The Goal by Eliyahu M. Goldratt, Jeff Cox, and David Whitford
Imported: 2022-10-17 from kindle
Real Title: The GoaL
- Cash Flow
- The goal is to increase net profit ROI and cash flow at the same time
- The level of utilization of a non-bottleneck is determined by other constraint in the system
- Making an employee work and profiting from the work are different things
- A system reaching local instead of global optimums it is a inefficient system
- Time and money saved on non-bottleneck is just an illusion
- Balance flow with demand
- The output of an worker is not determined only by his own potential but also by its dependencies
- Activating and utilizing a resource is not the same
- An hour saved at a non-bottleneck is worthless
- Mark Twain quote on common sense
- The 5 steps how to increase throughput
- Constraint is a better word compared to bottleneck since at one moment the market can be the constraint of the system
- The manufacturing industry has been shaped by two great thinkers Henry Ford and Taiichi Ohno.
- Ford managed to reduce lead time from mining the iron ore until having the car ready for delivery to 81h
- Ford focused on keeping inventories in operations moving
- Forded removed local efficiencies by limiting space
- Limiting space exposes the weakest link in the chain
Location 84 Textbooks should present a plot that enables the reader to go through the deduction process himself
I tried to deliver the message contained in the book in the Socratic way. Jonah, in spite of his knowledge of the solutions, provoked Alex to derive them by supplying the question marks instead of the exclamation marks. I believe that because of this method, you the reader will deduce the answers well before Alex Rogo succeeds in doing so. If you find the book entertaining maybe you will agree with me that this is the way to educate, this is the way we should attempt to write our textbooks. Our textbooks should not present us with a series of end results but rather a plot that enables the reader to go through the deduction process himself.
Location 707 Every action that does not bring a company closer to its goal is not productive
And he’s saying, “Alex, I have come to the conclusion that productivity is the act of bringing a company closer to its goal. Every action that brings a company closer to its goal is productive. Every action that does not bring a company closer to its goal is not productive. Do you follow me?”
Location 869 If the company is not making money none of the common thought goals like quality products are worth a damn
I reach for my briefcase, take out a yellow legal pad and take a pen from my coat pocket. Then I make a list of all the items people think of as being goals: cost-effective purchasing, employing good people, high technology, producing products, producing quality products, selling quality products, capturing market share. I even add some others like communications and customer satisfaction. All of those are essential to running the business successfully. What do they all do? They enable the company to make money. But they are not the goals themselves; they’re just the means of achieving the goal. How do I know for sure? Well, I don’t. Not absolutely. But adopting “making money” as the goal of a manufacturing organization looks like a pretty good assumption. Because, for one thing, there isn’t one item on that list that’s worth a damn if the company isn’t making money.
Location 879 Every action that is not making the company make money is non-productive
If the goal is to make money, then (putting it in terms Jonah might have used), an action that moves us toward making money is productive. And an action that takes away from making money is non-productive.
Location 962 Net Profit
“Well, you’d have to have some kind of absolute measurement,” he says. “Something to tell you in dollars or yen or whatever just how much money you’ve made.” “Something like net profit, right?” I ask. “Yeah, net profit,” he says. “But you’d need more than just that. Because an absolute measurement isn’t going to tell you much.”
“Oh yeah?” I say. “If I know how much money I’ve made, why do I need to know anything else? You follow me? If I add up what I’ve made, and I subtract my expenses, and I get my net profit—what else do I need to know? I’ve made, say, $10 million, or $20 million, or whatever.” For a fraction of a second, Lou gets a glint in his eye like I’m real dumb.
Location 969 Return on Investment ROI
“All right,” he says. “Let’s say you figure it out and you come up with $10 million net profit . . . an absolute measurement. Offhand, that sounds like a lot of money, like you really raked it in. But how much did you start with?” He pauses for effect. “You see? How much did it take to make that $10 million? Was it just a million dollars? Then you made ten times more money than you invested. Ten to one. That’s pretty goddamned good. But let’s say you invested a billion dollars. And you only made a lousy ten million bucks? That’s pretty bad.”
“So you need a relative measurement, too,” Lou continues. “You need something like return on investment . . . ROI, some comparison of the money made relative to the money invested.”
