Lehigh Steel Case Analysis

4078 Words Dec 8th, 2011 17 Pages
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
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Steel products were defined by several attributes which determined the product application and defined quality. Grade described the metallic (chemical) composition of the steel, or the elements added to the basic recipe of iron and carbon to create the desired properties. Product described the shape of the product, including semi-finished shapes (blooms, billets and bars) and finished shapes (wires and coils). Surface finish described the smoothness and polish that could be applied to the material’s surface to enhance presentation. Size described the latitudinal and longitudinal dimensions of the product. Structural quality described the absence of breaks in the inner metallic structure. Surface quality described the absence of cracks or seams on the surface. Because specific applications called for specific attributes, many products were customized along one or more attributes for the customer. However, of all attributes, customers valued most the grade, which determined product performance.
Producers typically focussed on a portfolio of product shapes within a single segment to carve niches in a broad industry. This focus strategy protected capital investments in a capital intensive industry. The industry was capital intensive because (i) lumpy and expensive capacity additions, (ii) cost structure was significantly changed only

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