Lehigh Steel Case Study Essay

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Lehigh Steel: The Case for Activity Based Costing and The Theory of Constraints

Lehigh Steel is a steel and alloy production company with a huge range of products. It was able to reach a record profit in 1988, but went down to a record loss by 1991. Lehigh is owned by a parent company, The Palmer Company who’s a global manufacturer of alloy and steel and were interested in Lehigh’s specialised equipment to allow them to gain a competitive advantage.

Palmer had acquired Lehigh in 1975 not for synergies with its own speciality steels businesses, but for the Continuous Rolling Mill (CRM). CRM is specialized equipment that can convert steel intermediate shapes to wire for Palmer’s Bearing rollers. There are only 6 mills
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In order to allocate these costs, we need to define a cost driver for each of the activities to allocate the cost to each product. These drivers are the machine times for the activities, pound of production for General Admin, SKU’s for production planning and no. of order for the remaining processes.

Figure 1 below summarises the above ABC technique that Lehigh adopted:

Figure 1: Summary of the Activity Based Costing at Lehigh.

During the 1980’s Goldratt and Cox (1984) advocated a new approach to production management called optimised production technology (OPT). OPT is based on a principle that profits are expanded by increasing the throughput of the plant. The OPT approach determines what prevents throughput being higher by distinguishing between bottleneck and non-bottleneck resources. A bottleneck may be a machine whose capacity limits the throughput of the whole production process.

The aim is to identify bottlenecks and remove them, or if not possible, ensure that they are fully utilized at all times. Non-bottleneck resources should be scheduled and operated based on constraints within the system and should no be used to produce more than the bottlenecks can absorb. Thus the OPT theory suggests that spare capacity and idle time are not considered to be detrimental to the overall efficiency of the company. TOC focuses
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