory. Lead Time The elapsed time from the point of entry of a job into production to its completion. LEAN LEAN is the conduct of manufacturing operations with minimum waste, processing time and maintenance. Pipeline The system or channel of information in the production of supply. Also a term given to describe our product production in the works for future company growth. Procurement To obtain material in the desired quality, quantity, place and time. Safety Stock The amount of material or product to meet demand when it exceeds forecasts or production is delayed. Sales and Operations Planning (S&OP) Management of Sales and Supply in different sites, considering the financial implications. Company priority setting for resource allocation. Shortage / Out-of-Stock The amount of stock that is planned to be used for deviations between actual demand and forecast, or actual supply against planned supply within the leadtime. Work-in-Process (WIP) Stock in production. In inventory management, stock is transformed by the manufacturing process into WIP and, therefore, ceases to be stock. It becomes stock again only when the final manufacturing step is complete.