Location 979 Cash Flow
“You know,” he says, “it is possible for a company to show net profit and a good ROI and still go bankrupt.” “You mean if it runs out of cash,” I say. “Exactly,” he says. “Bad cash flow is what kills most of the businesses that go under.” “So you have to count cash flow as a third measurement?”
Location 1033 The goal is to increase net profit, ROI and cash flow at the same time
To make money by increasing net profit, while simultaneously increasing return on investment, and simultaneously increasing cash flow.
Location 1220 The 3 KPIs that reflect the efficiency reaching the goal
“They’re measurements which express the goal of making money perfectly well, but which also permit you to develop operational rules for running your plant,” he says. “There are three of them. Their names are throughput, inventory and operational expense.”
“Throughput,” he says, “is the rate at which the system generates money through sales.”
Location 1226 Throughput must be calculated based on sales and not production
Then I ask, “But what about production? Wouldn’t it be more correct to say—” “No,” he says. “Through sales—not production. If you produce something, but don’t sell it, it’s not throughput. Got it?”
Location 1234 Inventory
“The next measurement is inventory,” he says. “Inventory is all the money that the system has invested in purchasing things which it intends to sell.”
Location 1236 Operational expense
“And the last measurement?” I ask. “Operational expense,” he says. “Operational expense is all the money the system spends in order to turn inventory into throughput.”
Location 1343 Questions to determine the effectiveness of a change
One of them, I remember as I’m driving, was whether we had been able to sell any more products as a result of having the robots. Another one was whether we had reduced the number of people on the payroll. Then he had wanted to know if inventories had gone down. Three basic questions.
Location 1355 The goal articulated using the 3 key measurements
Increase throughput while simultaneously reducing both inventory and operating expense.
Location 1466 Money coming in, money still stuck inside and money going out
“Interesting, isn’t it, that each one of those definitions contains the word money,” he says. “Throughput is the money coming in. Inventory is the money currently inside the system. And operational expense is the money we have to pay out to make throughput happen. One measurement for the incoming money, one for the money still stuck inside, and one for the money going out.”
Location 1475 Direct labor time should not be part of inventory because we are not selling the time of the employee
Then Stacey says, “Maybe Jonah feels direct labor shouldn’t be a part of inventory because the time of the employees isn’t what we’re really selling. We ‘buy’ time from our employees, in a sense, but we don’t sell that time to a customer—unless we’re talking about service.”
Location 1489 The value of the product is determined by the market
“First of all, the market determines the value of the product,” says Lou. “And in order for the corporation to make money, the value of the product—and the price we’re charging—has to be greater than the combination of the investment in inventory and the total operational expense per unit of what we sell.”
Location 1508 Money lost is operational expense, any investment that can't be sold is inventory
“Any money we’ve lost is operational expense; any investment that we can sell is inventory.” “The carrying costs have to be operational expense, don’t they?” asks Stacey.
Location 1513 Knowledge is valued based on what is used for
Then we decide it depends, quite simply, upon what the knowledge is used for. If it’s knowledge, say, which gives us a new manufacturing process, something that helps turn inventory into throughput, then the knowledge is operational expense. If we intend to sell the knowledge, as in the case of a patent or a technology license, then it’s inventory. But if the knowledge pertains to a product which UniCo itself will build, it’s like a machine—an investment to make money which will depreciate in value as time goes on. And, again, the investment that can be sold is inventory; the depreciation is operational expense.
Location 1707 A balanced plant is where the capacity of each resource is balanced exactly with demand from the market
He says, “A balanced plant is essentially what every manufacturing manager in the whole western world has struggled to achieve. It’s a plant where the capacity of each and every resource is balanced exactly with demand from the market. Do you know why managers try to do this?”
Location 1742 Reducing capacity with the goal of reducing operational expense is counter-intuitive
“For one thing, there is a mathematical proof which could clearly show that when capacity is trimmed exactly to marketing demands, no more and no less, throughput goes down, while inventory goes through the roof,” he says. “And because inventory goes up, the carrying cost of inventory—which is operational expense—goes up. So it’s questionable whether you can even fulfill the intended reduction in your total operational expense, the one measurement you expected to improve.” “How can that be?” “Because of the combinations of two phenomena which are found in every plant,” he says. “One phenomenon is called ‘dependent events.’ Do you know what I mean by that term? I mean that an event, or a series of events, must take place before another can begin . . . the subsequent event depends upon the ones prior to it.
