Armco, Inc.: Midwestern Steel Division Case Study

Case Study #1 – Armco, Inc.: Midwestern Steel Division

This case study is about the Kansas City Works of Armco’s Midwestern Steel Division.  At the time of the case, mid 1991, the company had experienced a severe decline in business for the past decade as the steel business had been in a slump.  As a result, the company determined that a new performance evaluation was necessary in order to determine if everything was being run as efficiently as possible in order to increase profits and cut back on losses.  

The two main products coming out of this particular manufacturer were grinding balls and carbon wire rods.  The balls were more a specialized item used mostly by mining operations and thus were not as abundant in numbers.  However, Armco’s balls were considered the best in terms of durability and performance by customers and so were in high demand in the industries in which they were used.  The quality of the rods came in at about average but are used in a multitude of areas so they generated the production numbers that the balls did not to help cover fixed costs.

As for the manufacturing process, the two products followed essentially the same procedure: melt scrap steel, pour into caster to create solid 7”x7”x30’ bars, mill press the bars to be square (rods) or circular (balls) with 3” or 4”cross-sections, press the bars into final shape.  There were three aspects of the process that had the potential to either delay production or increase cost.  The first and major one was the melt shop, which acted as a bottleneck in the lack of perfect performance, accounted for 40% of the cost of the process, and determined the quality of the steel.  Another was the Rolling and Finishing areas since the rolling operations required a lot of capital and the finishing areas were high in yield losses in addition to normal costs due to possible failed testing of products.  The last was maintenance, which was critical to keeping the plant operational but comprised 40% of the hourly workers.

The previous performance management system was well liked by the operating managers.  It focused on cost control and safety, featuring “Cost Above”, which told each production stage the cost added per ton of steel.  The main report was the Operating Statistics Report, which provided information such as objectives, variances, Cost Above, cost per net ton, and which used allocations such as what was used for financial reporting.  The report was designed for accountants and tried to be adapted for operations personnel as well, but as Bob Nenni stated, ‘One system can’t do all these things well.’  The report came out on the 15th of the following month, which was occasionally too late to see a negative trend and reduce costs.

In January of 1991, the director of finance, Bob Nenni, was permitted to implement the new performance measurement system that he had been working on since 1989.  The two major improvements that this system should provide were: a design that allowed managers to focus on a more high-level view of their own key objectives and how it affected the plant; the inclusion of only costs controllable by each manager, which allowed for the evaluation of managers based on a balanced set of performance measures rather than subjective measures.  The new system defined ten key performance measures then determined the components of each that could be used to aid each manager at a lower level.  It also removed the Cost Above aspect of the reports.

After implementation, there was a lot of kickback from the operations managers.  They had just recently become accustomed to the previous reports and had based their operations around the Cost Above measures.  They were also missing the increased detail provided by the previous system.  The accounting department made some changes to include some of the numbers to match the targets that were made using the old reporting style to for the remainder of 1991 but stressed that starting the following year only the new system would be used.  

Nenni was sure that despite the disgruntlement of the managers, the new system would be a success.  There were two major issues remaining with the system, however, at the time of this case: how are managers’ performances evaluated in uncontrollable situations that affect production and what proportion of compensation is based on performance evalution.

1. What factors most determine the success or failure of the Midwestern Steel Division?  In particular, how important is cost control?

There were three critical success factors detailed in this case study – the melt shop, the Rolling and Finishing area, and maintenance.  For each of these factors, cost control is a major concern.

The melt shop acts as a bottleneck since it is the first step in the manufacturing process and no other processes can operate until the melting shop completes its tasks and provides the materials needed.  This is why heats per week is a critical performance evaluation factor.  But speed cannot be obtained at the detriment of quality or work since the quality of the raw steel determines the quality of the finished product.  The cost control element of the melt shop processes is in the fact that it is responsible for almost 40% of the total steel conversion costs, with energy accounting for 10% of this.  The case study mentions introducing computer controls to utilize efficient energy usage but managers were still making most decisions at the time.  They had also invested in a new furnace that changed the technology used and was reducing costs as the managers grew accustomed to it.  The costs would have already been cut if computer technology had been used.