266 cHapTeR 5 Managers of Primary Operations, Finishing Operations, and Marketing and Technology; Vice President of Sales; Director of Operations Planning and MIS; and CFO. Marketing managers assumed product line responsibili- ties that crossed functional boundaries. They developed marketing strategies, determined product offerings, es- tablished minimum order quantities, selected orders and set price, all with the goal of building volume at strong Prices. Their performance was measured by product contribution margin calculated using standard costs: revenue less materials, direct labor, and direct manufac- turing costs such as utilities and maintenance; other overhead was considered beyond their control, Mant facturing staff executed the orders brought in by the marketing managers, and were measured on variances from standard cost for the output mix produced. Their Boal was to deliver quality product within the specified lead time at the lowest cost. Industry Structure Specialty steel comprised roughly 10% of the total US steel industry, and like ‘other high-tech, specialty industries, offered growth and profit opportunities to firms who targeted specific appli- cations and developed unique technical competencies. Specialty steel was characterized by variations in the metallic composition and manufactusing processing which enhanced the properties of basic carbon steel For example, adding nickel and chromium to carbon steel created ‘stainless’ steel, which resisted corrosion. Tungsten and molybdenum combined to strengthen, harden and temper carbon steel for cutting applications. Several industry segments evolved reflecting basic metallic combinations, which required different equip- ‘ment and knowledge bases for manufacture. Steel products were defined by several attributes which determined the product application and defined quality. Grade described the metallic (chemical) compo- sition of the steel, or the elements added to the basic recipe of iron and carbon to cteate the desired proper- (ies. Product described the shape of the product, includ- ing semi-finished shapes, such as blooms, billets and bbars; and finished shapes, such as wires and coils, Sur- face finish described the smoothness and polish that could be applied to the materiat’s surface to enhance presentation. Size described the latitudinal and longitu- dinal dimensions of the product. Structural quality de- scribed the absence of breaks in the inner metallic strue- ‘tre, Surface quality described the absence of cracks or seams on the surface, Because specific applications MEASURING THE COST OF RESOURCE CAPACITY called for specific attributes, many products were cus- ‘omized along one or more attributes for the customer, However, of all attributes, customers valued most the grade, which determined primary product performance. Producers typically focused on a selected portfolio of product shapes within a single segment, carving niches out of the broad, industry. ‘The focus strategy helped to protect volume and capital investments. The industry was capital intense in several areas. First, ca- Pacity additions were ‘lumpy’ and expensive, with equipment scaled in 100,000 tons of annual production, costing $10-$100. million, and requiring 18-24 ‘months to install. Second, the cost structure was signifi- cantly changed only by new technologies, such as Lehigh’s Precision Forging Facility (PFF), which were expensive, risky, generational ventures. Finally, knowl- edge work performed by metallurgists and other techni- cal specialists was a significant postion of the cost structure. Hall summarized the ‘focus’ strategy: “You choose to make product which you can make better than the competition.” Economics and focus’ also divided producers into manufacturers, who melted, refined, molded and rolled steel into basic shapes: and finisher/distributors, who broke semi-finished steel ordezs and shapes down to spe- cific products for metalworking shops and original equipment manufacturers (OEMs). Manufacturers and distributors worked closely together, often as separate di- Visions within a firm, The manufacturing process. fo- cused largely on the materials science, in which metal- lurgists supervised the careful blending of alloy additives with carbon steel to create the precise properties required in a product application, Formerly mere warehousing, distribution had assumed the industry marketing role, ‘creating product Fines across material segments and shapes, enabling a firm to serve a diverse metalworking market while maintaining focused manufacturing processes. Both manufacturers and distributors provided technical services for everything from material composi- tion to design to installation of the finished product. Industry Conduct and Performance