2011 Lehigh Steel Case Study- CA Assignment
Submitted by Group 6, Section D
Name
Roll No
Abhishek Suryawanshi 2011PGP913 2011PGP913 Aditya Kiran Nori 2011PGP514 2011PGP514 Pankaj Gupta 2011P!09 2011P!09 Abhishek " Pai 2011PGP50# Sneha$ %o&dand 2011PGP''( 2011PGP''( o bearin&s and a$$oy ,he Pa$)er -o)pany. /ehi&hs parent. is a &$oba$ )anuaturer So)eswar *asak 2011PGP#91 2011PGP#91 stee$s stee$s with 1992 reenues reenues oShrira)an 1' bi$$ion bi$$ion Pa$)er be$ieed that $on&6ter) $on&6ter) speia$i7atio speia$i7ation n S 2011PGP#(9
Company Overview
dee$oped know$ed&e and innoation. the true soure o o)petitie adanta&e Pa$)ers 2011PGP913
orporate objetie was to 8inrease penetration in )arkets Pa$)er had a:uired /ehi&h 2011PGP514
in 19(5 or -ontinuous "o$$in& !i$$ ;-"!<. speia$i7ed e:uip)ent that ou$d onert 2011P!09
stee$ inter)ediate shapes to wire or Pa$)ers bearin& ro$$ers As a )anuaturer o speia$ity stee$s or hi&h stren&th and hi&h2011PGP50# use app$iations it enjoyed a nihe position =t 2011PGP''( enjoyed a pre)iu) )arket position beause o its abi$ity to produe superior :ua$ity
produts by inte&ratin& $ean )ateria$s whih were usto)i7ed or speii app$iations 2011PGP#91 =t a$so operated a s)a$$ distribution diision whih oered a broad produt $ine ro) 2011PGP#(9 0#+0#+2011
Lehigh Steel Case 201 1 )u$tip$e )anuaturers to ater to dierent )arket se&)ents >n$y ' suh )i$$s e?isted in the @S ,he years 19## and 19#9 had been &reat ones or the o)pany when it had posted reord proits durin& a period o &enera$ industry &rowth as re$eted in ship)ents. operatin& rates and pries pries *ut. broad reessionary reessionary business business onditions onditions droe droe a seere seere industry de$ine in 1991. reduin& ship)ents. operatin& rates and pries /ehi&h posted reord $osses in 1991
Products ,oo$ and die. strutura$. hi&h te)perature. orrosion resistant and bearin& stee$s in a ariety o shapes and &rades !arkets or these produts in$uded aerospae. too$in&. )edi )edia$ a$.. ener& ener&y y and other other per peror or)a )an nee indu indust stri ries es/ /eh ehi& i&h h oper operat ated ed und under er )atr )atri? i? or&anisati or&anisation on !arketin& !arketin& )ana&ers )ana&ers assu)ed assu)ed produt $ine responsibi responsibi$iti $ities es that rossed rossed unti untiona ona$$ boundar boundaries ies ,hey dee$op dee$oped ed )arketi )arketin& n& strate strate&ie &ies. s. deter) deter)ine ined d produ produtt oerin&s. estab$ished )ini)u) order :uantities. se$eted order and set prie a$$ with the &oa$ o bui$din& o$u)e at stron& pries ,heir peror)ane was )easured by produt ontribution )ar&in a$u$ated usin& standard osts !anuaturin& sta e?euted the orders brou&ht by )arketin& )ana&ers and were )easured on arianes ro) standard ost or the output produed ,heir &oa$ was to proide :ua$ity produt within speiied $ead ti)e at $owest ost Stee$ produts were deined by seera$ attributes $ike Products
