Stermon Mills Harvard Case Solution & Analysis

Four Flexibility improvement, options are being presented to Stan Kiefner (Note: in performing your initial analysis, you may assume that all variable production costs due to yield loss are recoverable through plant recycling and you may ignore the impact of the marketing information provided in Exhibit-5

On September 12, discussion was made to improve flexibility of machine 4 for the company. The superintendent of machine 3 concluded that in case some process control systems are improved and if higher powered dryers are placed into machine 4, then it might become flexible. Machine 2 superintendent suggested improving the change over times. Grade change time and paper break affects the efficiency of machine 4 but it is important to understand about changing grades because machine 4 is making around 300 tons a day. Although, the superintendent for machine 4 faces some arguments and it is suggested that the machine will become more efficient across ranges of the paper, which will also make it flexible.

Overall four flexible options are available to increase the flexibility of machine 4. First option is to focus on computer control, extra dryer and staff training. Second option leads to changes in standard cycle from two weeks to one week, 5% premium prices for JITS runs, inventory cost savings and greater production flexibility. Third option leads to installation of new expert processes whereas yield equalized across all weights. The fourth option is available to increase the flexibility with the union without capital investment with any quantifiable benefits.

How does the marketing information contained in Exhibit 5 change your evaluation of option 3?

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. Marketing projections about the 20 lb paper for next two years simply support to proceed with Option 2. One week cycle would allow machine 4 to focus on the 20 lb paper that would reduce the 28% of two-week cycle in which there will be no 20 lb paper produced, as demand for the 20 lb will increase. This option could work along with option 2 but results would be to raise non-20 lb yields only about 3%. This is not really worth as the amount of investment required for this approach is $5.05million.

What recommendation would you make to Mr. Kiefner? On what basis would you try to persuade him that your proposal is best for Stermon Mills?

I recommend the implementation of option 1 & 2 because option one will help in making money as it will fulfill requirements of customers, although the capital cost for improving the machine is $3.1 million and it will recoup investments in 8.1 months. While the second option provides new ways of working. There will be a very great advantage to the firm by implementing this option, the company would save its inventory cost, cycle periods would also reduce from two weeks to one week............

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