Peerless Starch Company

June 20, 2018 Economics

Grading to be based on the CWE scoring rubric previously provided. c)Assignment must be placed on the online portfolio and must be submitted to etutoring for review. d)Read the case study below in its entirety and give it some serious thought. Then, in your own words, summarize the issues involved in this case (there are quite a few) and indicate whether Glen Baxter has a case and provide a thorough discussion to support your conclusion.

Finally, and within the write-up, discuss what you would do if you were John Ludwig? Essay word count should be no less than 750 words. e)Required dates: a. Provide your instructor a copy of your initial write-up that you are placing on the online portfolio and sending to etutoring by Friday, April 4. b. Send to etutoring ASAP and provide your instructor a revised write-up based on etutoring comments by Friday, April 11. f)Access the Writing Center LibGuide for instructions on how to have your work reviewed by etutoring and how to set up an online Portfolio if necessary. The Peerless Starch Company of

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Blair, Indiana For as long as anyone in Blair, Indiana, could remember, the Peerless Starch plant had always been the biggest thing in town. Built on a slight hill above the sluggish river and designed to look as much like the Tower of London as anything in Indiana can, the plant dominated the town spiritually even more than it did physically. The Peerless Starch Company was the largest employer in town, employing well over 8,000 men out of a population of 120,000 – or every fourth head of a family. It paid the highest wages, if only because most of the men were rated as skilled workers or technicians.

And alone of all the large businesses in Blair, it was locally managed; the Peerless top management sat on the fifth floor of the big mill itself, in the “New Building” that had been put up in the 1940s. And from the chief executive officer – the grandson of the founder – on down, all executives were Blair men who had started in the mill and worked their way up, and who were more often than not second- or third-generation Peerless employees. The Peerless Starch Company had started in Blair, Indiana during the Civil War when the founder had developed one of the first methods to extract starch from corn.

Until the 1940s, Peerless had only one mill. But the company had prospered so much that three additional mills were built in rapid succession during the years after World War II: one in Illinois, one in Texas, and, the biggest yet, in Oregon, built in the late 1950s. But while the Peerless Starch Company had flourished, the town of Blair, Indiana had not. During World War II it had boomed. But then Blair, Indiana had gradually drifted into being first a run-down and then a depressed area. One after another, many of the town’s other factories had laid off people and then fi¬nally closed their doors.

The Peerless Starch Company mill in Blair, Indiana seemed to be the only exception to this general rule of slow decay and downhill drift. But appearances were deceptive. Actually, the Peerless mill in Blair was in terrible condition and was kept going only by the success of the new Peerless mills in other states. The Blair, Indiana mill’s sales were about one-fifth of the entire Peerless Starch Company’s. But the Blair mill in Indiana employed almost half of Peerless’s hourly rated labor force and three-quarters of Peerless’s managerial and professional people.

Unlike the other mills in the other towns, the Blair, Indiana Mill did not make its own raw ma¬terials but got intermediates from outside suppliers or from the other mills. It should therefore have needed less labor per unit produced. Instead, it needed up to four times as much. There were reasons for Blair’s high costs – or at least there were arguments to justify them. The mill itself was a towering structure built to withstand the Crusaders’ armies but ill – equipped for modern production. All newer Peerless mills, for instance, were single story buildings, whereas Blair had five stories capped by twin towers.

Nobody at Blair ever got fired; if a man couldn’t do a job, the word from the head office was “Find him another one. ” If a new process came in, the workers on the old-one were quietly moved to plant maintenance or, if they had any skills, were made supervisors, with the ridiculous result that there were entire departments at Blair with more supervisors than workers. Above all, Blair considered itself a “quality mill,” and that apparently meant that nothing could be produced in quantity. But the central problem of Blair, and the greatest drain in money, was that Blair did not turn out quality products.

