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Lehigh Steel Case Study

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Justin Yau

on 11 April 2015

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Transcript of Lehigh Steel Case Study

LEHIGH STEEL
Product mix and other considerations
Recommendation
Conclusion
Introduction
Company overview
Industry analysis
Recession
Effects
Response
Problems faced by Lehigh Steel
Types of Costing
Activity-based costing
Theory of constraints
Presentation outline
Lehigh Steel is a specialty steel manufacturer.
7 product lines – Alloy, Bearing, Conversion, Corrosion, Die Steel, High Speed and High Temp.
3 of these products comprise 70% of Lehigh’s total sales: Alloy, Die Steel and High Speed.
Enjoyed a premium market position due to superior product performance.
Introduction
Company Overview
Producers are price takers because of powerful, sophisticated customers.
Reputation for exceptional quality allowed producers to charge premium prices.
Costs significant factor.
Specialty steel approximately 10% of the total US steel industry.
Firms target specific applications and develop unique technical competencies.
Firms adopt ‘focus’ strategy:
Portfolio of product shapes within a single segment
Protect volume and capital investments
‘You choose to make product which you can make better than the competition’.
Introduction
Industry Analysis
Introduction
Timeline of events
Market prices declined sharply:
Near product cost
Below product cost
Demand for the large volume products drastically reduced.
Cost increased mainly due to smaller order size.
Recession
Effects of recession
Synchronous flow manufacturing (Similar to Toyota).
Targeted smaller niche market demand.
Changed from selling few products with large demand to many specialized products.
CFO Jack Clark suggested a firm-wide product profitability analysis
Recession
Response
Decline in average order size resulting in buyers having a larger bargaining power.
No contingency plans-only non-flexible long term view.
Potential exposure of niche markers to competitors
High ordering cost because of smaller orders
Recession
Problems faced by Lehigh Steel
Product cost can be used for:

Stock valuation, cost control and decision making
There are different types of costing approaches. E.g.: Traditional Standard costing, Activity Based costing
Accuracy plays an important role
Types of Costing
Product cost
Types of Costing
ABC process
Types of Costing
ABC Calculations
Types of Costing
Standard v/s ABC
Types of Costing
Standard v/s ABC
Types of Costing
Activity Based Costing
The performance measurement system associated with the theory of constraints
Measures the speed at which throughput is generated
Throughput =Sales Revenue – Totally Variable Costs
Management paradigm that views systems being limited in achieving its goals because of constraints/bottlenecks
Constraints can be internal or external
Uses a focusing process to identify the constraint and restructure the rest of the organization around it
Types of Costing
Theory of Constraints
Types of Costing
Theory of Constraints
The performance measurement system associated with the theory of constraints
Measures the speed at which throughput is generated
Throughput =Sales Revenue – Totally Variable Costs
Management paradigm that views systems being limited in achieving its goals because of constraints/bottlenecks
Constraints can be internal or external
Uses a focusing process to identify the constraint and restructure the rest of the organization around it
Types of Costing
Theory of Constraints

Types of Costing
Theory of Constraints

Types of Costing
TOC calculations

Types of Costing
Theory of Constraints

Types of Costing
Theory of Constraints

Employ Kaizen production approach, by focusing on continuous improvement and reducing costs
Alloy, Die Steel and High speed comprised of 70% of sales
Production of High Speed and Die Steel are simple whereas Alloy products are complex
Is it economical to own the primary product- Conversion
Customers may wish to purchase a range of products
Product Mix
Other Consideration:

Therefore:
If the ABC costing approach is chosen- High Steel: Machine Coil should be produced. Less focus should be given to Alloy and Conversion
If the ToC costing approach is chosen- Conversion is the most profitable product with Alloy and High Speed following
The figures under both costing approaches are different to standard costing where High Steel was only tolerated and Alloy was seen as the most profitable
Product Mix
Product Mix
Summary
We recommend the ABC costing approach is adopted
It appropriates cost more accurately among the products
Will help achieve Lehigh Steel’s focus on continuous improvement
Increase motivation among production employees
We recommend the product mix should be more focused on High Steel
It is the most profitable under ABC
It is less complex to produce compared to other products
Recommendation
Lehigh Steel can increase it profits and performance by;
Increasing more barrier to entry through greater focus on brand image and reputation
Continuous improvement and lean production will help reduce inefficiencies in the production line
Palmer group should focus on backward vertical integration
Diversify into emerging markets to benefit from low labour cost
Recommendation
Recession and its consequences
Types of different costing approaches gives different profitability figures for products
When deciding on a method; Managers should consider its short term and long term goals
Lehigh steel is should continue focusing on increasing its knowledge and specialising where as Palmer can consider diversification
Conclusion
Any Questions?
Full transcript