Attribute description
Grade
!eta$$i o)position o the stee$
Product
Shape o the produt6 se)i inished and inished shapes
Surface Finis
S)oothness and po$ish
Si!e
/atitudina$ and $on&itudina$ di)ensions
Structural "uality
Absene o breaks in inner struture
Surface "uality
Absene o breaks on the surae Group '. Setion
2
Lehigh Steel Case 201 1
Industry Conduct and Performance: !aintainin& hi&h standards o produt :ua$ity whi$e keepin& osts o)petitie was essentia$ to o)pete in the stee$ industry Not a o))odity $ike arbon stee$. whih was so$d pri)ari$y on a prie and de$iery basis. speia$ty stee$. was nonethe$ess hi&h$y prie o)petitie !arket share ou$d be bou&ht or so$d by priin& s$i&ht$y be$ow or aboe )arket prie -ost. was the )ost si&niiant o)petitie weapon in deter)inin& share and proits ,o )ana&e uti$i7ation rates and unit osts. produers sou&ht o$u)e and $on& prodution runs Bhen de)and was stron&. produers ou$d se$et hi&h o$u)e orders whih a$$owed ontinuous operation at hi&h6setup ti)e workstations =n $ow de)and. ir)s hased $ow6 o$u)e nihe business to i$$ p$ants. rationa$i7in& the poor )ar&ins as o$u)e wou$d ontribute the i?ed6ost whi$e addin& $itt$e ariab$e ost Stee$ peror)ane trended with the eono)y =ndustry proitabi$ity $utuated wide$y. ran&in& ro) 61'(C to 50C in the $ate 19#0s =ndustry apaity peaked in 19## at #92C. p$u))eted to (41C in 1991. and reoered partia$$y to #22C in 1992
Marets and Products ! ,he usto)ers o /ehi&h Stee$ ran&ed ro) $ar&e or&e shops to >D!s. ro) distributors to tiny )eta$workers and a$so dependin& on the produt si7e So in order to ater to this diersiied usto)er base. /ehi&h $assiied the) in 33 )arket se&)ents whose re:uire)ents or &rade speiiity. tehnia$ support and shippin& aried
Recession Period # =n 19916 92. eono)y went into reession ,his aeted the proit )ar&ins o /ehi&h Stee$ as we$$
Group '. Setion
3
Lehigh Steel Case 201 1 -
,he aera&e order si7e de$ined ro) 1'00 pounds in 19## to $ess than 1200
pounds in 1991 - /ehi&hs sa$es distribution broadened - -usto)er sa$es ran&ed ro) 59 )i$$ion or 2( )i$$ion pounds o stee$. to #4 or # pounds with an aera&e usto)er buyin& 3'.'35 pounds o stee$ or
-
'3.40( 1# usto)ers spent )ore than 10 )i$$ion. 130 spent )ore than 100.000 and oer 420 usto)ers spent )ore than 1.000
$ei% ad & product lines'
Alloy
"earing
Corrosion
#ie steel
Conversio n
$igh Speed
$igh %emperat ure A$$oy. ie stee$ and Ei&h Speed o)prised (0C o the sa$es
Production Operations:
Group '. Setion
4
Lehigh Steel Case 201 1
Melt
Refne
Mold & Breakdo wn
Roll
Finish
$ei%(s Production Process Flo) *eltin%+
Srap purhased or 11420 per ton was )e$ted in D$etri Ar
urnae Refined+
Stee$ was urther reined by Ar&on >?y&en earbeuri7ation ;A><. in whih o?y&en or ar&on was bubb$ed throu&h )o$ten )eta$ to urther burn o i)purities
*old -rea.do)n F !o$ten stee$ was tee)ed ro) $ad$es into ota&ona$ !o$ds.