Maintaining high standards of product quality while keeping costs competitive were essential to compete in the specialty stee! industry. Quality differences among manufactur- fers meant that products were not perfectly substi- futable. Considerable value differentiation across pro- ducers within product classes had actually been confirmed and quantified by the Intemational Trade‘CHAPTER 5 ‘Commission during trade case investigations. Intended to protect suppliers, differentiation also benefited buy- ers, who enjoyed a range of choices within a product category, and could pay for the precise level of quality required. Technical services also differentiated sup, ers while benefiting buyers, and were becoming in- creasingly important. Over time, customers had become sophisticated about the value of the product, and the price they would pay for it, Not a commodity like carbon steel, which was sold primarily on a price and delivery basis, specialty steel ‘was nonetheless highly price competitive. Producers were small, fragmented price takers in a market domi- nated by powerful, sophisticated customers. Market share could be bought or sold by pricing slightly below or above market price. Niches provided some protection for producers. Reputation for exceptional quality and (echnical services. also earned producers some price premium. However, when cost and price were notice- ably out of alignment, manufacturers exited, pricing themselves quietly out of non-profitable products, sourcing those critical to their produet line from other firms. Cost, therefore, was a significant competitive ‘weapon in determining share and profits. ‘To manage utilization rates and unit costs, producers sought volume and long production runs. When demand ‘was strong, producers could select high volume orders which allowed continuous operation at high-setup time workstations. In low demand, firms chased low-volume niche business to fill plants, rationalizing the poor mar- gins as volume that would contribute against fixed-cost while adding little variable cost, Unfortunately, this business required short production runs if Lehigh were to avoid inventory buildup of customized products. Steel performance trended with the economy. Indus- try profitability fuctuated widely, ranging from —16.7% 10 5.0% in the late 1980s. Industry capacity utilization peaked in 1988 at 89.2%, plummeted 10 74.1% in 1991, and recovered partially to 82.2% in 1992. Markets and Products Customers ranged from large forge shops to original equipment manufacturers (OEMs), from distributors to tiny metalworkers, many of whom added further value by cutting down the prod- uct or the order size, Lehigh classified its customers into 33 market segments whose requirements for grade specificity, technical support and shipping varied. See Exhibit | for a market summary. During the recession, Lehigh pursued marginal busi- MEASURING THE COST OF RESOURCE CAPACITY 267 ‘ess to fill the plant, attracting many new customers in 1991-2. Under standard costing this business looked potentially profitable. However, specialized products re~ quired specialized processing and were ordered in smaller quantities. The average order size declined from 1600 pounds in 1988 to less than 1200 pounds in 1991 Accordingly, Lehigh’s sales distribution broadened: customer sales ranged from $5.9 million for 2.7 million pounds of steel, to $84 for 8 pounds, with the average customer buying 36,635 pounds of stee! for $63,407 Only 18 customers spent more than $1.0 million, and only 130 spent more than $100,000; over 420 customers spent less than $1,000. Lehigh had 7 product lines— Alloy, Bearing, Con- version, Corrosion, Die Steel, High Speed and High ‘Temp-~of which three—Alloy, Die Steel and High Speed—comprised 70% of sales. Die Steel was steel hardened and strengthened for use in machine dies and molds. The Die Steel market was broad, ranging from ingots to semi-finished and finished parts, and market participants felt the need to offer a full product line to maintain share, High Speed produets scrved endurance applications, such as metal cutting and punching, and were narrower in focus. Production of High Speed and Die Steel products was relatively simple, requiring little technical or process support. By contrast, Alloy prod- ucts were complex. ‘Their applications in aerospace frames, landing gears, missile cases and fasteners re- quired steel precisely graded by metallurgists within tighter-than-standard ranges, super-cleaned by a double melt, and precisely rolled to narrow tolerances. By virtue of its superior product performance, Lehigh was able to command a small price premium for its alloys. Lehigh also carried niche product lines—Bearing, Corrosion and High Temp—whose volume fluctuated with market