Summary The Goal - A Process of Ongoing Improvement PDF

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Executive Summary The Goal: A Process of Ongoing improvement is a book written in narrative form that tells the fictional story of Alex Rogo, a plant manager for UniCo Manufacturing, whose plant is performing poorly and is given three months to significantly improve or face a shut down of the entire plant. This groundbreaking business novel, first published in 1984, gives significant insight into the day-to-day life of an operations manager and challenges common business practices and thought processes. The book's authors, Eliyahu M. Goldratt and Jeff Cox, through their colorful story, are able to show how business practices and thought processes have strayed from what they should be. The Goal also shows that business thinking is based upon too many assumptions that are accepted at face value. Basically, people aren't questioning the things that they are being told are true. In Alex's case, it is assumed that if operating costs per unit are down and efficiencies are up then the company is being productive. However, these measurements neglect the bottom line. They should be less concerned with measurements that do not contribute to the success and profitability of the company. Basically what the authors are saying is that managers should exercise common sense in their decisions. In the book, Alex's superiors at the division level of the company are concerned primarily with productivity and efficiency of plant operations. Alex's boss, Bill Peach, is constantly harassing him over his plant's productivity and efficiency metrics. UniCo is concerned with how the cost per unit produced is increasing and believes that in order for the plant to be profitable it must run its machines at capacity and not have any idle time in labor. Unico's concern over having a low cost per unit is a prime example of how a company's management can lose sight of what is really important. In the case of UniCo, what should be important is how much money is being contributed to the bottom line, regardless of machine and labor efficiency. This book also demonstrates how UniCo's view of improvement, as being a reduction in its operating expenses, is flawed. Although it is good to reduce costs, it comes at a cost to the company because they are not increasing throughput, which leads to an increase in sales and they aren't focused on reducing their inventories, which also provides substantial cost savings. Goldratt and Cox's greatest contribution to the business world is the introduction of the theory of constraints. Theory of Constraints (TOC) is an overall management philosophy that is geared to help organizations continually achieve their goal. The TOC process seeks to identify the constraint and restructure the rest of the organization around it . The Ten Things Managers Need to Know fromThe Goal

1. Before one can be successful, it is important to know what their one true goal is. In the case of UniCo Manufacturing in this book, the goal is to make money. Although it sounds simple and obvious, it is the reason for the company's existence. Everything else is just a means to achieving the goal. 2. The problem with most ill managed companies is managers' way of thinking. Much of what managers believe to be true is accepted without question and leads to them not thinking at all. 3. Productivity is the act of bringing a company closer to its goal. Productivity is meaningless unless you know what your goal is. 4. The three measurements which express the goal of making money but also permit you to develop additional rules for running your plant are throughput, inventory and operational expense. Throughput is the rate at which the system generates money through sales. Inventory is all the money that the system has invested in purchasing things it intends to sell. Operational expense is all the money the system spends in order to turn inventory into throughput. 5. The way to express the goal is: increase throughput while simultaneously reducing both inventory and operating expense. three measurements must be accounted for together and not held in isolation since any changes to one will directly affect the others.

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6. A balanced plant is where the capacity of each and every resource is balanced exactly with demand from the market. It is essentially what every manager has struggled to achieve. However, the closer you come to a balanced plant, the closer you are to bankruptcy because the goal is not to improve one measurement in isolation, but all three. 7. When capacity is trimmed exactly to marketing demands, throughput goes down, while inventory goes up dramatically. Therefore operating expense increases due to the carrying cost of inventory. This can be explained by two phenomena working together: dependent events and statistical fluctuations. 8. Maximum throughput of a system is determined by the constraints in the system. For example, if a system is comprised of three machines and two of those machines can process 25 units an hour and the third machine can only process 15 units an hour, the maximum throughput of the system in an hour is 15 units. The machine that only process 15 units an hour is a constraint and therefore limits the maximum throughput. 9. The intrinsic order of things can be revealed through the scientific method. Management is a thinking process that attempts to reveal this intrinsic order. It is based on the scientific method and the key relationship: IF . . . THEN. Managers can logically derive results from their hypothesis.

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The five steps critical to solving throughput problems are: 1. IDENTIFY the system's constraint(s). 2. Decide how to EXPLOIT the system's constraint(s). 3. SUBORDINATE everything else to the above decision. 4. ELEVATE the system's constraint(s). 5. WARNING!!!! If in the previous steps a constraint has been broken, go back to step 1, but do not allow INERTIA to cause a system's constraint.

