Lehigh Steel Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Lehigh Steel Case Solution

Background

Lehigh Steel is considered as a leading player in the steel industry, which was founded in 1913. The company is famous for providing high quality steel products with wide variety of shapes and finishes,due to which the company is famous for providing premium products with clean material as well asit has sustained premium position within the market. The company recorded profits in the year 1988 by following the increase in the penetration strategy and innovation strategy, which also provided competitive advantage to the company. However, the economic downturn affected the financial position of the company significantly and the earnings of the company changed into losses, which created serious threats for the company as the market was cost competitive and it was impossible to increase the cost to compensate the decreased sales and earnings. The management of the company took certain measures to overcome this issue, as it helpedto some extent, but not completely.

Problems and Issues

The economic downturn affected the purchasing power of the consumers, and it resulted in losses. Moreover, the company is following the matrix organization structure therefore, per unit cost increased due to increase labour resources such as assembling for lower and specialized orders. However, the lead time did not decrease comparatively along with the decrease in prices and demand therefore, the management of the company was considering decreasing the lead times along with identifying the profitable products, which were consuming less resources to overcome this issue, and for that purpose the company was looking for different costing principles such as standard costing, ABC and TOC.

Analysis of the company’s problems and issues

Qualitative Analysis of Standard Costing, ABC, TOC and the Combination of ABC and TOC

Lehigh Steel is the premium producer of the steel products and is following the focus strategy, which gave it the position of the market leader. The company had glorious past and well established product line, product range and customer base, whereas, the economic downturn resulted in decreased prices, more orders as well as an increase in the demand of Lehigh Steel’s products. The market is cost competitive and the lead times remain the same irrespective of the decreased prices and the volume of the orders therefore, there is a need to develop a proper product matrix which could help the company to deal with this recession.

The company was using the standard costing method,which is considered as a matrix organization structure under which the contribution margin is calculated by deducting the material, labour and direct overheads. This method was widely applicable in the past but in the current situation when the order volume reduced along with the increased utilization of resources at specific orders, this method is not applicable as it allocates the overheads by using just two basis such as machine hours and products’ weightage, which has led towards inappropriate results as it does not indicate the products which are consuming more resources and generating less profit.

In order to deal with the drawbacks of the method of the standard costing, the management of the company suggested ABC method, which would help the company to allocate overheads by using the appropriate cost drivers as well as it would help the company to identify the activities which are non-value adding. However, it is complex and the overheads are not only volume related, therefore the implementation of the ABC costing method does not produce satisfactory results.

The other costing method which the management could use in this period of recession is TOC, which could help the company in achieving the lead production system by identifying the products that are generating maximum contribution by using less resources and constraints...............

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