conditions. Bearing steels were designed for a broad range of aircraft bearings and similar highly stressed parts whose grade precision required a triple melt, Corrosion-resistant steels were designed to oper- ate in challenging environments in markets such as oil and gas exploration and medical implants. High Tem- perature steels were designed to withstand sustained ex- posure to temperatures from 800F to 1300F, such as in Jet engines. These product lines were highly complex, requiring significantly higher levels of support from metallurgy, for making very clean steel, and process en- gineering, for testing and certification. For example, steel for artificial limbs had to pass stringent require- ‘ments for purity, for which each part had to be certified.268 cHarter 5 Almost 80% of metallurgists’ time was spent on the niche product 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 com- plex, as the breadth of the end customer's product line translated into multiple rolling specifications, and mul- tiple setups. Lehigh’s product hierarchy was structured as fol- Tows: product lines were broken down into grades, which were subdivided into product shapes, and further into skus, which reflected variations in size and finish. In any one year, Lehigh produced over 100 grades of steel, 500 individual products, and over 7,000 individ- ual stock-keeping units (skus). Over multiple years, tual production could span over 10,000 skus. See Ex- hibit 2 for a product line summary. Production Operations Specialty steel producers used steel scrap as the primary raw material, and essen- tially recycled rather than manufactured steel, Produc- tion 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 per ton was pre-processed, or combined ‘with iron-based compounds to achieve the Low compos: ite residual (contaminant) 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 ares of electricity emanating from cat- bon electrodes. Synthesized fluxes containing limes re- fined the hot metal by binding with phosphorus and ‘other impure elements, which were skimmed off. ‘The steel was further Refined by Argon Oxygen De- carbeurization (AOD), in which oxygen or argon was bubbled through the moltcn metal to further bum off impurities. Alloys were then added to achieve the spe- cial properties. The Melting and Refining processes. constituted chemical reactions between various ele- ments which created the desired material. As temper: ture was an essential factor in generating the appropri- ‘ate chemical reaction, the hot metal processes were carefully monitored and controlled by metallurgists to achieve the precise grade. ‘The molten steel was teemed from I les into octag- [MEASURING THE COST OF RESOURCE CAPACITY onal Molds, forming ingots. Once solidified, ingots were stripped and left to soak in a storage furnace 10 ‘maintain malleability and prevent damage. Molding was a relatively laborious process, as each 2500-pound ingot had to be handled and moved manually. Some in- gots were then remelted to meet stringent purity re- quirements at either the Vacuum Arc Remell Furnace or the Electro Slag Remelt Furnace, which cleansed the steel in solid form. Ingots were then Broken down into semi-finished (rectangular) shapes such as billets and bars. The Mesta press hot-worked bars over 12" iu di- ameter, a small percentage of overall output. Most {ots were routed to the PFF. The PFF was $40 million of relatively new technology in which an ingot was heated and forged by 4 hammers programmed to pro- duce intermediate billets or bars. Afier being worked, the solid steel underwent a thermal treat called anneal- ing, of 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, fotlowed by a series of stands with progressively narrower rollers that pressed the hot steel into progressively thinner sizes unti it achieved its final shape, such as a wire, A mill contained several sets of stands to roll different shapes; however, only one shape could be rolied at a time. Unique product shapes were rolled manually on the Hand Miill,-95% of inter- mediates were rolled on the CRM into one of 4 prod- ucts: rods, flats, coils 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 ovt of four weeks was dedicated to the conversion of billet to coit for Palmer. At $50 million, the CRM represented a capital investment that could not 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 . . . in terms of the resources used and the schedule it drove.” The final step was Finishing, which included a vari- ely of treatments, Most products were annealed a final time to improve formability and make the surface more durable, and rough turned, or straightened. Other treat- ments included pickling (dipping in acid to clean off sealing) and polishing (grinding to produce