Full Summary of The Goal I. Introduction In the brief opening section of the book, titled Introduction, the author prepares the reader for the following text by talking about how the purpose of the book is science and education. The author says that he believes that the original meaning of these two words have been lost in a "fog of too much respect and mystery". The author goes on to say that science is not about "the secrets of nature or even about truths" but is simply the method used to try and postulate a minimum set of assumptions that can explain, "through a straightforward logical derivation" the existence of many phenomena of nature. The book attempts to show that a small number of assumptions can be "postulated and utilized" to explain a very large spectrum of industrial phenomena. Goldratt has attempted to show with his book that "no exceptional brain power is needed to construct a new science or to expand on an existing one". Finally, Goldratt attempts to show that the way we are educated and learn is not by being given the answers but by being given the right questions that allow us to find our own answers through logical thought processes. For this reason, he presents his message in the "Socratic way". He goes on to say that if he is able to change the reader's perceptions of science and education then he has accomplished his goal. II. Act 1 As the book begins we are introduced to Alex Rogo, a plant manager for Unico Manufacturing whose plant is struggling to survive. We are given an account of what his daily life is like managing the plant. Alex's work life consists of a high stress environment where orders are consistently behind schedule and upper management is constantly breathing down his neck to get orders shipped. The plant is a train wreck that is losing money and facing a shut down. It is apparent that UniCo is not a streamlined operation where departments work together effectively to achieve its goal. Alex is

constantly fielding calls from his boss Bill Peach about problems with his plant's efficiency measures in terms of cost per unit. Alex soon learns that his plant has three months to find a way to turn things around and find a way to make it profitable again. Under the pressure of losing his job, Alex is forced to think about how he can avoid disaster and revive the struggling plant. Unsure of how to proceed in his attempt to save the plant, Alex sees the challenge as impossible. However, Alex runs into his old college physics professor, Jonah, who is able to provide a mental spark that will kick start Alex's efforts by getting him to think about what the goal of the company is. Jonah informs Alex that his thinking is wrong because he has "accepted so many things without question" that he's not really thinking at all. Jonah tells Alex that in order to be productive he must accomplish something in terms of the goal of the organization. Before Alex's plant can be productive, he must first know what the goal of the company is. After meeting with Jonah, Alex thinks long and hard about what the goal of the company is and is able to determine that the goal is to make money. Although this goal sounds simple and obvious, Alex learns that everything he does is pointless unless the company is making money. UniCo is concerned with measurements like "cost-effective purchasing, employing good people, high technology, producing quality products and selling them, and capturing market share". However, these measures are not the goal but a means to achieving the goal. III. Act 2 Once Alex has determined that the goal of the company is to make money, he starts to think about the performance measures that UniCo is using and wonders if there is a simple measurement that will allow him to know if the plant is actually making money. Alex comes up with three measurements that will allow him to know if his plant is making money: net profit, ROI and cash flow. Alex further revises what the one true goal of the plant and the company is. He determines that the goal is "to make money by increasing net profit, while simultaneously increasing ROI, and simultaneously increasing cash flow". After revising what he thinks the goal of the company is Alex talks to Jonah who gives him definitions of throughput, inventory and operating expense. Jonah tells Alex that these three things are what should be used to measure the productivity and profitability of his plant and that they will also permit him to develop operational rules for running the plant. Alex again revises what the goal is and states that the goal is to "increase throughput while simultaneously reducing both inventory and operating expense". After a further revision of the goal, Alex assembles a team from across the different functions of the plant. Everyone on the team has particular expertise that can help Alex determine what to do to save the plant. Alex's

