April 26, 2011 EXECUTIVE SUMMARY: Stermon Mills (Stermon) is a small, independent paper producer that is being forced to compete more effectively against much bigger competitors in the uncoated fine paper market. President & CEO Stan Kiefner understands that the company needs to become more flexible in order to more efficiently use its workforce and equipment, differentiate its products and better serve its customer base. To become more flexible, Stermon needs to concentrate its efforts on its processes, machines and products. In the near term, it is critical for the company to address certain issues with machine #4 (#4) and its workforce.

Focusing on upgrades and yield improvements for #4 on less frequently produced paper grades will improve net income by seeking better niche markets with improved pricing power. Stermon also needs to work with the Union to implement cross-training programs that will allow employees to become more flexible in their roles and better contributors to Stermon’s success. The company should also explore ways to tap into high grade de-inking waste paper generated by office and business waste, since demand for recycled fine papers was not being met by others in the industry.

BACKGROUND: Stermon Mills was a small, independent paper producer that was founded in 1910. The company had one pulping plant and four paper machines housed in 20 buildings. Stermon historically focused on uncoated fine papers since coated papers required additional equipment and mechanical papers could not be produced in its pulping plant. Demand for uncoated paper had been quite strong for an extended period of time, but significant capacity expansion combined with softening demand in 1989-92 had led to excess capacity and low prices.

According to exhibit 5, in 1991 the top 10 paper companies had 77% share of US market of uncoated fine paper. The result was that several larger producers had significant economies of scale and could provide paper at much lower prices than the smaller mills. Stan Kiefner, the President & CEO of Stermon, realized that the company could not compete with the larger mills for commodity grade paper. Since the price of Xerox grade paper had hit 20-year lows, he now was forced to address the urgent need for Stermon to become more flexible than the competition.

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Kiefner has put together a team of his best managers, headed by Bill Saugoe, to determine how the company can become more flexible. In addition, one of the most important changes in the paper industry was the growing emphasis on recycling. Demand for recycled fine papers was not being met because of the limited supply of suitable waste paper. The paper industry needed to find a way to tap into high grade de-inking waste paper generated by office and business waste. PROBLEM: It has become clear that Stermon Mills cannot compete with the top paper producers on 20lb Xerox paper.

Many of these competitors have state-of-the-art machines that can produce 850 tons per day. The result is these companies can take advantage of significant economies of scale and offer paper at prices that Stermon Mills can’t afford to match. Stermon needs to find away to compete with the other paper producers in different areas outside of 20lb uncoated paper. Stermon is also experiencing frustration because customers are trying to carry as little inventory as possible. As a result, Stermon has been forced to adopt just in time (JIT) delivery which requires that the company carry more inventory or push short runs on the machines.

This puts pressure on the workers as they are often asked to make grade changes which take a great deal of time, especially with machine #4. Another problem is that the company has been having quality issues due to the higher frequency of changes and lack of familiarity with different paper weights. Finally, Stermon is not getting the most productivity in can from its employee base. Roles in the factory are very specific which can result in idle time for workers when other tasks need to be accomplished. An added dilemma is that increased demand for recycled paper was not being met.

There is a large, untapped market for high grade de-inking waste paper generated by offices and businesses, but setting up an efficient, low cost collection programs has been a challenge. ANALYSIS: Stermon needs to become more flexible in its ability to offer customers a differentiated product in a timely manner, and to do so at a competitive price while still providing the company with reasonable operating margins. Saugoe’s list of four options to increase flexibility can be viewed across Gregory Heim’s three manufacturing flexibility dimensions: Process, Machine and Product.

In this case, the company needs to become more flexible in all three areas to effectively compete with the other paper producers. Machine #4 is Stermon’s largest tool and clearly needs to become more flexible before it can contribute to the success of the company. Exhibit 1 highlights this fact as the September 1992 statement shows a net loss for the machine. The company realizes that they can’t compete on price for 20lb paper. Therefore, upgrading and improving the yields on #4 for less frequently produced paper grades could be an option. Exhibit 8 shows that Stermon could benefit from yield improvements for


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