Stermon Mills Incorporated Write-Up

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?

From my analysis it emerged that the best option for Stermon Mills Inc. is the Option 2, which is moving machine #4 to a one week cycle and run through the existing grades every week instead of every two weeks.

The main reason that should convince Mr. Kiefner to look at reducing the cycle time is due to a customer requirement. Elly Ryesham, from the Sales Department, realized a straw poll of the sales force to understand what the most important things are for their customers. I have analyzed those results (see Exhibit 1) and converted the A,B,C… grades to numbers (A+= 4.33, A=4, A-=3.66 and so on until E=0) and calculated the average of each requirement. As you can notice the most important requirement for customers is definitively the responsiveness in delivery/JIT approach with a 3.93 average.

The benefits of adopting a JIT approach are invaluable for Stermon; first of all, given the market situation, they need to act as soon as possible as they currently cannot compete on cost with giants like International Papers and Georgia Pacific. This option represents a survival matter for the company as would allow them to be more flexible and therefore able to compete on differentiation.

Certainly we need to look at the feasibility, implications and consequences of this option. If we look at the monthly statement of income for machine #4 on September 1992 (See Exhibit 2) we can appreciate that the machine is not generating any profit, it is actually producing a loss of 34$/Ton, which is causing Stermon financial issues. However, if Stermon reduced the cycle time to one week customers will be willing to pay an extra 5% on top of the standard price. If we look at the Profitability Analysis of Option #2 (See Exhibit 3) we can see that the 5% higher rate would lead to a 1$/Ton profit. However, if Stermon are going to offer a better service their sales are likely to increase, so the 1$/Ton profit represents a worst case scenario which is higher than the break-even point.

There are two main potential issues with this approach. By reducing production lead times a company would likely increase manufacturing costs, but this increase should be leveraged by the increase in demand. The other issue would be the 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.

Due to this last potential issue, the ideal strategy that Stermon should adopt would be a combination of Option 2 (One cycle week) and Option 4 (Labor multi skilling). The Option 4 would definitively improve the effectiveness of the labor in the plant, and it would benefit the change over time reducing it. However, if we look at Saugoe’s notes about the combination