or)in& in&ots whih were *roken down into se)i6inished shapes suh as bi$$ets and bars RollF
,he inter)ediate bi$$ets and bars were transor)ed by ro$$in& into inished shapes
Finisin% F
,he produts were annea$ed a ina$ ti)e to i)proe or)abi$ity and )ake surae )ore durab$e. and rou&h turned. or strai&htened
Support atiities were a$so ritia$ to prodution !aintenane. depreiation and uti$ities were basi osts re:uired to run the p$ant. and o)prised 21C o the reenues
%he Case for Change: Group '. Setion
5
Lehigh Steel Case 201 1 =ndustry wisdo) stated that stee$ proits were a si)p$e untion o pries. osts and o$u)e Eoweer. 1991 presented ha$$en&es in a$$ three unda)enta$ proit driers !arket pries de$ined sharp$y to near or be$ow produt ost whi$e the osts ai$ed to de$ine with prie or o$u)e !ark Ddwards. iretor o >perations P$annin& and !=S be$ieed that pu$$ based )anuaturin& onepts wou$d $ead to redued inentory osts Eoweer. under the urrent tehno$o&y. it proed diiu$t to e$i)inate the steps in setups and han&eoers ritia$ to eiient s)a$$ order throu&hput As a resu$t. /ehi&h tar&eted a hi&h a$ue produt )i? that wou$d $eer proits in stron& de)and. and ushion it in $ow de)ands with &reater ontributions to i?ed ost per unit o$u)e Produt wei&ht was the pri)ary unit o )easure or standard ost whih in$uded )ateria$s. $abour. diret )anuaturin& e?pense and oerhead ost ate&ories
Activity &ased costing 'A"C( Group '. Setion
'
Lehigh Steel Case 201 1 -rief o/er/ie) of A- Atiity6based ostin& ;A*-< is a speia$ ostin& )ode$ that identiies atiities in an or&ani7ation and assi&ns the ost o eah atiity with resoures to a$$ produts and series aordin& to the atua$ onsu)ption by eah ,his )ode$ assi&ns )ore indiret osts ;oerhead< into diret osts o)pared to onentiona$ ostin& )ode$s Bith A*-. an or&ani7ation an sound$y esti)ate the ost e$e)ents o entire produts and series =t an he$p the or&anisation in two ways 1 ,o identiy and e$i)inate those produts and series that are unproitab$e and $ower the pries o those that are oerpried ;produt and serie porto$io ai)< 2 ,o identiy and e$i)inate prodution or serie proesses that is ineetie and a$$oates proessin& onepts that $ead to the ery sa)e produt at a better yie$d ;proess re6en&ineerin& ai)<
ntroduction of A- in $ei% steel =n 1992. ater attendin& a se)inar on A*- -$ark deided to adopt A*- in the o)pany as he be$ieed that as disrete )anuaturer o thousands o SK@s that shared the sa)e prodution proess /ehi&h was the peret app$iation o A*- ,he standard ostin& was aera&in& the dierse resoures used by dierent produts $eadin& to under ostin& and oer ostin& o produts =n iew o i)p$e)entin& A*- *ob Ea$$ was hired as an A*- e?pert ,he &oa$ was to arrie at a $earer sense o produt and usto)er proitabi$ity ,his wou$d hae he$ped the) to hoose the ri&ht produt )i? and do away with non6proitab$e produts Ater the initia$ re&ression study Ea$$ ound that proitabi$ity o the o)pany was hi&h$y o6re$ated with the hi&h o$u)es o hi&h speed and die stee$ sa$es Bhereas under standard ostin& the )arketin& )ana&ers thou&ht that a$$oys were the proitab$e produt ,his indin& an be e?p$ained6 under standard ostin& the uneen resoures used were perhaps aera&ed out *ut when A*- was i)p$e)ented it )ade proper a$$oation o resoures and atua$ proitabi$ity a)e out Aordin& to A*- dierent atiity osts and ost driers are $isted in e?hibit ' a$on& with re$eant a$ues
Group '. Setion
(
Lehigh Steel Case 201 1
,akin& these into aount we an restruture the )anuaturin& and ad)inistratie oerhead osts in e?hibit 5 into dierent ost poo$s as )entioned in e?hibit ' Be a$so take he$p o the e?hibit 4 to asertain the per pound re:uire)ent o resoures or eah kind o produt
Group '. Setion
#
Lehigh Steel Case 201 1
-a$u$ations are shown as be$ow
Group '. Setion
9
Lehigh Steel Case 201 1
