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268

CHAPTER 5

MEASURING THE COST OF RESOURCE CAPACITY

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Almost 80% of melallurgists' time was spent OI! the niche produCllines. Conversion involved the processing of non-Lehigh owned material on equipment slJch as the PPF or thc CI\M that was not economical for some producers to own. The primary 'product' was the conversion of billet to rol!er wire for Palmer. Conversion was subtly complex, as the breadth of the end customer's product line translated into multiple rolling specifications, and multiple setups. Lehigh's product hierarchy was structured as fo!lows: product lines were broken down into grad:::s. which were subdivided into product shapes, and further into skus, which reflected variations in size and finish; In anyone year, Lehigh produced over 100 grades of steel, 500 individual products. and over 7,000 individual stock-keeping units (skus). Over multiple years, actual production could span over 10,000 skus. See Exhibit 2 for a product line summary.

oBal Molds,

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were stripped and left to soak in a storage fumac~ [0 .~ 'paintain malleability and prevent damage. MoJdiog:M \;/ilS2. relatively laborious process, as each 2500.pouno';I ingot had to be handled and moved manually. Some in. ;lfi gats were then remelted to meet stringent purity reo .~ QUlrementsat either the Vacuum Arc Remelt Furnace or ;~

steclm sol'd form, Ingots were then Brokendowl1Into :11

tile Electro. Slag Reme]t Furnace, which cleansed, the

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semi-finished (rectangular) shapes such as billets aod ~; bars, The i\'1esta press hot. worked bars over 12" in di- ,:;.. ameter, a smaJi percentage of overall outpLit. Most in- ~ gots were routed to the PFE The PFF was $40 million , :;~: '-" of relatively new technol-ogy in which an ingot was ' heated and forged by 4 hammers progwmmed to pro- ';9 cing worked, :: ~ duce intermediate billets or .bars. After b ~: the sohd steel underwent a tllermal treat called annea]. ';-'. ing, or slow cooling, to prevent shrinking and cracking .

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Production Operations Specialty steel producers used steel scrap as the primary raw material, and essentially recycled rather than manufactured steel. Production involved six steps, whose complexity varied by product. See Exhibit 3 for a summary of the production process. " Hauled in wIth magnets and cranes, scrap purchased for $114.20 pcr ton was pre-processed, or combined . with iron-based compounds to achieve the low compos-

Rolling transformed intermediate billets and bars ;';~'~ into finished shapes. A hot rolling mill had a soaking furnace to heat the steel, followed by a series of srands'; ';

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steelmto progressively thrnner sizes unlit It achieved Its '" final shape. such as a wire. A mill contained several sets

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of stands to roll different shapes; however, only on~ I~ shape could be rolled at a time. Unique product shapes.::~ were rolled manually on the Hand Mill. 95% of inter- ~~

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high-grade products. The scrap compound was Melted in the Electric Arc Furnace, where high-powered (80 megawatts) electrical charges heated the solid metal by zapping it with arcs of electricity emanating from carbon electrodes- Synthesized fluxes containing limes refined the hot metal by binding with phosphorus and other impure elements, which were skimmed off. The steel was further Refilled by Argon Oxygen Decarbeurization (AOD), in which oxygen or argon was bubbIe9 through the'molten metal to further bum off impurities. Alloys were then added to achieve the special properties. The Melting and Refining processes constituted chemical reactions between various~\ements which created the desired material. As tempera, ture was an essential factor in generating the appropriate chemical reaction, th~ hot metal processes were carefully monitored and controlled by metallurgists to achieve the precise grade. The molten steel was teemed from ladles into octag-

mediates were rolled on the CPJvl intO one of 4 produets: rods, tlal~, coils and bars, Shape changeovers were ;;4-. time-consuming events which dictated continuous 3 :'~ shift production, as well as a set production schedule '~~

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represented a capital investment that c~uld nor be dupE- :~' cated 10 less than five years. LabellOg It the plant bottle-'!:! neck, Hall described the CRM as "the one manufactur-':' ~ ing process that has the most impact on Lehigh - . . in~terms of the resources used and the schedule it drove:; ,~ The final step was Finishing, which included a vari-5~;J!E ety of treatments. Most products were annealed a final:~ time {Qimprove formability and make the surface more.'~~ durable, and rough turned, or straightened. Other treat,:~ ments included pickling (dipping in acid to clean off'- ' ~