Rejection rates at Blair ran almost twice as high as at the other mills. What the Blair quality-control inspectors accepted provoked angry complaints from the customers. Indeed, as everyone knew, the sales¬people spent little time selling. They spent most of their time talking customers into not sending the stuff right back to Blair as faulty and unusable, often by granting the complaining customer a nice rebate. The rebate never appeared in the Blair direct cost accounts but was. charged off to the overhead account “miscellaneous customer service.

” Things had been drifting from bad to worse and no one in the Blair, Indiana Mill expected that they would ever change. But then suddenly, in the spring of 1985, a number of circumstances coalesced. 1. The founder’s grandson, the “old man” who had run the Peerless Starch Company for thirty five years, died. And, it turned out that the founding family owned practically no stock at all. Thereupon the outside directors, who had not dared speak up while the “old man” was alive, refused to appoint his son-in-law or his nephew as his successor.

Instead they picked an outsider to become president and chief executive officer: John Ludwig, who was not even a native of Blair, Indiana, let alone a chemical engineer or a starch machinist. In fact, Ludwig had been with Peer¬less less than four years and had been forced on the “old man” by some of the outside directors. Having started as an industrial psychologist, Ludwig had first taught, then worked for the Pentagon as a training specialist, then in Industrial Relations for Ford, where he helped reorganize one of the major divisions and then had become general manager of one of the smaller Ford Motor divisions.

He had come to Peerless in 1981 as its first “professional manager” – at least the first one in Blair – and as executive assistant to the president. The “old man” had kept him busy with the affairs of the other plants in the other towns, so that Ludwig knew very little about the Blair, Indiana Mill. Although he had several times thought of resigning what he felt was a futile and frustrating job, he now found himself in charge. 2. Even before the death of the “old man,” things had turned critical at Peerless, and Especially at the mill at Blair, Indiana. The market had sud¬denly become competitive.

Synthetic starches and adhesives were flowing onto the market out of the labs of the chemical companies and the oil companies and the rubber companies – businesses that never before had been competing in the starch market. Peerless and a few other companies used to have the field all to themselves – and carefully refrained from hurting each other too badly. But the new¬comers didn’t know what everyone else in the industry knew: you can’t make the market bigger by lowering the price or improving product performance; all you can do is spoil the market for every¬body. Worse still, the success of the newcomers seemed to disprove such old “truths.

The new mills in Illinois, Texas, and Oregon had managed to hold their own – indeed Oregon did phenomenally well and managed to bring out a highly profitable new line of synthetics (without even telling the folks in Central Research in Blair, Indiana) that quickly became industry leaders. But Blair came close to collapse. With supply abundant, customers flatly refused to tolerate the Blair quality – or lack of quality – anymore. Despite all the efforts of the sales department, whole carloads of the stuff came back – often with a curt note: “Don’t bother to call on us anymore; we have contracted to buy our supply elsewhere.

” And Blair, which for years had been barely breaking even, plunged into the red and began to lose money. By mid-1985 Blair was losing more money than the other three mills made, so that Peerless no longer showed any profit and, indeed, barely managed to earn the interest on its fixed debt. Blair, clearly, was bleeding Peerless white. As soon as Ludwig had become president, he asked the ablest man in Blair management – an assistant manager of the Blair plant – to study what could be done with Blair. The result was a recommen¬dation to spend some $25 million on modernizing the Blair plant.

For this sum, the assistant manager promised, Peerless would get as modern a plant as any in the country (to build one from scratch would cost around $60 million). Employment in the modernized plant would shrink from 8,000 to 2,600. Ludwig had resolved not to take any action until the assistant manager completed his study. But he hadn’t been idle during that time. He himself carefully studied the economics of Peerless, which had previously been kept rather secret. It soon became apparent to Ludwig that, economically, Blair was on very shaky ground. The only economi¬cally justifiable course was to close the Blair mill and not replace it.