a shiny, buffed finish). Pieces were tested or inspected if cus- tomer requested special tolerances in grade or shape, Finished product was shipped directly to customers.CHAPTER 5 Support activities were also critical to production. Maintenance, depreciation and utilities were basic costs required to run the plant, and comprised 21% of rev- enues. Production support activities such as material handling/setup, production planning and order process- ing ebbed and flowed with order volume. Technical sup- port—metallurgy and engineering—was considered the lifeblood of Lehigh’s reputation. Around the indus- ty it was rumored that Lehigh had more metallurgists per ton of steel than anyone in the world. General & ad- ‘ministrative included company-wide activities such as ‘management, finance and research and development (RAD). R&D combined raw research in materials sci- ‘ence with applied research in production technologies. The Case for Change Industry wisdom stated that stcel profits were a simple function of prices, costs and volume. However, 1991 presented challenges in all three fundamental profit dri- vers. Market prices declined sharply to near or below product cost, lower in real terms than 1982 levels. Vol- ume was available at market price, though in the form of niche specialties and small orders, but virtually disap- peared at premium prices. Costs failed to decline with price or volume: shrinking operating rates drove up unit costs, and broader customer bases and product lines bred complexity and increased labor resources, particu- larly in scheduling. Profit could nat be generated simply bby working the tradition levers of price, cost or volume, Particularly pressing were the simultaneous decline of the average order size and shortening of lead times, which had left volume-driven Lehigh flush with inven- tories and cost. In an effort to meet these demands and eliminate inventory ‘waste’, Mark Edwards, Director of Operations Planning and MIS, drove the 1991 move to synchronous flow manufacturing. Edwards believed that ‘Toyota's Jean, pull-based manufacturing concepts were kkey to reducing inventory cost, and pushed for their adoption at Lehigh. The new approach appealed to the marketing managers, who could broaden theie customer bbase by offering smaller orders. However, under the ‘current technology, it proved difficult to eliminate the steps in setups and changeovers critical to efficient small ofder throughput, and production staff observed a ‘dramatic decline in efficiency. In late 1992, Lehigh was reprieved somewhat by slow but steady market recovery. Facing an increase in demand, Lehigh now had to choose which products to MEASURING THE COST OF RESOURCE CAPACITY 269 emphasize to convert sales into profits. Following its market strategy, Lehigh targeted a high value product, mix that would lever profits in strong demand, and cushion it in downturns with greater contributions to fixed costs per unit volume. CFO Jack Clark suggested 4 firm-wide product profitability analysis, which would enable market managers to rationalize unprofitable products and focus resources on high value ones. Clark reviewed the products’ standard costs, which were used for both inventory valuation and decision- ‘making. Product weight (pounds) was the primary unit of measure for standard cost, which included materials, labor, direct manufacturing expense and overhead cost categories. Standards for materials and direct labor ‘were based on the bill of materials and routings, and in- cluded yield factors for scrap and rework, Scrap pre- processing was handled as a material burden rather than, a routing step. Direct manufacturing costs such as ‘maintenance and utilities were allocated to products, ‘based on machine hours. Indirect manufacturing and administrative costs were allocated to products based on pounds produced, since weight was assumed to be the Primary driver of resource consumption. The results were not news: the most profitable pron ‘ucts —alloys—were already heavily promoted by mar- keting and sales. If these products were truly profitable, where were profits? The Case for ABC. In 1992, Clark attended a seminar ‘on Activity-Based Costing. He realized that Lehigh was a perfect application for ABC as a discrete manufac- turer of thousands of skus that shared the same produc- on processes, serving a diverse customer base with a wide range of support needs. They knew that individual ‘customers and products made different demands for re- sources, and that their standard cost system was likely averaging the diverse resource use by products and cus- tomers. Resources were heavy on his mind; support re- sources had increased through the recession. The num- bber of production planners alone had increased by 25% to handle