Eliyahu M. Goldratt's The Goal is an interesting and informative business book that covers many of the issues facing businesses today. These issues include bottlenecks, activating versus utilizing resources, small batch sizes, work in progress, the concept of a "Balanced Plant", "the real goals" of an organization, and the Theory of Constraints. In this novel, Al Rogo learns there are three things that a manager must be able to do in order to manage and that is to learn what to change, what to change to, and how to cause the change.
To start at the most basic level of changing mindsets, you must understand that the real goal of any organization is to make money. No company exists to lose money or to produce a product out of the goodness of their heart. Therefore, the real goal is to make money. There are three measurements which "express the goal of making money perfectly well, but which also permit (development of) operational rules for running (a) plant" (Goldratt 60). These measurements are throughput, inventory and operational expense. According to Goldratt, these are defined as follows. "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 which it intends to sell"; and "Operational expense is all the money the system spends in order to turn inventory into throughput" (Goldratt 60-61).
The balanced plant concept is a mistake that managers have been trying to achieve for years. Efficiency ratios do not increase sales. There are dependant and statistical variables that impact the way the plant should be running. The balanced plant concept is based on balancing capacity with efficiency. By balancing your plant with your capacity, you are insuring bankruptcy (Goldratt 86). The reason is due to dependent events and statistical fluctuations. A dependent event (or series of events) is one that must take place before another can begin; the subsequent event DEPENDS on the prior ones. A statistical fluctuation is an event that may vary from one instance to the next. Statistical fluctuations average themselves out over time (i.e. a worker can average 25 pieces per hour but his exact output will likely be more or less than that number each hour). To balance a plant accurately, you must look at dependent events and statistical fluctuations together.
The Theory of Constraints is the key concept in Goldratt's book. This theory is why he wrote this novel. The Theory of Constraints (TOC) consists of three parts: A set of problem-solving tools - called the TOC Thinking Processes (TP) - to logically and systematically answer the three questions essential to any process of on-going improvement: "What to change?", "To what to change to?" and "How to cause the change?"; A set of daily management tools - taken from the TOC Thinking Processes - that "can be used to significantly improve vital management skills, such as communication, effecting change, team building and empowerment; and; innovative, proven solutions created by applying the TOC Thinking Processes to specific application areas, such as Production, Distribution (as discussed in Its Not Luck), Marketing and Sales (as discussed in Its Not Luck), Project Management, and Setting The Direction of The Company, to name only a few" (Nguyen).
The Theory of Constraints is composed of views of the short run and the long run.
In the short run most costs are fixed, so we could maximize profit by increasing throughput and reducing inventories and operating costs. The theory of constraints helps identify methods to maximize operating profits when faced with a mix of bottleneck, and non-bottleneck operations. The bottleneck is the resource that is limiting throughput (Coughlin 46).
In the long run most costs are not fixed and should not be treated as such. However, in the long run we are all dead. For this topic consider that you are a manager of a plant focused on the short run and facing a lot of fixed constraints. Faced with these constraints you need to maximize the contribution margin per unit of the constraining factor. You would aim at achieving higher operating income by identifying the bottleneck resource or work-station, having the bottleneck process at capacity, move resources to the bottleneck, less resources to other, non-bottleneck stations, eliminating idle time, reducing set-up times, minimizing defects, only making what you plan to use, and bettering co-ordination of factory processes (Coughlin 46).
The theory of constraints may be of the most benefit where factory operations have developed in an ad hoc manner. Becoming aware of a bottleneck allows analysis to improve operations. These improvements can result in increased production allowing increased sales. These improvements can result in lower costs to produce the same level of production. These improvements can result in a higher quality of product because the constraining resource was adversely impacting quality.
The theory of constraints may be of least value for a factory where operations have been continually optimized over time. The bottleneck may be a constraint that employees are well aware of. The bottleneck remains because nobody has come up with a cost-effective method for removing the constraint, or even increasing throughput through the constraining operation, or there is a longer term project to replace the operation.
Another logical step in getting to the real goal of the company is the decrease batch sizes. Then there will only be half that amount of work-in-progress on the floor at a time, thereby cutting inventories in half (Coughlin 75).
By processing smaller and smaller batches, you can improve overall efficiency of the plant. By holding back materials, non-bottleneck processes now had extra capacity, or time when nothing was being run on the machine. With the extra time, these processes have the time to do extra set-ups, thereby allowing the smaller batches. Instead of running very large batches of one part, and having parts destined for bottlenecks waiting behind it, you start doing smaller batches, increasing the number of deliveries between processes (this amounts to beginning a just-in-time inventory scheme). The extra set-ups don't cost any extra in labor, because the processes were no longer being run at full capacity. The plant in The Goal was only running at capacity equal to throughput demand. By reducing batch sizes, they reduced the time it takes to process a batch, This also means reduced queue time and wait time, thereby reducing inventory. With less time sitting in piles waiting, total process time and overall lead-time is shortened. With a shortened lead-time, the whole production process is able to respond to market demand faster (Goldratt).
In the book, Rogo came to a lot of his decisions simply by paying attention to everyday life. One of the most important and influential discoveries was learning about bottlenecks. He found his bottlenecks in his plant simply by going on a hike with his young son's Boy Scout troupe. He observed that Herbie, a larger boy who had trouble keeping up with the others. The other boys walked around him leaving him in the back of the pack. This put the fastest walkers way out ahead, leaving Herbie (and those behind him) behind. Soon, Rogo gets the idea of what's happening and decides to unload the extra pressures off Herbie (the excess weight in his backpack) by spreading the job among the other boys. Then he puts Herbie in front of the troupe, and tells the other boys that no one is permitted to pass Herbie. At this point, he realizes that the rest of his plant must follow the bottlenecks or the "Herbies" as they call them throughout the book. Each "Herbie" has to work to its fullest capacity, while the rest of the plant's machines work to the capacity of the bottlenecks. This creates a harmony in the plant, orders start to get out on time, there is less work-in-process, and costs are lowered because of this.
By following these processes outlined above, the plant was able to save itself from certain closure. Rogo was able to hold on to his job, and actually gain a promotion giving him control over all the plants in this division. He would now have to bring this same style of management to the entire division.