Lehigh Steel Case Solution
Background:
This case introduces Lehigh Steel, a company established in 1913 and engaged in the manufacturing, molding and fabrication of specialty steel acquired by Palmer as its parent company in 1975. Initially, the company enjoyed premium market position because of its ability to manufacture the high-quality premium product by combining unhazardous material with precession to increase its product's life using advanced techniques to prevent them for rust. So that the clients demanding the company's customized specialty products would be satisfied increasing its sales. The industrial performance of Lehigh was relative well compared to others. The company hit record profits in 1988 and 1989. However after the recession Lehigh suffered, reducing the market prices while the demand for large product volumes drastically decreased. Whereas the cost of production increased attributed to the small order sizes, the company posted its record loss by the year 1991. Furthermore, the specialty steel shared 10% of the market in the United States. The competitor in the market employed advanced techniques to target specific applications further enhancing their technical competencies. Moreover, Lehigh Steel used standard costing to assess and evaluated the cost attributed to its production process and management implemented activity-based costing. The company had seven different and niche product lines. Lehigh steel used ABC costing which was running smoothly. However, the resulting profitability statements of its products were puzzling. While the operational staff believed that the product which would utilize or consume more resources of the company should result in higher cost which could reduce the profitability of the product.
Problem statement:
The primary issues faced by the company was that, it had suffered because of the recession which had increased the bargaining powers of the buyer while reducing their purchasing power resulting in a decrease in the demand for large volume of product causing the company to fulfill smaller order sizes which would increase the companies ordering cost and could reduce the profitability of the enterprise. Furthermore, it had faced intense competition in the industry from its competitors. Moreover, the company's management is facing the challenge of choosing between the two alternative costing methods and is responsible for determining which method would be beneficial for the enterprise to change the face of its financial statement from losses towards potential profits. Furthermore, so that the management could rationalize the product costs and their potential product profitability as both methods employed a different technique to evaluate the costs and their profitability.
Analysis
The company in response to the recession should use and implement synchronous flow of manufacturing where the company would identify those activities that constraints in the production process being underutilized so that the company could mitigate these restrictions in the production by enhancing the activities to maximize the capacity utilization of the equipment. Furthermore, the company targeted smaller niche market by instead of supplying larger order the company could concentrate on selling various specialized products to gain market share by appealing and selling to different customers segments. The realization that the constraints associated with switching from one product to another were causing severe problems for Lehigh's operation.
The company could use theory of constraints to identify the weaknesses in the production equipment that cause it to perform lesser then its optimum capacity in like manner the company could use the ABC costing to improve business process identifying the activities that are underperforming so that the company could better allocate the limited resources that would result in increasing its profitability. Furthermore, the company could identify the wasteful products and unnecessary costs to reduce the cost of production and help the company to set efficient prices for its products. ...............
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