the increased scheduling complexity of the extra business, Believing that ABC presented an opportunity to un- derstand the drivers of profitability, Clark hired Bob Hall from Armco Steel. A steel industry accountant, with undergraduate and MBA degrees in Accounting & Finance, Hall had spent a year developing an activity- based product costing application at Armco. As Man- ager for Operations Accounting, Hall was assigned to270 CHAPTER 5 implement ABC at Lehigh, with the goal of arriving at a clearer sense of the product and customer channels that ‘were profitable to the company. Hall investigated the issue by performing a regres- sion analysis between the various product mixes and overall company profitability over time. The results ‘were curious: company profitability was highly corre- lated with high volumes of High Speed and Die Steel sales. Under standard costing, the marketing managers hhad only tolerated these products, since they con- tributed against fixed costs, but believed that the real generators of profits were Alloys. Familiar with the the- ‘ory of ABC as weil as the specialty steel business, Hall agreed with Clark that standard costing was probably averaging uneven resource consumption across prod- ucts, and that resources thought 10 be benefiting the whole business were in fact only benefiting 2 subset. The full ABC analysis would highlight the resource consumption of individual products. ‘The ABC model encompassed all customers, prod- ucts and operations. Hall followed the two stage methodology of assigning general ledger account bal- ances (‘resource casts’) to activities, using the resource river ‘percentage of time or effort expended’, and allo- ccating activities to products and customers using cost rivers appropriate to that activity. The activity pools and cost drivers reflected a 4 level ABC: cost hierarchy of unit, batch, product and facility costs. The model in- cluded 50 business processes and 270 activities, Activ- ‘ty pools ranged from $5,017 for secretarial support to $1,096,952 for direct sales, with most covering $50,000 to $200,000. ‘As with standard costing, material costs were based on the bill of materials structure (i.e, 14" ingot to 4 5/16” billet to 0.71” rod product), and included a burden rate for material pre-processing, as well as a serap yield fac- tor. Labor costs were based on the routing and standard labor rates, and included a rework yield factor. Overhead activities were driven to products using cost drivers that defined the causal relationship between the product and the activity, such as number of orders, machine hours, or ‘number of skus per product (a measure of product com- plexity). For activities that were environmentally re- quired, such as administrative activities, costs were allo- cated by the generic driver, ‘pounds produced’. The results were as. Hall expected, and he was pleased with the study. However, responses by the rest Of the organization were understandably mixed. Antici- ating small changes in profits, managers were not pre- MEASURING THE COST OF RESOURCE CAPACITY pared for the magnitude of the shift. Hall argued that the ABC model was comecting distortions created by standard costing, and that the ABC data was a true re~ flection of resource consumption, To facilitate accep- tance, the project team refined some allocations to more accurately reflect the consumption of certain activities and resources, The refinements did not substantively change the results. ‘Support for the ABC model began to grow. In partic- ular, production operations staff felt that the model con- firmed some of their intuitions about profitable and un- profitable products, which were based on how smoothly ‘material flowed through the plant. Certainly, it was felt that ABC was an improvement over standard costing. However, some results remained counter-intuitive. For example, high temps showed a similar ABC profitabil- ity to high speeds, even though high speeds could be processed across the CRM at a rate 6 times faster. ‘Surely product profitability should reflect such vast dif- ferences in resource consumption ‘The Case for TOC Fdwards thought he understood why the ABC profit figures did not make sense, He had thoroughly researched recent manufacturing theories in his effort to reduce order planning and inventory costs, and had hecome a convert to lean manufacturing. He had read all of Eli Goldratt’s books on synchronous ‘manufacturing, summarized as the Theory of Con straints (TOC), TOC advocated proactive management of the constraint in a business system, and vilified ab- sorption accounting as the driver of unprofitable deci- sion-making. It was intriguing that a theory of produc- tion and operations management incorporated a theory ‘of management