team consists of the production manager, inventory manager, head accountant and marketing manager. They are able to give Alex a clear picture of what is going on in the plant in terms of the newly developed goal (throughput, inventory and operating expense). Alex quickly learns that the newly purchased robots that were supposed to increase productivity and plant efficiencies are not doing what they were believed to be able to do when they were purchased. After thinking about what the problem is with the robots Alex talks to Jonah again. Jonah introduces the concepts of dependent events and statistical fluctuations to Alex as being the reason that the robots are not as productive as they could be. Basically, this means that Alex has bottlenecks in his plant that are holding up production and therefore reducing throughput. Alex comes up with a way to improve productivity in the plant while on a hike with his son's Boy Scout troop. Goldratt and Cox illustrate this point very clearly through the story of Alex leading a troop of boy scouts on a hike through the woods. The troop is not moving at a fast enough pace and is getting too spread out on the trail because of one kid, Herbie. Alex realizes that the spacing problem (statistical fluctuations) is because Herbie cannot walk as fast as the others and anyone behind him in line is limited in their speed by him, therefore gaps form and may end up getting some of the kids lost. To keep the line moving at a constant pace and to avoid any gaps forming in the line, Alex places Herbie at the head of the line. Since Herbie dictates the pace of everyone else behind him (dependent events), he is the constraint on the system. After Alex's camping trip with the Boy Scout troop he shares his revelation with his team about dependent events and statistical fluctuations. Alex illustrates it further in an order that is trying to be completed by the end of the day. The illustration proves that capacity of a system is limited by the bottlenecks in the system. It is soon apparent to Alex and his team that their figures for how much it costs to run the bottleneck machines are all wrong. Jonah tells Alex "the actual cost of a bottleneck is the total expense of the system divided by the number of hours the bottleneck produces". Alex and the team learn that the bottlenecks are costing the company much more money than they had originally thought and that the only way to reduce these costs and make the bottleneck machines more productive is by "maintaining a flow sufficient to meet demand and make money through finding added capacity". Since they cannot increase the capacity of the bottleneck machine, they must optimize its use by making sure that time isn't wasted at these machines and by making these machines work only on what will contribute to throughput today while offloading excess to other machines in the plant or outside vendors capable of performing the function of the bottleneck machine. Basically, Alex and his team learn that they need to balance flow in the plant not capacity. Fixing the problem of production flow requires Alex and his team to restructure to process of operations so that no capacity is wasted with their bottleneck machines. To do this they move quality control to a point in the system that occurs

before the parts reach the bottleneck machines so that parts that don't meet their quality standards can be scrapped before take up capacity in these machines. This effectively increases the capacity of good quality products that are running through the bottlenecks of the system. They also implement a tagging system that places priority on backlogged orders so that they can catch up. This system increases their throughput while decreasing inventory and operating expense (accomplishes the goal). As a result, the plant begins to experience positive effects of the changes. The company is becoming profitable. However, it is coming at the expense of the performance metrics that UniCo uses to measure productivity. Alex doesn't care because the company is making money and who can argue with that. IV. Act 3 Alex and his team have turned their plant into a cash cow by restructuring the order of operations to take advantage of their system's capacity. The overall efficiency of the operation in terms of quality product being produced on time has increased and the bottom lie has swelled to record highs. Alex and everyone on his team has received a promotion and saved the plant. However, some problems do occur. They are quickly able to diagnose the problems with help from Jonah. The problem is that nonbottleneck machines have excess capacity which is creating excess inventory and finished goods because materials are being released faster than the bottlenecks can process it, which eats into profits through increases in inventory and operating expenses. Alex and his team develop a signaling system to figure out when materials should be released to bottleneck machines so that inventory doesn't pile up. Alex learns that by decreasing the batch sizes he can reduce the lead-time on orders and respond faster to market demand. This technique allows UniCo to further increase its throughput and its sales. UniCo has quickly become a reliable leader in its industry thanks to the changes that Alex and his team have made. In the end of the book Alex and his team develop a five-step process for solving throughput problems and Jonah asks Alex what are the techniques for effective management. The five-step process consists of: 1. IDENTIFY the system's constraint(s). 2. Decide how to EXPLOIT the system's constraint(s). 3. SUBORDINATE everything else to the above decision. 4. ELEVATE the system's constraint(s). 5. WARNING!!!! If in the previous steps a constraint has been broken, go back to step 1, but do not allow INERTIA to cause a system's constraint. Alex and his team also determine what the techniques for effective management are. They come to the conclusion that the Socratic/scientific method of analyzing a problem is effective in management. Through this process the intrinsic order of things can be determined and therefore basic assumptions used in the decision making process can be verified as accurate or inaccurate. The techniques needed for effective management are thinking processes that must be learned. Alex concludes that the

purpose of the organization requires the synchronized efforts of more than one person and the performance of the organization is largely dependent upon the performance of individuals. Organizations should be regarded as chains, not just a pile of different links. The process of effective management in short form that Alex and his team decide on is: what to change, what to change to, and how to cause the change. For a manager to be effective they must learn these three thinking processes....