Lehigh Steel: The Case for Activity Based Costing and The Theory of Constraints
Introduction:
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…show more content… This makes TOC very applicable to Lehigh because it is an accurate reflection of the business, where operating costs are fixed in the short run.
In order to implement TOC, the company must firstly identify the bottleneck (constraint), secondly decide on a method to exploit the bottleneck by increasing its utilisation, thirdly subordinate everything to the bottleneck, fourthly is to elevate the bottleneck by increasing the capacity and finally repeat the whole process if the bottleneck changes after these steps. Together with its offshoot ‘throughput accounting’, it allows companies not only to remove the constraints of the overall profitability, therefore enhance the profit, but also evaluate the company and products using a new concept, throughput, further products can be ranked using throughput per bottleneck to show the profitability. Therefore it’ll enable companies to drop the unprofitable products and possible increase the favourable ones, also to make more accurate price decisions.
The above TOC technique is summarized in figure 2:
Figure 2: Summary of the TOC applied to Lehigh.
Edwards implemented TOC at Lehigh as it was a good candidate for the technique. For example there were aims to increase “The rate at which raw materials were turned into sales", and by using throughput accounting and TOC, emphasis is placed upon getting products