A$thou&h the Ea$$ was p$eased with the resu$ts o the A*- but reation ro) the o)pany was )i?ed or the o$$owin& reasons6 1 A$thou&h the A*- was orretin& the distortions reated by the standard ostin& )ode$ yet )ana&ers were not ready or the shit 2 Ee urther tried to reine the a$$oation o resoures but it did not yie$d substantia$ han&es ,he prodution depart)ent was. howeer. p$eased with the resu$ts as they e$t that the )ode$ onir)ed so)e o the intuitions they had about proitab$e and unproitab$e produts A$thou&h resu$ts were deinite$y better than the standard ostin& yet so)e resu$ts were ounter6intuitie Group '. Setion
10
Lehigh Steel Case 201 1 or e?a)p$e. hi&h te)peratures showed a si)i$ar A*- proitabi$ity as hi&h speeds een thou&h hi&h speed ou$d be proessed at $east ' ti)es aster than the hi&h te)peratures ,his was rea$$y unanny as produt proitabi$ity shou$d re$et suh ast dierenes in resoure onsu)ption
%heory of constraints '%OC( -rief o/er/ie) of 3 ,he theory o onstraints ;,>-< adopts the o))on idio) HA hain is no stron&er than its weakest $inkH as a new )ana&e)ent paradi&) ,his )eans that proesses. or&ani7ations. et. areu$nerab$e beause the weakest person or part an a$ways da)a&e or break the) or at $east aderse$y aet the outo)e ,he ana$yti approah with ,>- o)es ro) the ontention that any )ana&eab$e syste) is $i)ited in ahiein& )ore o its &oa$s by a ery s)a$$ nu)ber o onstraints. and that there is a$ways at $east one onstraint Eene the ,>- proess seeks to identiy the onstraint and restruture the rest o the or&ani7ation around it. throu&h the use o ie ousin& steps 1 =dentiy the onstraint ;the resoure or po$iy that preents the or&ani7ation ro) obtainin& )ore o the &oa$< 2 eide how to e?p$oit the onstraint ;&et the )ost apaity out o the onstrained proess< 3 Subordinate a$$ other proesses to aboe deision ;a$i&n the who$e syste) or or&ani7ation to support the deision )ade aboe< 4 D$eate the onstraint ;)ake other )ajor han&es needed to break the onstraint< 5 =. as a resu$t o these steps. the onstraint has )oed. return to Step 1 onIt $et inertia beo)e the onstraint
Group '. Setion
11
Lehigh Steel Case 201 1
,he theory o onstraints has three under$yin& assu)ptionsF on/er%ence ' nerent Simplicity J
,he )ore o)p$e? a syste) is to desribe. the si)p$er it is to )ana&e onsistency ' ere are no conflicts in nature J
= two interpretations o a natura$ pheno)enon are in on$it. one or possib$y both )ust be wron& Respect ' People are not stupid J
Den when peop$e do thin&s that see) stupid they hae a reason or that behaiour
3 in $ei% steel ,he ounter6intuitie resu$ts ro) the atiity based ostin& ou$d be e?p$ained by the $ean or synhronous )anuaturin& proess su))ari7ed as the teory of constraints 435 ,his theory adoated proatie )ana&e)ent o onstraint in a business syste) rou%put+ uantity o )oney that the business syste) &enerates throu&h a speiied
period o ti)e rou%put sales price # direct /ariable cost
=t is &enera$$y represented as sales price # material cost
=t is rou&h$y o)parab$e to the ontribution )ar&in Profit of te system is increased by ma7imi!in% trou%put per unit of te constrained resource8
-a$u$ations are as o$$ows
Group '. Setion
12
Lehigh Steel Case 201 1
Produt osts do not p$ay any ro$e in this )ethod as it $eads to sub6opti)a$ deision )akin& as it i&nores the onstraint o ti)e in a proess 8,hrou&hput is not )easured in ter)s o units produed. but in &ross proit rea$i7ed ro) units produed that are so$d D)phasis is p$aed on &ettin& produts throu&h the )anuaturin& proess and so$d in the $east possib$e ti)e >n proper inesti&ation it was ound that bath o stee$ wou$d wait at the ro$$in& )i$$s or seera$ days So natura$$y it was the onstraint in the who$e bath proess ,>- adoated that )ana&e)ent shou$d so$e$y ous on the onstraint as it hoked the entire operation ,he apaity o the onstraint deter)ined the apaity o the entire syste) ,hey had to inrease the throu&hput or the onstraint ,he key to proitabi$ity was to send the )ost proitab$e produts throu&h the onstraint ,hey identiied -"! as the onstraint o the p$ant