Location 1751 Dependent events and statistical fluctuations
“The big deal occurs when dependent events are in combination with another phenomenon called ‘statistical fluctuations,’ ” he says. “Do you know what those are?” I shrug. “Fluctuations in statistics, right?” “Let me put it this way,” he says. “You know that some types of information can be determined precisely. For instance, if we need to know the seating capacity in this restaurant, we can determine it precisely by counting the number of chairs at each table.” He points around the room. “But there are other kinds of information we cannot precisely predict. Like how long it will take the waiter to bring us our check. Or how long it will take the chef to make an omelet. Or how many eggs the kitchen will need today. These types of information vary from one instance to the next. They are subject to statistical fluctuations.” “Yeah, but you can generally get an idea of what all those are going to be based on experience,” I say. “But only within a range. Last time, the waiter brought the check in five minutes and 42 seconds. The time before it only took two minutes. And today? Who knows? Could be three, four hours,” he says, looking around. “Where the hell is he?”
Location 2014 The 3 measurements in boy-scout terms
I’m the last operation. Only after I have walked the trail is the product “sold,” so to speak. And that would have to be our throughput—not the rate at which Ron walks the trail, but the rate at which I do. What about the amount of trail between Ron and me? It has to be inventory. Ron is consuming raw materials, so the trail the rest of us are walking is inventory until it passes behind me. And what is operational expense? It’s whatever lets us turn inventory into throughput, which in our case would be the energy the boys need to walk. I can’t really quantify that for the model, except that I know when I’m getting tired.
Location 2192 Covariance
Then a long-lost memory from way back in some math class in school comes to mind. It has to do with something called a covariance, the impact of one variable upon others in the same group. A mathematical principle says that in a linear dependency of two or more variables, the fluctuations of the variables down the line will fluctuate around the maximum deviation established by any preceding variables. That explains what happened in the balanced model.
Location 2267 The team speech
And I say, “The idea of this hike is not to see who can get there the fastest. The idea is to get there together. We’re not a bunch of individuals out here. We’re a team. And the team does not arrive in camp until all of us arrive in camp.”
Location 2647 A bottleneck is any resource whose capacity is equal to or less than the demand
“A bottleneck,” Jonah continues, “is any resource whose capacity is equal to or less than the demand placed upon it. And a non-bottleneck is any resource whose capacity is greater than the demand placed on it. Got that?”
Location 2661 Make the flow though the bottleneck equal to demand from the market
“Oh, I see,” says Stacey. “The idea is to make the flow through the bottleneck equal to demand from the market.”
Location 3002 The bottleneck must work only on quality input
“But you’re not saying we should ignore quality, are you?” asks Bob. “Absolutely not. You can’t make money for long without a quality product,” says Jonah. “But I am suggesting you use quality control in a different way.” I ask, “You mean we should put Q.C. in front of the bottlenecks?” Jonah raises a finger and says, “Very perceptive of you. Make sure the bottleneck works only on good parts by weeding out the ones that are defective. If you scrap a part before it reaches the bottleneck, all you have lost is a scrapped part. But if you scrap the part after it’s passed the bottleneck, you have lost time that cannot be recovered.”
Location 3045 Three ways to optimize the use of the bottleneck
“Of course it does,” says Jonah. “And with that in mind, how do we optimize the use of the bottlenecks? There are two principal themes on which you need to concentrate . . . “First, make sure the bottlenecks’ time is not wasted,” he says. “How is the time of a bottleneck wasted? One way is for it to be sitting idle during a lunch break. Another is for it to be processing parts which are already defective—or which will become defective through a careless worker or poor process control. A third way to waste a bottleneck’s time is to make it work on parts you don’t need.” “You mean spare parts?” asks Bob. “I mean anything that isn’t within the current demand,” he says. “Because what happens when you build inventory now that you won’t sell for months in the future? You are sacrificing present money for future money; the question is, can your cash flow sustain it? In your case, absolutely not.” “He’s right,” admits Lou. “Then make the bottlenecks work only on what will contribute to throughput today . . . not nine months from now,” says Jonah. “That’s one way to increase the capacity of the bottlenecks. The other way you increase bottleneck capacity is to take some of the load off the bottlenecks and give it to non-bottlenecks.”
