I'm taking a Project Management class for my Masters. Here is my latest paper. Actually, some interesting concepts for anyone interested or involved in managing things.
A DISCUSSION OF ‘THE GOAL’
A review of the book and its concepts
By JBC
The Goal, by Eliyahu Goldratt and Jeff Cox, is a business management book that proposes the ‘theory of constraints’ in the form of a parable. The book’s main character is faced with challenges in his personal and professional life that must be overcome or he will lose everything he’s worked for in both. With the help of an old mentor he learns, over time, that in order to achieve his goals he must re-think his business and focus on how each element of production impacts end profit. Fortunately, he has a talented and loyal management team who help him implement changes that sometimes defy established business practices. The results of his efforts are greater challenges for he and his team but they face these with a new perspective formed by their journey and experiences.
The Goal’s protagonist is Alex Rogo who discovers that the factory he runs will be shut down if profits are not increased within three months. To make matters worse; Alex’s marriage is on the rocks from the long hours he has already been putting in at the plant. He wonders how he can do more to improve operations and save his marriage. After a chance meeting with an old physics professor, Jonah, he begins to seek him out for advice. Rather than provide direct answers Jonah uses the Socratic Method to guide Alex towards an appropriate course of action. “The Modern Socratic Method is a process of inductive questioning used to successfully lead a person to knowledge through small steps,” (Maxwell, 2009).
At their first meeting Alex tells Jonah that his plant is increasing productivity by adding robots and improving efficiencies in its processes. But, Jonah questions whether this is helping Alex, or his company, meet their ultimate goal. Jonah asks if the new procedures and equipment have reduced inventory, lowered costs or sold more products. Alex isn’t sure, but argues that increasing productivity within the manufacturing process should increase overall productivity and thus, support company goals. Jonah advises him that his thinking is wrong and that in order to survive he needs to identify his company’s true goal.
Back at his plant Alex does some soul searching and comes to the conclusion that making money should be the goal of his factory and his company. He determines that this is, and always has been, the goal of any for-profit venture. He meets with his factory Comptroller and decides that the best way to know if a company is profitable is to determine if profits, return on investment and cash flow are increasing. But, he is still perplexed by how to connect the complexities of his individual factory processes to the overall goal of making money. He decides to contact Jonah again for advice.
Jonah affirms that profit is indeed the goal of any company and that Alex is on the right track by assigning simple measures for success. To link operational activities to the ultimate goal of making a profit Jonah informs Alex that he has come up with his own three distinct measures.
The first measure is throughput. Jonah tells Alex that this “is the rate at which the system generates money through sales.” He goes on to say the second measure is inventory or “all the money that the system has invested in purchasing things which it intends to sell.” The third measure is operational expense or “all the money the system spends in order to turn inventory into throughput,” (Goldratt, 1984, p60-61).
Alex has more questions but Jonah dashes off again leaving him to ponder them on his own. Alex gathers his management team together to discuss how each of these concepts can be applied to their plant. They surmise that they can translate these measures to their situation by defining ‘throughput’ as money being funneled in, ‘inventory’ as money tied to production resources and ‘operational expense’ is the cost of moving it through.
Looking at things in this light the team realizes that the robots they had been so proud of are actually increasing costs and reducing productivity. The employees that the machines replaced were reassigned (resulting in no savings) and the capacity of the robots created bottlenecks in the system (adding cost). This revelation causes them to begin thinking about how local changes impact the balance of the entire production system.
Later, when Alex speaks to Jonah about this he is surprised at what he is told. Conventional thinking is that the goal of a plant is to be perfectly balanced so that output exactly meets the demands of the market. To do this many companies focus on improving metrics and efficiencies of individual segments of their systems so that all the parts are working at their maximum capacity. Jonah disagrees and counsels Alex that a balanced plant is actually one on its way out of business. Further, he says, it’s ok to occasionally have idle equipment and staff if having them working creates excess inventory or pile ups at choke points. This is the difference between activating and utilizing resources. Activating a resource (labor or equipment) simply to keep it working can cause a strain on, or add cost to, the system. Utilizing a resource, however, puts it to work only to ensure that products are built and sent through the system when they are needed.
The objective is not to have everything working all the time, Jonah says, but rather to reduce operational expenses and inventory while increasing throughput. This helps achieve the goal of making money by lowering the costs of overhead and storage while speeding up the process for producing products that customers want.
