Operations Strategy

Case: Stermon Mills Incorporated

Submitted by: Group 9

 Introduction
Stermon Mills is small, independent fine-paper producer. The company is nearly one
hundred years old and operates with some machinery that is nearly 50 years old.
At present, Stermons machines are very costly to operate based on the amount of output
they produce.
Currently Stermon Mills is an unprofitable paper mill losing $34 per ton of paper ($278K
per month) and struggling with labour issues. Its core product 20 lb paper has been
commoditised.
Faced with some of these issues, Stermon Mills must decide on the best course of action to
take to improve the overall business of its uncoated paper production.
Market Analysis - The North American market is the worlds largest producer as well as
consumer of uncoated fine paper. Growth in demand for uncoated fine paper increased in
the late 1970s due to a growth in the information processing area of the office/business
segment.
Expansions to meet long-term demand hurt the industry during the 1989-1992 recession.
Problem Statement Stermon Mills needs to embrace flexible processes to restore
profitability
Q1. Strategic and financial implications of the
four flexibility improvement options
Option 1 UPGRADING MACHINE 4 WITH EXTRA DRYER CAPACITY AND
TRAINING STAFF TO ACHIEVE OPERATIONAL EFFICIENCY
Getting 7 % premium pricing on non-standard grades of paper
Provides greater machine and product flexibility
Fulfilling customer specific requirements both within and outside existing machine range

Initial capital outlay of $3.1 million

Specialty jobs production happens only for 30% of the time
Loss of efficiency due to frequent change-overs causing paper breaks

Option 2 CHANGES IN STANDARD CYCLE FROM 2 WEEKS TO 1 WEEK

Reduce inventory storing and handling costs
Getting 7 % premium for specialty products
Charging 5% pre-freight premium
Customer satisfaction increased due to short lead time
Reduction in cycle lead time will further increase the product flexibility ultimately increasing companys profitability

10% machine time lost to changeovers

Possible labor dissatisfaction
Q1. Strategic and financial implications of the
four flexibility improvement options
Option 3 IMPROVE YIELD ON MACHINE 4
Installing new expert control system doe not seem beneficial as it does not provide any price benefit
Will help in equalizing the machine yield across all weights
Consistent quality across all grades

Will require total investment of $5.05 million which is higher than Option 1
Flexibility will not be considerably improved. It will consistently improve the output not adhering to market sentiments

INVOLVING UNION TO ACCEERATE CURRENT

Option 4 FLEXIBILITY PROGRAM
Beneficial to the company in the long run for developing the culture of fewer people sitting around
No capital investment
Labor effectiveness might improve

Does not provide any quantifiable benefit to the company in the short run
Cannot be solely relied to bring in flexibility, responsiveness and broad product ranges
Q2. How does Marketing Information in Exhibit
10 change your evaluation of Option 3
Exhibit 10 talks about the probability of various fraction of two-week cycles in the next two
years in which there will be no 20 lb paper produced.

Observation:
14% of the time probability 0.2
No 20 lb. paper 28% of the time probability 0.6
for 56% of the time probability 0.2
Conclusion:

Option 3 is useful for meeting customers demand who value having a broad
product range. While converting the grades provided by customers in Exhibit 7,
into scores as 8 being most important and 1 being not important, it is observed
that having a broad product line is the second most important requirement.

This supports the option 3 of installing the expert control system

for process control of machine 4 to enhance the yield of 15lb and
24lb paper compared to 20lb. Thus supporting the option of
achieving flexibility across grade range on machine 4 in
upcoming years.
Q3. What recommendation would you make to Mr.
Kiefner? On what basis would you try to persuade
him that your solution is the best?
Why we believe Option 2 is best?
Market Responsiveness is the deciding factor here and cycle time needs to be reduced.
Hence, moving machine #4 to a one week cycle and run through the existing grades
every week instead of every two weeks. 5% premium for weekly-JIT can be charged.

Issue 1: By reducing production lead time, the company would likely increase
manufacturing costs, but this increase should be leveraged by the increase in demand
and charging 5% premium

Issue 2: Drop of the utilization rate by ten percent using this method. The key would
be training the staff to implement faster change-times, which is not an impossible
achievement. Also involve some crew of Machine#3 during changeovers

Marketing projections about the 20lb paper for next two years simply support to
proceed with Option 2. It will also save on inventory cost.
Why Not a combination of Option 2 & 4?
Option 4 Labor Multiskilling; it would definitively improve the effectiveness of the labor in the
plant, and it would benefit the change over time reducing it. But this might cause a lot of discontent
if people were asked to change over faster as well as performing multiple functions.
So sticking to Option 2 is the best solution.

Why not Option 1?

The first option consists of upgrading machine#4 with computer control, extra dryer capacity, and
better training in an effort to produce a broader range of basic weights.
This would broaden the product line and provide customization. But a capital cost of $3.1Million had
to be incurred. Only 30% of the time can be allocated for specialty jobs and currently, this is not the
top priority. There are already companies in the Top 10 who house better-grade and dedicated
machines for catering to this need.

Why not Option 3?

Improving the yield of machine 4 on the less frequently produced grades would satisfy those
customers that value having a broad product line but this is not the top priority for Stermon at the
moment.
3rd option could work along with option 2 but results would be to raise non-20 lb yields only about
3% (Ex. 3). This is not really worth as the amount of investment required for this approach is
$5.05million.
This option does not allow machine #4 to meet the changing demands of the market because of the
nature of batch sizes. The companys warehouse will have to absorb variances in demand during
batch runs.
Q4. How will you know if Stermon has made progress on
its manufacturing flexibility improvement plan?

Develop Key Performance Indices in terms of Machine, Labor and Cost. Related
labour struggles must be dealt with before engaging in flexibility improvement plan.

Incentivize the operating crew for minimizing the downtime of machine 4. This
would eradicate the lethargic attitude of the crew and give them added motives to
utilize the machine to its best capacity.

Monitor on the throughput It should be higher than the current state. Revenue
should increase and minimal inventory should be ensured to second the weekly-
JIT approach.

Stermon Mills must return to profitability. Currently, it is losing $34 per ton of paper
($278000 per month).
THANK
YOU