Location 3057 You gain capacity on your bottleneck if you can find other resources to process them
“That’s why I was asking those questions when we were out in the plant,” he says. “Do all of the parts have to be processed by the bottleneck? If not, the ones which don’t can be shifted to nonbottlenecks for processing. And the result is you gain capacity on your bottleneck. A second question: do you have other machines to do the same process? If you have the machines, or if you have a vendor with the right equipment, you can offload from the bottleneck. And, again, you gain capacity which enables you to increase throughput.”
Location 3384 The tagging system
“By the end of today, all work-in-process on the floor will be marked by a tag with a number on it,” he says and holds up some samples. “The tag will be one of two colors: red or green. “A red marker means the work attached to it has first priority. The red tags go on any materials needing to be processed by a bottleneck. When a batch of parts with that color marker arrives at your work station, you are to work on them right away.” Bob explains what we mean by “right away.” If the employee is working on a different job, it’s okay to finish what he’s doing, as long as it doesn’t take more than half an hour. Before an hour has passed, certainly, the red-tagged parts should be getting attention. “If you are in the middle of a setup, break the setup immediately and get ready for the red parts. When you’ve finished the bottleneck parts, you can go back to what you were doing before. “The second color is green. When there is a choice between working on parts with a red marker and parts with a green marker, you work on the parts with the red marker first. So far, most of the work-in-process out there will be marked by green. Even so, you work on green orders only if you don’t have any red ones in queue. “That explains the priority of the colors. But what happens when you’ve got two batches of the same color? Each tag will have a number marked on it. You should always work on the materials with the lowest number.”
Location 3951 The level of utilization of a non-bottleneck is determined by other constraint in the system
the level of utilization of a non-bottleneck is not determined by its own potential, but by some other constraint in the system.”
Location 3959 Making an employee work and profiting from the work are different things
You have created this mountain of inventory with your own decisions. And why? Because of the wrong assumption that you must make the workers produce one hundred percent of the time, or else get rid of them to ‘save’ money.” Lou says, “Well, granted that maybe one hundred percent is unrealistic. We just ask for some acceptable percentage, say, ninety percent.” “Why is ninety percent acceptable?” asks Jonah. “Why not sixty percent, or twenty-five? The numbers are meaningless unless they are based upon the constraints of the system. With enough raw materials, you can keep one worker busy from now until retirement. But should you do it? Not if you want to make money.”
Then Ralph suggests, “What you’re saying is that making an employee work and profiting from that work are two different things.” “Yes, and that’s a very close approximation of the second rule we can logically derive from the four combinations of X and Y we talked about,” says Jonah. “Putting it precisely, activating a resource and utilizing a resource are not synonymous.”
He explains that in both rules, “utilizing” a resource means making use of the resource in a way that moves the system toward the goal. “Activating” a resource is like pressing the ON switch of a machine; it runs whether or not there is any benefit to be derived from the work it’s doing. So, really, activating a non-bottleneck to its maximum is an act of maximum stupidity.
Location 3971 A system reaching local instead of global optimums it is a inefficient system
“And the implication of these rules is that we must not seek to optimize every resource in the system,” says Jonah. “A system of local optimums is not an optimum system at all; it is a very inefficient system.”
Location 4374 Time and money saved on non-bottleneck is just an illusion
“No, it isn’t,” I tell him. “Since we began withholding materials from the floor until the bottlenecks are ready for them, the non-bottlenecks now have idle time. It’s perfectly okay to have more setups on non-bottlenecks, because all we’re doing is cutting into time the machines would spend being idle. Saving setups at a non-bottleneck doesn’t make the system one bit more productive. The time and money saved is an illusion. Even if we double the number of setups, it won’t consume all the idle time.”
Location 4863 Balance flow with demand
“According to the cost-accounting rules that everybody has used in the past, we’re supposed to balance capacity with demand first, then try to maintain the flow,” I say. “But instead we shouldn’t be trying to balance capacity at all; we need excess capacity. The rule we should be following is to balance the flow with demand, not the capacity.
