Lehigh Steel Case Analysis

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Executive Summary

Lehigh Steel is a manufacturer of speciality steels for high strength, high use applications. Its financial performance has generally trended wit but outperformed the industry as a whole. Following the general recessionary trend of the market, Lehigh Steel reported record losses in 1991 after posting record profits in 1988. This had led to an increasing need to rationalizing Lehigh Steel’s product mix.

Traditionally, Lehigh Steel has followed Standard Cost Method for cost accounting. Jack Clark, CFO of Lehigh Steel has given Bob Hall the task of implementing Activity Based Costing at Lehigh Steel. Mark Edwards, Director of Operations and MIS explored the implementation of Theory of Constrains (TOC) accounting for Lehigh Steel.

The task is to evaluate the best costing alternative for Lehigh steel. For this, an improvised costing system is developed which overcomes the assumptions of ABC and TOC costing and the optimum product mix for Lehigh Steel is calculated using the same.

Situation Analysis
Company Analysis
Founded in 1913, Lehigh Steel enjoyed a niche position as a manufacturer of speciality steels for high strength, high use applications. Products included high-speed, tool and die, structural, high temperature, corrosion-resistant and bearing steels, available in a wide range of grades in a variety of shapes and finishes. Its markets included aerospace, tooling, medical, energy and other performance industries. Lehigh Steel’s premium market position came from its superior ability to integrate clean materials with precision processing to produce high quality products which were often customized for specific applications, and bundled with metallurgy and other technical services. It also operated a small distribution division which served certain market segments by offering a broad product line comprising of products from multiple manufacturers. Lehigh Steel was acquired by The Palmer Company in 1975. The Palmer Company was a global manufacturer of bearings and alloy steels with revenues of $1.6 billion in 1992. Palmer believed that long-term specialization developed knowledge and innovation, the true source of competitive advantage. Palmer’s corporate objective was to “increase penetration in markets providing long-term profit opportunities” by taking “a long-term view in decision making by strategically managing (the) business,” and “emphasizing the fundamental operating principles of quality, cost, investment usage and timelines.” The acquisition of Lehigh Steel gave Palmer speciality in Continuous Rolling Mill (CRM) that could convert steel intermediate shapes to wire for Palmer’s bearing rollers. Lehigh operated under a matrix organization structure. Reporting to the company president were the General Managers of Primary Operations, Finishing Operations, and Marketing and Technology; Vice President of Sales; Director of Operations Planning and MIS; and CFO. Their performance was measured by product contribution margin calculated using standard costs: revenue less materials, direct labour, and direct manufacturing costs such as utilities and maintenance; other overhead was considered beyond their control. Lehigh had 7 product lines – Alloy, Bearing, Conversion, Corrosion, Die Steel, High Speed and high Temp. Out of this Alloy, Die Steel and High Speed comprised 70% of the sales, Lehigh also carried niche product lines – Bearing, Corrosion and High Temp are – whose volume fluctuated with market conditions. Conversion involved the processing of non-Lehigh owned material on equipment such as the PFF or the CRM that was not economical for some products to own. Conversion was subtly complex, as the breadth of the end customer’s product line translated into multiple rolling specifications, and multiple setups. Industry Analysis

Speciality steel comprised roughly 10% of the total US steel industry, and like other high-tech, speciality industries, and offered growth and profit...
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