To meet this objective, Jonah explains, it is important to understand the concepts of dependent events and statistical fluctuations. Alex is told that dependent events are those that rely on some previous activity to finish before they can start. Statistical fluctuations are things that cannot be precisely predicted. Alex fails to see the relevance of these ideas until that weekend when he is able to put them into practice while serving as a Boy Scout Troop leader.
He theorizes that walking the Scouts along a trail in single file is essentially like a factory assembly line. Each Scout depends on the one directly in front of them to keep moving along the trail so that they may subsequently pass the same points. Actions, such as length of stride, are different for each Scout and fluctuate depending on conditions. This fluctuation can cause the line to spread out or bunch up.
The final product (the hike) cannot be complete until the last hiker reaches the end so speeding the faster Scouts along the trail first does not benefit the overall goal. After some trial and error Alex places the slowest Scout first and spreads his gear out among the others. The result is that the Troop moves at a fairly even pace and finish the hike together. The business analogy is that this reduces the time that inventory (Scouts waiting at the end of the trail) must be stored until the final product (the last Scout arrives at the end) can be shipped.
The next time Alex speaks with Jonah they discuss balance and bottlenecks. From his hike Alex has learned the importance of moving production along at a regular and balanced pace. Jonah suggests that one way to speed up this pace is to increase the flow at the bottlenecks. In Alex’s factory the bottlenecks are machines but, in general, these represent constraints that can come in many forms including technological, human, procedural, etc. “A bottle neck” Jonah explains, “is any resource whose capacity is equal to or less than the demand placed upon it. A non-bottle neck is any resource whose capacity is greater than the demand placed upon it,” (Goldratt, 1984, p139).
On a visit to the plant Jonah explains that because products have no value for the customer until final completion, any extra time spent at a bottleneck represents a loss to the entire system. With a few calculations he determines that when crucial machines (bottlenecks) are down, this costs the company thousands of dollars per minute in lost throughput. Alex and his team quickly reorganize the system to optimize use of the machines causing the bottlenecks. This reorganization itself causes some problems but they eventually figure out a method for balancing the flow so that the bottleneck areas only receive the exact components they need, when they need them.
The team is so successful in turning the plant around that Alex is promoted to Division Manager. But, he soon learns that the whole division is in trouble. Determined that other plants can benefit from their methods Alex gathers his team together to hash out some rules for their system. What they develop is the Theory of Constraints.
The Theory of Constraints holds that business processes must continually be evaluated and acted on in five ways. First, its bottlenecks, or constraints, must be identified. Second, these must be exploited for optimum performance. Third, all other considerations must be made subordinate to the need to do this. Fourth, resolving and relieving the constraints must be elevated and made a top priority. The fifth and final step is a warning; when a constraint is resolved it is critical to return to step one. Decision makers should be careful not to be caught up in the inertia of continually focusing on bottlenecks that have already been overcome.
After some tough days Alex and his team are able to save the division. Looking back at their experience Alex philosophizes that the purpose of a manager is three-fold. A manager must be able to use the Theory of Constraints to determine what to change, what to change to and how to cause the change. A good manager should be able to do these things by implementing solutions that solve problems without creating new ones. Those who can do this while creating organizational enthusiasm for the change are true masters.
In conclusion, Goldratt & Cox use the Goal to propose several problem solving techniques. These techniques are presented for their application to business but would be valuable in other settings as well. The first is the ‘Socratic method’ which teaches students to resolve problems by asking questions. Next it reveals throughput, inventory and operational expense as the three most important measures of business. The difference between activating and utilizing resources is explained, as are dependent events and statistical fluctuations. In the book, the key to resolving production problems is developing an understanding of bottlenecks and non bottlenecks. Once the authors have explained these concepts they reveal the theory of constraints. The theory holds that for a system to operate at a profit its bottlenecks (or constraints) must be continually sought out and resolved.
After his factory tour Jonah all but vanishes from the book. His role is taken over by Alex who uses the techniques he has learned to teach his team how to be successful. The thread that is not addressed is what Alex will pay Jonah for his consulting work. Early in the book Jonah suggests that Alex pay him the value of his advice based on earnings from implementing his theories. At the time Alex thinks his factory will be closed in a few months and probably doesn’t think he will have to pay at all. Since the division was saved almost entirely due to Jonah’s advice it would be interesting to know how Alex intends to reimburse his mentor.
As the book closes we see that Alex’s use of Jonah’s methods have brought him success with the company and his personal life. His wife and he are reconciled and back on good terms, the plant is doing well and he has earned the respect of his team.
END