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268

CHAPTER 5

MEASURtNG THE COST OF RESOURCE CAPACITY

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AJrnost80% of metaJlurgists' time was spent 011the niche prod un lines, Conversion involved the processing of non-Lehigh owned material on equipment such as the PFF or the CRM that was not economical for some producers to own. The primary 'product' was the conversion of billet to roller wire for Palmer. Conversion was subtly complex, as the breadth of the end customer's product line translated into multiple rolling speci.fications, and multiple setups, Lehigh's product hierarchy was structured as follows: product lines were broken down into grad~s. \vnich were subdivided into product shapes, and further into skus, which reflected variations in size and finish~ In any on~ year, Lehigh produced over 1OOgrades of steel, 500 individual products, and over 7,000 individu,a!srock-keeping units (skus). Over multiple years, actual production could span over 10,000 skus, See Exhibit 2 for a product line summary.

OIJai Molds,

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Ingot had to be handled and moved manually, Some in. '~ gots were then remelted to meet stringent puriry re, .tJ quiremcnts at either the Vacuum Arc Remelt Furnace or the Electro Slag Remelt Furnace, which cleansed the
steel in sol;d form, ln~ots were then Broken down into bars, The Mesta press hot-worked bars over 12" in di, arncter, a small percentage of overall output. Most in, gots 'Nere roUled to the PFF The PFF was $40 million

WC:C s~ripped and ~t?ft to soak in a storage furnace tol lpallltalll malleabI1lty and prevent damage, MoJdingR~ \./;[S 2. relatively laborious process, as each 250O-pound ...~ . =

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.

Production Operations Specialty steel producers used steel scrap as the primary raw material, and essentially recycled rather than manufactured steel. Production involved six steps, whose complexity varied by product. See Exhibit 3 for a summary of the production process, .' Hauled in w1th magnets and cranes, scrap purchased for $114,20 per ton was pre-processed, or combined . with iron-based compounds to achieve the low compos. ite residUJI (contamin;\nt) levels required by Lehigh's high-grade products. The scrap compound was Melted in'the Electric Arc Furnace, where high-powered (80 megawatts) electrical charges heated the solid metal by zapping it with arcs of electricity emanating from carbon electrodes. Synthesized fluxes containing limes refined the hot metal by binding with phosphorus and other impure elements, which were skimmed off. The steel was further Refined by Argon Oxygen Decarbeurization (AOD), in which oxygen or argon was bubble? through the'molten metal to further burn off impurities. Alloys were then added to achieve the special properties, The Melting and Refini.ng processes constituted chemical reactions between various _~lements which created the desired material. As telTIpera~ ture was an essential factor in generating the appropriate chemical reaction, the:. hot metal processes were carefully monitored and controlled by meta!1urgists to achieve the precise grade. The molten steel was teemed from ladles into octag-

ing, or slow cooling, to prevent shrinking and cracking;; " caused by air cooling. Rolling transformed intermediate billets and bars ~ into finished shapes, A hot rolling mill had a soaking .~ furnace to heat the steel, followed by a series of swnds ': ';
.

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.

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with progressivelynarrower rollers that pressedthehot .)~,

steel into progressively thinner sizes until it achieved its final shape, such as a wire, A mill contained several sets

of stands to roll different shapes; however, only one :> c shape could be ro!led at a time. Unique product shapes ,~ were rolled manuallv on the Hand Mill. 95% of inter- ~.:J mediates were rolled on the CP~M imo one of 4 prod. 'f.~ ucts: rods, flats, cuils and bars. Shape changeovers were.

time-consuming events which dictated continuous 3 shift production, as well as a set production schedule' with dedicated windows rotating within a 4 week cycle.
One out of four weeks was dedicated to the conversion

'

of billet to coil for Palmer. At $50 million, the CRM :. represented a capital investment that could nO{be dupli, cated in less than five years. Labeling it the plant bottle. '

neck, Hall described the CRM as "the one manufactur-..~

.

ing process that has the most impact on Lehigh.

terms of the resources used and the schedule it drove." .

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The finalstep was Finishing, which includeda vari,;; ety of treatments.Most products were annealeda final., time w improveformability and make the surfacemore
durabl~, and roug~ tu.rned, ~r s.trai~htened, Other treat,:~ ments mcluded pICklmg (dlppmg m aCid to clean ou'; scaling) and polishing (grinding to produce a shin)', hufferl fini<;h) Pieces were tested or inspected if cus. tomer requested special tolerances in grade or sha~, Finished product was shipped directly to customers,

;;-

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....