Group '. Setion
13
Lehigh Steel Case 201 1
Assumptions ! Standard ostin% • •
,here is one idea$ ost or any produt A$$ oerheads need to be assi&ned to the produt and that these oerheads re$ate to the a)ount o $abour re:uired to )ake the produt =t $eads to oer ostin& or
•
under ostin& o Produts ,hese osts )is$ead peop$e and ause the) to )ake wron& deisions re$atin& to
•
priin&. proitabi$ity and so orth =t is assu)ed that the o)pany traes atua$ osts at eah sta&e o prodution to a$$oate the osts =t )i&ht $ead to o)p$iated data $ow whih &enerates hu&e :uantities o wasteu$ and onusin& transations
Acti/ity -ased ostin% +
Atiities onsu)e resoures "esoures onsu)ed hae nu)erous auses Atiities o wide array an be identiied and )easured -ost poo$s are ho)o&eneous -osts in eah poo$ are ariab$e
eory of onstraints+
,here is a$ways at $east one onstraint on eah produt that $i)its the ir)s
reenue Bithin eery )anuaturin& eniron)ent. statistia$ $utuations and rando)
eents our ,he opti)i7ed prodution tehno$o&y syste) is i)p$iit$y stab$eLat any &ien ti)e bott$e neks are identiied and order )i? is stab$e with respet to &ien soure
Analysis of di)erent types of costing: Group '. Setion
14
Lehigh Steel Case 201 1
Standard costing ' *+ In the standard costing method manufacturing and administrative overheads were allocated on the &asis of ,uantity+ "ut in reality each ind of products consumed di)erent amount of resources+ So this ind of costing was denitely faulty+ .+ According to this method only alloy: condition round in
proftable and all other product lines are loss maing+ /+ "ut this does not re0ect the true picture as the costing here is faulty+ So we moved to activity &ased costing+
cti!ity based costing ' *+ In this method we allocated the manufacturing and administrative overheads according to the resources consumed &y each of the activity+ .+ 1e found out the driver for each activity and allocated costs to them in proportion of the resources consumed &y each activity+ /+ 2esults were very di)erent in this case+ As we found that some of the products were under-costed hence were showing more prots 'alloy3 conversion3 die steel- chipper nife( and others were overcosted hence were showing losses 'die steel-round &ar3 high speed(+ 4+ In A"C we found that only high speed is showing profts and all other product lines were showing losses+ So if we go &y this method of costing they should go for high speed only+ 5+ 1e have also eep in mind that Lehigh might have decided on the prices of their product lines according to the costs so they could contemplate on changing the prices of the loss maing product+ 6+ %hey could easily increase the price as they were dealing with speciality steel and in these inds of customi7ed products one could easily charge a premium depending upon the demand of the product and competitors+ Group '. Setion
15
Lehigh Steel Case 201 1 8+ %he industry was ,uite price-competitive+ Although niches provided some protection it was sonly reputation of e9ceptional ,uality and technical services gave the producers leverage in charging a premium+ + $owever cost was a signicant competitive weapon in determining share and prots+ ;+ Although results were denitely &etter for A"C than the standard costing yet some results were counter-intuitive+ *<+ =or e9ample3 high temperatures showed a similar A"C prota&ility as high speeds even though high speed could &e processed at least 6 times faster than the high temperatures+ **+ %his was really uncanny as product prota&ility should re0ect such vast di)erences in resource consumption+ *.+ So we moved on to the concept of lean or synchronous manufacturing- theory of constraints '%OC(+
"heory o# constraints ' *+ 1e rst found out that the C2M was the constrained resource+ .+ %he o&>ective of %OC is to ma9imi7e throughput and minimi7e investments and operating costs+ /+ According to the "$% analysis alloy and high speed were
