HALDEN ZIMMERMANN STERMON MILLS CASE ANALYSIS PART 3

The Stermon Mills plant had four machines that were housed in their own building and were
fed pulp from the mill by pipelines. Each machine operated like it was its own plant. Each
machine operated three shifts, seven days a week, with a two week shutdown in the
summer to perform needed maintenance procedures. The company sells to paper
merchants who, in turn, sell to converters (i.e., paper envelopes and forms).
Operations Strategy
Stermon Mills operations strategy was to run an integrated plant that contained a pulp mill
that supplied 4 different machines located within the plant site. Each machine operates
independently of each other with machine #4 having nearly 50% of the output of the entire
pulp mill. Machine #4s output of 280 tons per day centers around a production of 20 lb.
paper which is nearly 50% of the total plant output.
The machine also operated on a 2 week cycle. Each machine needs between 4 to 6
operators to run. Machine operators are ranked by seniority. The hourly workers belong to
the United Papermakers Union (UPU). Employee turnover was very low at the plant with
average length of service for a tender at the plant was 24 years.
Operation of machine had changed in the 1980s with the use of digital computer controls.
This helped machines #3 and #4 with grade changes, however, machine #3 operators
proclaimed that the computer control was slower and they were able to control grade
changes more effectively without computer control. Smaller machines carried out 4 to 5
grade changes within a day. Machine #4 only averaged 1 grade change a day because of
the high cost of this machine when it was not running.

Option I
The data provided in the case indicates Stermon Mills would not be well served by
continuing to compete as a low cost producer. This suggests that innovation and flexibility
would be excellent areas to explore in terms of change.
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
option would not only appear to satisfy the strategic needs of the product lifecycle, but also

the two major requirements that the sales force survey revealed, including having a broader
product line and providing customization. The majority of these changes would be realized
by tailoring paper to customers specific requirements and charging an estimated premium
of 7% (before freight).

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