CHAPTER 5

MEASURING

THE

COST OF

RESOURCE

CAP!\UTY

269

r ..

to convert sales into profits. Following its market strategy, Lehigh ;arget~d a high value product mix that would lever profits in strong demand,-and cushion it in dowMurns with greater contributions to . fixed costs per unit volume. CPO Jack Clark suggested a firm-wide product profitability analysis, which would -metallurgy and eni;ineering- was considered enable market managers to rationalize unprofitabie ifcbloodof Lehigh's reputation.Around the indusproducts and focus resources on high valueones. t was rumored that Lehigh had more metaJIurgists Clark reviewed the products' standard costs, which were used for both inventory valuation and decisionon of steel than anyone in the world. General & adstrative included company-wide activities such as making. Product weight (pounds) was the primary unit 1gement,"~finf1ce and research and developme~t ' of measure for standard cost, which included materials, labor, direct manufacturing expense and overhead cost D). R,&D combined raw research in materials scicategories. Standards for materials and direct labor w!th, applied research in production technologies. i. were based on the biB of materials and routings, and in-/.~ cluded"yield factors for scrap and rework. Scrap preCase for Change processing was handled as a materia! burden rather than stry wisdom stated that steel profits were a simple a routing step. Direct manufacturing costs such as tien of prices, costs and volume. However, 1991 maintenance and utilities were allocated to products ~ntedchallenges in aJI three fundamental profit dribased on machine hours. Indirect manufacturing and . Market prices declined sharply to near or below administrative costs were allocated to products based on .uct cost, lowel'-in real terms than 1982 levels. Volpounds produced, since weight was assumed to be the was available at market price, though in the form of primary driver of resource consumption. e specialties and small orders, but virtually disapThe results were not news: the most profitable prod;:d at premium prices. Costs failed to decline with ucts-alloys-were already heavily promotedby mar~or volume: shrinking operating rates drove up unit keting and sales. If these products were truly profitable, S, and broader customer bases and product lines where were profits? , complexity and increased labor resources, paIticL!The Case for ABC In 1992, Clark attended a seminar . in sched!.lling. Profit could not be generated simply on Activity-Based Costing. He realized that Lehigh was Norkingthe tradition levers of price, cost or volume. 'articularly pressing were the simultaneous decline a perfect application for ABC as a discrete manufacturer of thousands of skus that shared the same producfie average order size and shortening of lead times, eh had left volume-driven Lehigh flush with invention processes, ~erving a diverse customer base with a ~sand cost. In an effort to meet these demands and wide range of support needs. They knew that individual linate inventory 'waste', Mark Edwards, Director of customers and products made different demands for reS9urces, and that their standard cost system was likely ~rationsPlanning and MrS, drove the 1991 move to averaging the diverse resource use by products and cus:hronous flow manufacturing. Edwards beli~v~Lltbat tome[s. Resources were heavy on his mind: support reota's lean, pull-based manufacturing concepts were SOIlrCeshild increased through the recession. The numto reducing inventory. cost. and pushed for the:ir bcr of production planners alone had increaseduy 25% ption at tehigh. The new approach appealed to the l~ting manager!;, who could broadt"on th~il <.:u~tulllel to handlt-. the increased scheduling complexity of the extra business. ~ by offering smaller ordns. However, under the upport

activities were also critical to production.

emphasize

Itenance, depreciatiol1 and utilities were basic costs ired to run the plant, 3nd compri~ed 21% of revs. Production support activities such as material !iing/set~p, production planning and order process:bbed ar.d flowed with order volume. Technical sup-

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technology,it proved difficult to eliminate the

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IS in $etup3 and chahg~ovtas uitical

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throughput, and productionstaff observed a

maticdecline in efficiency. [n late 1992. Lehigh was reprieved somewhat by a w but steady market recovery. Facing an increase in nand, Lehigh now bHd to choose which products to

Believing that ABS'_presented an opportunity to understand the drivers of protitablllty, Clark hired Bob Hall from Armco Steel. A steel industry accountant, with undergraduateand MBA degrees in Accounting& Finance, Hall had spent a year developing an activitybased product costing application at Armco. As M::,nager for Operations Accounting, Hall was assigned to

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