Stermon Mills Incorporated Case Solution

1. Evaluate the strategic and (where possible) financial implications of the four flexibility improvement options 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 in-plant recycling, and you may ignore the impact of the marketing information provided in Exhibit 10. 

Financial Implications:

Program #1:

In order to fulfill the wants of a larger customer base, machine 4 could be upgraded in terms of offering a wider category of weights. This would increase the flexibility as well as the output through which demands of different customers could be met. When customer demands are met and their personalized offers are catered to, customer loyalty towards the brand increases which help improve the image of the brand. However, this is a costly process. In order to operate this machine, training of employees is necessary which requires finances. A 7% premium would be charged for the marketing of such a machine while the machine would work 30% of the total time. Hence, the costs are expected to be higher than the revenue. 

Program #2:

This program involved people more than machines. The employees had to operate the machine in different ways in order to be more flexible. As a result, training and specialization costs would increase. Reward programs also have to be implemented here to increase the motivation of the employees. The benefit of this program will be that the company’s inventory costs will be reduced which means that the overall costs would decrease. There is also a lower marketing premium of 5% charged here, 2% less than the previous program. However, the issue was that this program frequently involved rotation of machines as well as the crew which handled them. As a result, a lot of time was expected to be lost during which an extra output would be made. 

Program #3:

An updated expert system which controlled the overall paper production process was installed here. This would increase the paper output from 15lb to 24lb and this is how Stermon could gain a competitive advantage over its competitors in terms of excess capacity. Whenever there’s a demand for any type of paper grade, the excess supply fulfills it. Also, the quality would remain the same due to specialization of the overall process and so, consistency is ensured. Even though the cost is $5.05 million, the excess capacity can prove to be beneficial for the company at challenging times.

Program #4:

While working with the Union, this program could improve the performance of the crew which was working for this plant. With such a program, employees would remain motivated as they would be entrusted with important tasks. Employee turnover rate would decrease and overall output would increase with improved quality. With specialization, there will be reduced costs as employees will be rotated to perform tasks. There is no capital investment required over here and it creates a culture of productivity where no time is wasted and the employees are motivated to work.