the ost proftable products+ 4+ As these products generated more throughputs per unit of constraints+ 5+ %hey should try to eep the &ottlenec operation &usy &y continuously running the &ottlenec operation+ It should not &e waiting for >o&s+ 6+ %hey can also tae actions to improve the e?ciency and capacity of the &ottlenec operation+
Group '. Setion
1'
Lehigh Steel Case 201 1
2ecommendation *+ Standard costing method is not applica&le in this ind of industry of speciality steels as here the amount of customi7ation and resources used &y each product are di)erent+ .+ According to A"C high speed is the most prota&le product+ /+ According to %OC alloy and high speed have greater prota&ility than others+ 4+ In terms of A"C and %OC die steel chipper nife is the least prota&le product+ 5+ Also it taes the most of the constrained resource C2M+ 6+ So according to A"C and %OC we recommend that Lehigh should do away with this product to trim the product line+ 8+ %rimming the product line will lead to longer production runs and greater e?ciency+ + #ie steel round &ar is maing great losses+ So Lehigh could do away with this product or try to rewor its price to &ecome prota&le+ ;+ So according to A"C and %OC analysis their new product line would only have /products alloy3 conversion and high speed+ *<+ "ut &efore maing any decision we should go through e9hi&it .+
Group '. Setion
1(
Lehigh Steel Case 201 1
@9ploring the Alternatives It is ,uite evident that A"C is not giving proper results+ It can &e seen that most of products are maing loss so there should &e some other method that can &e used for costing+ arious other alternatives which can &e used are • • •
Process &ased costing Bo& Costing $y&rid costing
'rocess costing It cannot &e used as company is not producing huge no+ of di)erent products rather it is producing only few di)erent varieties of products+ %hese products are sold in small as well as very large ,uantities so it does not mae much sense of doing process costing here+
(ob costing A >o& order costing system is used when a >o& or &atch is signicantly di)erent from other >o&s or &atches+ Cost accounting is usually fairly simple in these systems+ La&our and materials are Group '. Setion
1#
Lehigh Steel Case 201 1 entered on a >o& ticet+ Overhead is usually added to the amount the customer will &e charged for la&our and materials+
)ybrid %osting Allocating Overhead using A"C Costing Overhead is a large mi9ed group of costs that cant &e directly traced to products+ %here are several methods of allocating overhead costs in a cost accounting system+ A"C costing is one method+ 1e will learn other3 simpler methods as well+ Activity-&ased costing
'A"C( - used
overhead
traced overhead that is hard to trac to
activities
costs that
are
primarily
for
allocating
consume specic productsdepartments
resources+ A"C Costing is a little more sophisticated that the single-driver method+ "ut it is really not much more di?cult+
"wo*Stage $!erhead llocation Stage *- Allocate %otal Cost to Pools Stage .- Allocate pools to products or services / cost pools can &e identied3 each with a relevant driver+ It can trace total overhead costs as follows+
Group '. Setion
19
Lehigh Steel Case 201 1 A t c u d o r P
Cost pool A
" t c u d o r P C t c u d o r P
Product A %otal Overhead Cost
Cost pool "
Product " Product C
Product A Cost pool C
Product " Product C
Dsing separate cost pools and drivers3 total overhead costs can &e allocated more accurately to the products that consume those costs+ Dsing separate pool cost in A"C would give us a &etter picture in term of resources used as given in case di)erent pool of resources are used di)erently &y di)erent products so &y using a little variation of A"C we would get a clear picture of how cost of di)erent resources used is a)ecting overall cost of product+
Group '. Setion
20