The existing mills in Illinois, Texas, and Oregon could easily replace Blair’s production volume – at a fraction of Blair’s cost and at supe¬rior quality. Closing Blair would entail very heavy short-run costs, mainly severance pay. But within six months, the Peerless Company would have absorbed the loss and would have become profitable again. If Blair was kept going, no matter how successfully modern¬ized, Peerless could at best hope to break even – and the capital required to rebuild Blair would use up all the credit Peerless could possibly command – if indeed that much money could be raised in Peerless’s shaky condition.

Ludwig was deeply disturbed by this conclusion. He knew how much the Peerless Mill meant to Blair; without it there weren’t going to be any jobs in the town. He himself was old enough to remember the Depression days when his father, a machinist in a Milwaukee automobile plant, had been unemployed for three bitter years. Yet Ludwig also knew that he had to make a decision fast. When he had been made president, he had asked the board of directors to give him six months to study the situation – and the board had given him that much time only grudgingly.

At that time the board had not really known how bad things were – and at the next Board meeting, in January 1986, he would have to tell them that the first nine months of 1985 had been catastrophic months. Surely at that meeting, if not before, the board would expect him to have a definite recommendation. As a business decision, there was clearly no choice: Blair had to be closed. But what about the company’s social responsibility to Blair and to the people who depended on the Peerless mill for their livelihood?

The more Ludwig thought about this the more he became convinced that Peerless had the social responsibility to try to save the Blair mill, and the town with it. There was a fair chance, after all, that the rescue operation would succeed. He was not at all sure that his board would go along – indeed, he half-suspected that the board would ask for his resignation rather than authorize spending $25 million on Blair. Still he saw no choice in conscience but to try. But before recommend¬ing to the board that the Blair mill be remodeled, Ludwig thought it prudent to discuss the matter with an old acquaintance, Glen Baxter.

Baxter had attended the same college as Ludwig, had wanted to become a minister, and had actually had a year or two of divinity school, but had then turned to economics and was now the economist for the very union that represented the Peerless workers. Ludwig was really more interested in getting Baxter’s support than in getting his advice – privately, he had always considered Baxter somewhat of a “radical” and an “oddball. ” But Ludwig knew that he needed union support for any plan to rebuild Blair – and that his board would not even listen to such a plan unless he could give assurances of union support.

And surely Baxter would support a plan that maintained 2,600 jobs for his members! Much to Ludwig’s surprise, Baxter did no such thing. On the contrary, he became almost violent in his opposition. “To invest all this money in rebuilding Blair,” he said, “is not only financial folly; it’s totally irresponsible socially. You aren’t just president of the Blair, Indiana mill; you are president of the Peerless Starch Company with its 8,000 employees outside of Blair, Indiana.

And you propose to sacrifice the 8,000 people you employ outside of Blair, Indiana just for the people at Blair. You have no right to do so. Even if you succeed and Blair survives, Peerless will have lost the capacity both to pay severance pay and pensions should you have to lay off more people and to raise the money to modernize and expand the other mills and to maintain the jobs there. All right, John Ludwig, maybe you’ll be a hero in Blair, Indiana with your plan, maybe people there will think you’ve done great things for ¬them. But in my book you’ll be a cheap demagogue – as president of the Peerless Starch Company you are paid for doing the right thing and not for being popular. “

“Of course,” Baxter said, “we in the union will do everything to make closing the Blair, Indiana mill as expensive as possible for Peerless – we do have a responsibility toward our members. But for you to jeopardize the jobs and livelihoods of all of the workers in the healthy plants just because you have a guilty conscience about Blair’s mismanagement all these years – that’s the height of social irresponsibility.

” Required: Now that you have finished reading the above case, give it some serious thought. Then, in your own words, summarize the issues involved in the case (there are quite a few) and indicate whether Glen Baxter has a case and provide a thorough discussion to support your conclusion. Finally, and within the write-up, discuss what you would do if you were John Ludwig?


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