Stermon Mills Harvard Case Solution & Analysis

Back ground of the study:

Stermon Mills, a fine paper producer was incorporated in 1910. The mill was a collection of 20 buildings, one pulping plant and four paper machines. The oldest machine, which was installed at the time of incorporation of the business was named as Little Jack and then in 1950s two machines were further added as giants, the fourth machine was installed in 1976 which was the largest one having speed of 1700 feet per minute. Out of 4 machines, the fourth produced 280 tons out of total output of 570 tons. Major products of the company are wood free papers and its market was dominated by Xerographic paper. Other un-coated fine paper includes book paper and paper for writing tablets. There are some other papers such as coated and mechanical papers but coated papers require heavy coating equipment, whereas mechanical papers cannot be produced at plant. Paper could vary in area from 15 to 100 lbs per unit area, on the other hand Xerox paper weight 20 lbs in Stermon’s plant.

North American market was the largest un-coated producer of fine paper. International paper was the largest company of un-coated fine paper with sales of $12.96 billion in 1990.

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)

Option 1:

Option 1 is about upgrading machine four with extra dryer capacity and training staff in order to achieve operational efficiencies. This option will result in getting 7% pricing premium on non-standard grades of paper. Furthermore, this option is focused on providing greater machine and product flexibility and the capital investment for implementing this option will be $3.1 million.

Option 2:

Second option leads to changes in standard cycle from two weeks to one week which will aid in getting 5% premium prices for JITS runs. This option will result in 10% additional downtime for changeovers and from the sales department perspective; it will help in improving customer satisfaction due to shorter lead time. In addition, reduction in cycle time will further increase the product flexibility which will ultimately help in increasing company’s profitability.

Option 3:

Installing new expert control system does not seem beneficial as it will not help in getting any price benefit. Additionally, it will require total investment of $5.05 million which is higher than option 1. However, this will help in equalizing the machine yield across all weights.

Option 4

Fourth option is about involving union to accelerate the current flexibility program which requires no capital investment. Although this option is helpful for the company in the long run for developing the culture of “fewer people sitting around”, however, this option does not provide any quantifiable benefits to the company in short-run. Therefore, this option is not feasible for the current situation.

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

Option 3 is useful for meeting the customers’ demand who value having a broad product range. While converting the grades, provided by customers on requirements depicted in exhibit 3 of the case, into scores as 8 being most important requirement and 1 being not important, it is observed that having a broad product line is the second most important requirement as per the customers. Therefore, information provided in exhibit 3 of the case suggests that the second most important priority for the company is option 3. This option could work along with option 2 but results would be to raise non-20 lb yields only about 3%. However, capital required for this option is quite high therefore; this option can be utilized in the long run................................

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