Location 4866 The output of an worker is not determined only by his own potential but also by it's dependencies
assumption that the level of utilization of any worker is determined by his own potential,” I tell them. “That’s totally false because of dependency. For any resource that is not a bottleneck, the level of activity from which the system is able to profit is not determined by its individual potential but by some other constraint within the system.”
Location 4870 Activating and utilizing a resource is not the same
“No, and that’s a third assumption that’s wrong,” I say. “We’ve assumed that utilization and activation are the same. Activating a resource and utilizing a resource are not synonymous.”
Location 4873 An hour saved at a non-bottleneck is worthless
say an hour lost at a bottleneck is an hour out of the entire system. Hilton says an hour lost at a bottleneck is just an hour lost of that resource. I say an hour saved at a non-bottleneck is worthless. Hilton says an hour saved at a non-bottleneck is an hour saved at that resource.
Location 5007 Mark Twain quote on common sense
Probably Mark Twain was right saying that ‘common sense is not common at all’ or something similar.”
Location 5608 The 5 steps how to increase throughput
After that it was easy. Relatively easy. It wasn’t too long before the process was written clearly on the board:
STEP 1. Identify the system’s bottlenecks. (After all it wasn’t too difficult to identify the oven and the NCX10 as the bottlenecks of the plant.)
STEP 2. Decide how to exploit the bottlenecks. (That was fun. Realizing that those machines should not take a lunch break, etc.)
STEP 3. Subordinate everything else to the above decision. (Making sure that everything marches to the tune of the constraints. The red and green tags.)
STEP 4. Elevate the system’s bottlenecks. (Bringing back the old Zmegma, switching back to old, less “effective” routings. . . .)
STEP 5. If, in a previous step, a bottleneck has been broken go back to step 1.
Location 5625 Constraint is a better word compared to bottleneck since at one moment the market can be the constraint of the system
“You’re right,” I say. And then, “It’s a little odd to call the market or the system of material release a bottleneck. Why don’t we change the word, to . . .” “Constraint?” Stacey suggests.
Location 6343 The manufacturing industry has been shaped by two great thinkers, Henry Ford and Taiichi Ohno.
The manufacturing industry has been shaped by two great thinkers, Henry Ford and Taiichi Ohno. Ford revolutionized mass production by introducing the flow lines. Ohno took Ford’s ideas to the next level in his TPS, a system that forced the entire industry to change its grasp of inventory from an asset to a liability.
Location 6345 Ford managed to reduce lead time from mining the iron ore until having the car ready for delivery to 81h
Ford’s starting point was that the key for effective production is to concentrate on improving the overall flow of products through the operations. His efforts to improve flow were so successful that, by 1926, the lead time from mining the iron ore to having a completed car composed of more than 5,000 parts, on the train ready for delivery, was 81 hours!3 Eighty years later, no car manufacturer in the world has been able to achieve, or even come close, to such a short lead time.
Location 6350 Ford focused on keeping inventories in operations moving
Flow means that inventories in the operation are moving. When inventory is not moving, inventory accumulates. Accumulation of inventory takes up space. Therefore, an intuitive way to achieve better flow is to limit the space allowed for inventory to accumulate. To achieve better flow, Ford limited the space allotted for work-in-process between each two work centers.
Location 6354 Forded removed local efficiencies by limiting space
The daring nature of Ford’s method is revealed when one realizes that a direct consequence of limiting the space is that when the allotted space is full, the workers feeding it must stop producing. Therefore, in order to achieve flow, Ford had to abolish local efficiencies.
Location 6358 Limiting space exposes the weakest link in the chain
One might think that preventing resources from working continuously will decrease throughput (output) of the operation. That undesirable effect might have been the result if Ford would have been satisfied with just limiting the space. But, there is another effect that stems from restricting the accumulation of inventory. It makes it very visible to spot the real problems that jeopardize the flow—when one work center in a line stops producing for more than a short while, soon the whole line stops. Ford took advantage of the resulting clear visibility to better balance the flow by addressing and eliminating the apparent stoppages.4 The end result of abolishing local…