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The Goal: A Process of Ongoing Improvement Paperback – July, 2004
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"Like Mrs. Fields and her cookies, The Goal was too tasty to remain obscure. Companies began buying big batches and management schools included it in their curriculums." --Fortune Magazine
"This theory provided a persuasive solution for factories struggling with production delays and low revenues." --Harvard Business Review --This text refers to an alternate Paperback edition.
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TOC postulates that for an organization to have an ongoing process of improvement, it needs to answer three fundamental questions:
1. What to change?
2. To what to change?
3. How to cause the change?
The goal is to make (more) money, which is done by the following:
1. Increase Throughput
2. Reduce Inventory
3. Reduce Operating Expense
Goldratt defines throughput (T) as the rate at which the system generates money through sales. He also defines inventory (I) as everything the system invests in that it intends to sell. Operating expense (OE) is defined as all the money the system spends in order to convert inventory into throughput.
The author does an excellent job explaining his concepts, especially how to work with constraints and bottlenecks (processes in a chain of processes, such that their limited capacity reduces the capacity of the whole chain). He makes the reader empathize with Alex Rogo and his family and team. Don't be surprised if you find yourself cheering for Alex to succeed.
The importance and benefits of focusing on the activities that are constraints are clearly described with several examples in "The Goal". One example from the book is the one in which Alex takes his son and a group of Boy Scouts out on a hiking expedition. Here Alex faces a constraint in the form of the slowest boy, Herbie. Alex gets to apply two of the principles Jonah talked to him about - "dependent events" (events in which the output of one event influences the input to another event) and "statistical fluctuations" (common cause variations in output quantity or quality). He realizes that in a chain of dependent processes, statistical fluctuations can occur at any step. These result in time lags between the processes that accumulate and grow in size further down the chain. This leads to the performance of the system becoming worse than the average capacity of the constraint.
It is interesting to note that TOC practitioners often refer to TOC concepts in terms of references from this book. For example, a constraint is often called a Herbie.
The Goldratt Institute (goldratt dot com) has illustrated TOC Analysis in the form of five steps used as a foundation upon which solutions are built:
1. Identify the constraint
2. Decide how to exploit the constraint
3. Subordinate and synchronize everything else to the above decisions
4. Elevate the performance of the constraint
5. If, in any of the above steps the constraint has shifted, go back to Step 1
Although this book is excellent in the context of Operations, the "Goal" to "make (more) money by..." is limited in its focus. It is concerned with the cost centers internal to a business. Business performance in today's increasingly competitive market depends on a variety of factors that exist outside the business. These include competitors, external opportunities, customers and the non-customers. Executives need to focus on these in order to see the bigger picture.
This book is necessary reading at the best MBA programs. In addition to being a review, this write-up was intended to serve as a summary of the core concepts of this book and TOC. If you are reading this as part of your coursework, please feel free to share the link with your fellow students.
Key points in the book include the principle of finding and then focusing on the one true goal and not getting caught up on a lot of side issues that others (even others in management) might think are the goal. This requires learning how to stop and really look at the problem. It then requires new ways to look for and try potential solutions. This includes ask penetrating questions of yourself and others who may provide key information and insights. And it requires really listening to what the affected people have to say about different aspects of achieving the goal.
An important point that is made is that every individual within the organization has part of the knowledge needed to reach the goal, and that we need to create a genuine environment where we not only encourage their participation but we also teach everyone how to ask the right questions so they can see for themselves what needs to be done to achieve the goal.
Incidentally, the partnership of communication that ultimately develops between the lead character and his employees and superiors overflows into his relationship with his spouse and naturally changes their relationship as well. There is much to be learned from this book, and I can see why it has been such a huge success for so many years.
His schtick is that one can achieve great gains by identifying the bottlenecks ('constraints') that are blocking improved performance toward your goal, and then doing anything necessary to unblock those constraints - even if this means inefficiently using other non-bottleneck resources.
He says that one should think of the cost of each resource as including its effect on the whole system. So if a machine costs $1K/month to operate, but its rate of production is preventing the business from accepting or fulfilling extra orders that would represent $10K/month in profits, then the true cost of the machine is $11K.
It follows that anything one can do to remove that bottleneck would be worthwhile, provided it adds less than the amount saved to the cost and doesn't introduce a new bottleneck. It's fine if you have to overpay for other resources or use them inefficiently as long as you accomplish this.
It then becomes a matter of analyzing and brainstorming all the ways that bottleneck can be reduced. For instance:
- Can extra capacity be added, even if it is less efficient or uses antiquated equipment or is outsourced to a vendor?
- Can you prioritize the use of the bottlenecked resource so that high-profit and time-sensitive work comes first?
- Can you divert work that doesn't need to go through the bottleneck, even if it would then go through another more cumbersome process?
- Can you prevent work from reaching the bottleneck if Quality Control will eventually reject it?
- Can you increase the rate of output of the bottleneck resource by doubling up batches?
This logic applies regardless of the nature of the bottleneck - whether it relates to a machine (production capacity), marketing effort (how much business is coming in), or any other element of one's environment.
To help identify the bottlenecks and judge tradeoffs, one should identify one's goal as a measure (in a business context this is generally profits or ROI), then identify the factors that influence that measurement and create an equation. For instance,
Profits = Sales - Cost of Inputs - Cost of Transforming Inputs
Return On Investment = (Sales - Cost of Inputs - Cost of Transforming Inputs) / Money Trapped In Unfinished Goods And Inventory
Essentially, his thesis is that by focusing on these bottlenecks, and analyzing and brainstorming their solutions, one takes advantage of the 80/20 rule by prioritizing those few factors that most greatly impact one's performance.
The most rewarding part of the book are the examples in the Testimonials section at the end. The testimonials describe creative solutions to tough bottleneck situations. The book doesn't help the reader come up with this type of creative solution - it only mentions where to look for the problem. Here are the memorable examples he cites:
1. A large office supply company (similar to Staples) was losing business to companies that were charging very low prices. Investigating this marketing bottleneck, they determined that from the customers' perspective, the larger problem was the overall cost of stocking and procuring and purchasing and tracking the office supplies.
Rather than competing on price, its owner fixed the Sales bottleneck with an innovative concept, where they arranged to place fully stocked cabinets filled with office supplies throughout their client companies, just like a hotel minibar. They'd visit each week, restock any items that were used, and charge the company for the items that were removed, thereby saving the company the aggravation and cost of even having to purchase or account for office supplies. They also supplied each customer with detailed information regarding what was used, when. In exchange for this unique convenience, they charged higher prices and achieved large profit margins.
2. A printing company, constrained by the number of presses available to print jobs, made more efficient use of its presses by routing jobs to different types of presses in a way that would maximize the total output of the presses.
3. A manufacturing company's output was limited by a saw that cut pipes. They dug up an old, inefficient saw, put it to work to remove that bottleneck, and increased output and profits significantly.
4. In the book itself, the protagonist's factory increased its Return On Investment (profit/money tied up) by shortening the time it took for a product to be manufactured (as doing that reduced the money tied up, hence increased ROI). This was accomplished by removing delays that were keeping costly unfinished products sitting around the plant. For instance, by reducing the 'batch size', a product would wait less time for its batch to be complete, allowing it to move to the next step of production sooner.