accounting. Perhaps the key to the profit puzzle would he found in TOC. Edwards reread his notes on the principles of TOC accounting, which proposed a simple operational mea- sure to guide an organization toward the goal of making money. Throughput was defined as the quantity of money which the (business) system generated through sales over a specified period of time. Generalized as sales less direct variable cost, it was most commonly calculated as sales less material cost, and was roughly comparable to contribution margin. Profit for the system was increased by maximizing throughput per unit of the constrained resource. Interestingly, product costs played no part in TOC accounting. In fact, TOC proponents ar- gued thet produet costing of any kind led to suboptimal decision-making because it ignored the constraint ofCHAPTER § time in a process. Edwards focused on a phrase he had ‘underlined several times that contradicted every thing he had ever been taught about cost accounting: ‘Throughput is not measured in terms of units produced, ‘but in gross profit realized from units produced that are sold. Emphasis is placed on getting products through the ‘manufacturing process and sold in the least time possible Edwards often walked through the plant as he rumi- nated. The ABC figures were not the only seemingly contradictory results at that time. Despite a decrease in demand during the recession, Lehigh's lead times had not decreased comparably. Excess material could easily be found on the shop floor despite the reduced process, bbatches, which were supposed 10 facilitate the rapio flow of material through the plant, and the reduction of inventories. Had the reality of Lehigh’s synchronous manufacturing fallen short of the vision? Or was the tra- ditional accounting system contradicting the concepts of synchronous flow, impeding its full implementation and the realization of results? He decided (o investigate one batch of steel as it traveled through the plant, He paused with his batch at rolling, where it would wait several days for its scheduled run, and reviewed what he had seen, He observed that some WIP piles were larger than others, and his batch had waited longer at some work- stations than at others. He considered the possibility of ‘@ constraint in the process, TOC advocated that man- agement attention be focused exclusively on the con- straint, which acted as the drum that set the pace for the entire operation. ‘The capacity of the constraint deter- mined the capacity of the entire system. To increase throughput through the constraint was to increase throughput for the entire system, Alternatively, to ig- nore the constraint was (0 lose control of the process. He also noted that products had moved at vastly differ- ‘ent rates across workstations. Thinking of throughput, MEASURING THE COST OF RESOURCE CAPACITY 271 he imagined the ‘faster’ products flowing. smoothly through the plant, out the door to customer. Other products seemed to crawi through the plant, requiring slower machine speeds, and routing promptly to inven- tory. He began to visualize the slowpokes at the bottle- neck, tying up that critical resource, constraining throughput and profits, Time was the only resource that mattered in TOC, but time was not typically a factor used in Lehigh’s decision-making. ‘The key to profitability was to send only the most Profitable products through the constraint. Operations staff would unequivocally identify the CRM as the con- straint in the plant. Edwards abandoned his production batch and returned to his desk to calculate Throughput for Lehigh's products. The results were almost as shock- ing as the ABC results, though for different reasons. Accounting for Change Edwards called Clark before the next Quarterly Financial Review, eager to share his results. Concerned by the contradictions between the three accounting theories—standard costing, ABC and TOC—Clark asked Hall and Edwards to present their theories in the meeting. The managers would agree on one and use it to target products. To simplify the ac- counting for the other managers, Hall and Edwards agreed fo model five products that were representative of the major product lines. Exhibit 4 contains product data for the sampte products. Exhibit 5 contains their standard costs used in the initial analysis. Exhibit 6 con~ tains activity cost pools prior to Stage 2 cost allocation, ‘The managers were equally confused by the differ- cent results. Surely calculating profits was a straightfor- ward exercise. They preferred to focus on the decision at hand: which products to rationalize. Following either set of recommendations would likely have sig- nificant impact on Lehigh’s product portfolio, not (0 profits272 CHAPTER 5 MEASURING THE COST OF RESOURCE CAPACITY