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 of improvement plans we can appreciate that adopting Options 2 and 4 at the same time might cause a lot of discontent if people were asked to change over faster as well as performing multiple functions. Therefore we believe that going with option 2 alone is the best solution to Stermon’s problems. Option 1, doing a much broader range of basic weights would certainly satisfy those customers who value the customization and tailoring.
However, the survey of sales force tells us that this requirement is not the top priority for Stermon at the moment, being after the responsiveness in delivery, a broader product line and having helpful and flexible sales people. Moreover, if we look and the financial implications of this option, we can appreciate that it would not sort Stermon’s problems out (See Exhibit 4). We know that the Marketing department estimated that a 7% premium (before freight) could be charged for such a service on those tailored grades, though the machine would only produce such specialty jobs for 30% of the time. If we look at the calculations on Exhibit 4 we can see that machine #4 would still produce a 20$/Ton loss. It is true that demand would probably increase, but still I think that with these conditions the $3.1million investment required for this option is not justified. The last point supporting not adopting this approach is the fact that it would be incompatible with Option 2. It will be difficult to make new grades without trying to change them quickly and a combination of unfamiliar grades and process instability might cause paper breaks and quality problems.
Option 3, improving the yield on machine 4 on the less frequently produced grades, would satisfy those customers that value having a broad product line. Again, this is not the top priority for Stermon at the moment (See Exhibit 1). Marketing projections about the 20lb paper for the next two years simply reinforce my decision to proceed with Option 2. Having a one week cycle would allow machine 4 to focus on the 20lb paper, which would potentially reduce the 28% figure as a fraction of two-week cycle in which there will be no 20lb paper produced, as demand for the 20lb will increase. This option could potentially work along with option 2, but results would be to raise non-20lb yields only about 3%, which is not really worth it having in mind that the investment required for this approach is $5.05million. Option4, accelerating the flexibility program to improve effectiveness of the labor, would be the best option combined with Option 2, but, as explained before, this would lead to potential problems of employees dissatisfaction. Conclusion
The four options that Saugoe presented to Mr. Kiefner represent the first step for Stermon to start thinking about the customer as a powerful source of information that will help them to focus on things that really matter in order to improve their sales and profitability. Stermon should definitively start a Sales and Operations Planning (S&OP) process, which is a powerful business planning process that integrates sales, marketing, operations, product development and finance in order to improve business profitability . On a monthly basis, the above departments should analyze past sales, purchasing trends, customer service and satisfaction and inventory to decide what actions to take in the next future.