EXHIBIT 1 Lehigh Market Summary No.of 1992 Sales 2 Sates Market Segment —¢,.3 ibe) 8) Auto Die 2 9,394 $30,595 Bar 16 986,806 $1,631,655 Boating a 130,714 $800,308 Billet 2 1,598,041 $556,615 Col 7 981.341 $2,044,596 Cold Head 25 332,631 $876,704 Core Pin 7 1,044,121 $2,688,490 Die Cast 13 1,026,689 $1,487,216 Distributor 154 10,593,749 $16,585,553 Extrusion 28 5.067.407 $5,042,492 Fastener 10 148,345 $2,269.67 Forge Billet 9 396,945 $905,515 Forge Die 6 323,131 $357,229 Forge Shop 34 7,416,347 $10,716,024 Gauge 3 10.274 © $34,687 Ingot / Electrode 2 251,897 $56,269 intercompany 1 431,672 $483,369 Kite 8 2,637,048 $2,893,755 Label Die " 108.665 $153,091 Large OEM 92 7,578,987 $18,995,673, Mandre! Bar 19 19,452 $263,644 New eat 6.373.803 $12,611,225 Other 5 16922 $39,651 Plastic Mold 6 51,906 $105,433 Punch 23 952,428 $1,967,775 Rock Bit 1 36,192 $33,784 Roll Form, 8 291,028 $406,876 Special Machinery " 3,725 $149,988 Spring 3 36038 $118,992 Thread 3 614.882 $1,681,541 ‘Wheel Mold 1 6.074 $8,204 Wire 1 5074 $10,758 ZaMill 3 332,021 $619,269 Total 1373 50,298,420 $87,057,521CHAPTER 5 MEASURING THE. COST OF RESOURCE CAPACITY 273 EXHIBIT 2. Lehigh Product Summary No.of No.of 1902Sale0 1992 Sales Productline = Grades Products (Ibe) {5} Alloy a 153 14,836,227 $17,494,283 Bearing 7 24 328.816 $1,541,070 ‘Conversion 16 16 5,516,107 $6,878,068 Corrosion 4 20 762.448 $1,327,111 Die Stee! 49 156 22,336,768 $29,046,569 High Speed 24 97 9,375,129 $26,298,139 High Temp. 3 16 142,925 $4,472,281 Total 124 482___50,209.420_ $87,057,521 Process Flow Melt = [+] Refine =| Bena LK Roll Finish Workstations Blectrc Are Argon Oxygen Ingot Mote Continuous Reing ——_Anneaer Pomace ocarbuetiaer vail (2) too, Frecision orging Bar Stesightener Pacty (PP Mand Mat Vacintn Are a Tuner Remelt Meat Peas ‘Testing ico Sag Remelt Inspection Vacuum Induction Furnace EXHIBIT 3 _ Lehigh Production Processes274 CHAPTER 5 MEASURING THE cost OF RESOURCE CAPACITY EXHIBIT 4 Sample Product Data Alloy: . Round __FoterWire “ite, Round Bar Martane Colt Production (Ibs) 478.678 2.081543 2413209 697.682 2,530,552 Number of skus, an 473, 418 172 102 Number of orders 957 4,163, 3.218 3.349 1.012 Bill of Materials (bs /b of output) Steel scrap 1.00 0.00 1.00 1.00 1.00 Alloys 0.01 0.00 0.01 0.01 001 (@$49.28/) (@ $6291) (@ 5152976) (@$15229/) Machine Time (min /1b; crew = 1) Melting (Etectric Arc Fumace) 0.20 0.00 0.09 0.09 0.09 Refining (VOD) 0.21 0.00 0.10 0.10 0.10 Molding / Breakdown (ingot / PFF) on 0.00 0.07 0.08 0.07 Rolling (CRM) 0.10 0.15 0.33 0.09 0.03 Finishing (multiple) 0.08 0.02 0.07 0.08 0.05 Total time 0.69 0.17 0.65 04g 0.34CHAPTER 5 MEASURING THE COST OF RESOURCE CAPACITY 275 EXHIBIT 5 Standard Cost Results Alloy: Die Steel: Conversion: Die Steel: High Speed: Standard Coat(S 1b) Gonettion “oner wire CRIPP®F Round Bar Machine Coll Price $2.31 $0.7 $1.02 $0.93 $2.33 Materials $0.54 $0.00 $0.12 $0.21 $1.58 Direct labor $020 $0.07 $0.28 $0.18 $0.14 Direct manufacturing expense $0.24 $0.06 $0.23 $0.16 $0.12 Contribution margin $1.24 $0.64 $0.39 $0.38 $0.49 ‘Contribution margin (%) 53.7% 83.1% 38.2% 40.9% 21.0% Tota contribution $583,562 $1,392,188 $941,187 $2,545,119 $1,230,970 Manufacturing & administrative $0.64 $0.66 $0.64 $0.64 $0.64 overhead Operating profit $0.60 $0.00 ($0.25) (80.26) ($0.15) ‘Operating profit (%) 26.0% 0.0% (24.5% 28.0% 64% Total operati $267,207 $0_ ($603,325) ($1 ($379,583)276 CHAPTER 5 MEASURING THE COST OF RESOURCE CAPACITY EXHIBIT 6 Lehigh Activity Cost Pools Activity Driver Veet Amount oer Metting: Depreciation melt machine minutes 5,145,632 $2,139,865 Melting: Maintenance melt machine minutes: 5.145.632 $975,130 Mating: Utilities melt machine minutes 5,145,632 $2,036,477 Refining: Depreciation refine machine minutes 5,691,042 $1,711,802 Refining: Maintenance ‘refine machine minutes 5,691,042 $780,104 Refining: Utilties fefine machine minutes 5,691,042 $1,745,551 Molding: Depreciation mold machine minutes 4226.965 $427,973 Malding: Maintenance mold machine minutes (4,226,965 $390,052 Molding: Utilities Mold machine minutes 4,226,965 $290,925 Rolling: Depreciation roll machine minutes 8,258,382 $2,995,811 Rolling: Maintenance roll machine minutes 8,258,382 $975,130 Rolling: Utilities roll machine minutes 8,258,382 $872,7/6 Finishing: Depreciation finish machine minutes 4,057,311 $1,283,919 Finishing: Maintenance finish machine minutes 4,057,311 $780,104 Finishing: Utilities finish machine minutes 4,057,311 $872,776 Generel & Administrative pounds 50,299,420 $5,400,955 Material Handling & Setup* orders 57,147 $4,936,068 ‘Order Processing orders ‘57,147 $3,953.709 Production Planning orders 87,147 $3,339,500 Technical Support skus 6642 $5,768,579 x Total “Material Handling & Setup includes Depreciation for setup hours