An insightful read on the philosophy behind managing and increasing the flow of your operations in your business. This book will challenge the way you think of the output of a system, and encourage you to optimize the system as a whole.
The following are my favourite passages from the book The Goal, by Eliyahu Goldratt.
“Productivity is meaningless unless you know what your goal is.”
What is Productivity?
- “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.”
What is the Goal?
- “The goal is to make money.”
- “Whatever enables the goal, to make money, is a means of achieving the goal.”
- “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.”
The Goal of a Company
- “The Goal of a Company is to make money by increasing net profit, while simultaneously increasing return on investment, and simultaneously increasing cash flow.”
The Goal of an Operation
- “The Goal of an Operation is to increase throughput while simultaneously reducing both inventory and operating expense.”
- “The goal is not to improve one measurement in isolation.”
- “Throughput is the rate at which the system generates money through sales.”
- “Throughput is the money coming in.”
- “Inventory is all the money that the system has invested in purchasing things which it intends to sell.”
- “Inventory is the money currently inside the system.”
Understanding Operational Expense
- “Operational expense is all the money the system spends in order to turn inventory into throughput.”
- “Operational expense is the money we have to pay out to make throughput happen.”
II. PRODUCTION CAPACITY
“We have to change the way we think about production capacity. We cannot measure the capacity of a resource in isolation. Its true productive capacity depends upon where it is in the plant.”
- “A bottleneck is any resource whose capacity is equal to or less than the demand placed upon it.”
- “A non-bottleneck is any resource whose capacity is greater than the demand placed on it.”
Non-Bottlenecks (Excess Capacity)
- “The level of utilization of a non-bottleneck is not determined by its own potential, but by some other constraint in the system.”
- “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.””
Bottlenecks (Limiting Constraints)
- “The capacity of the plant is equal to the capacity of its bottlenecks.”
- “An hour lost at a bottleneck is an hour lost for the entire system.”
- “Make sure the bottleneck’s time is not wasted.”
- “Make sure the bottleneck works only on what will contribute to throughput today.”
- “Gain capacity by offloading to non-bottlenecks for processing.”
III. MANAGING FLOW
“We shouldn’t be trying to balance capacity at all; we need excess capacity.”
Balancing Flow with Demand
- “What you need to do instead is balance the flow of product through the plant with demand from the market.”
- “We must find enough capacity for the bottlenecks to become more equal to demand.”
- “When capacity is trimmed exactly to marketing demands, no more and no less, throughput goes down, while inventory goes through the roof. 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.”
Dependences and Fluctuations
- “The big deal occurs when dependent events are in combination with another phenomenon called statistical fluctuations.”
- “Dependent events means that one operation has to be done before a second operation can be performed.”
- “Statistical fluctuations refers to the deviations in performance from an expected mean/target.”
- “The maximum deviation of a preceding operation will become the starting point of a subsequent operation.”
- “Dependency limits the opportunities for higher fluctuations; which is why negative fluctuations accumulate.”
The Role of Slack (Spare Capacity)
- “It’s not the material that concerns me. It’s the capacity. You see, when the problem that caused the stoppage is overcome, the upstream resources not only have to supply the current consumption of the bottleneck, at the same time they have to rebuild the inventory… That means that there are times when the non-bottlenecks must have more capacity than the bottlenecks. Now I understand. The fact that we have bottlenecks and non-bottlenecks is not because we designed the plant very poorly. It’s a must. If the upstream resources don’t have spare capacity, we won’t be able to utilize even one single resource to the maximum; starvation will preclude it.”
IV. VELOCITY AND LOAD
T (Lead) ∑= T (Setup) + T (Process) + T (Queue) + T (Wait)
Understanding Lead Time
- “Part of what Jonah told me last night over the phone had to do with the time a piece of material spends inside a plant. If you consider the total time from the moment the material comes into the plant to the minute it goes out the door as part of a finished product, you can divide that time into four elements.
- Setup. The time the part spends waiting for a resource, while the resource is preparing itself to work on the part.
- Process. The amount of time the part spends being modified into a new, more valuable form.
- Queue. The time the part spends in line for a resource while the resource is busy working on something else ahead of it.
- Wait. The time the part waits, not for a resource, but for another part so they can be assembled together.”
- “As Jonah pointed out last night, setup and process are a small portion of the total elapsed time for any part. But queue and wait often consume large amounts of time—in fact, the majority of the elapsed total that the part spends inside the plant. For parts that are going through bottlenecks, queue is the dominant portion. The part is stuck in front of the bottleneck for a long time. For parts that are only going through non-bottlenecks, wait is dominant, because they are waiting in front of assembly for parts that are coming from the bottlenecks. Which means that in each case, the bottlenecks are what dictate this elapsed time. Which, in turn, means the bottlenecks dictate inventory as well as throughput.
Understanding BATCH SIZE
- “If we reduce batch sizes by half, we also reduce by half the time it will take to process a batch. That means we reduce queue and wait by half as well. Reduce those by half, and we reduce by about half the total time parts spend in the plant. Reduce the time parts spend in the plant, and. . . . “Our total lead time condenses,” I explain. “And with less time spent sitting in a pile, the speed of the flow of parts increases.”And with faster turn-around on orders, customers get their orders faster,” says Lou. “Not only that,” says Stacey, “but with shorter lead times we can respond faster.” “That’s right!” I say. “If we can respond to the market faster, we get an advantage in the marketplace.”
V. ONGOING IMPROVEMENT
The Theory of Constraints (TOC)
1. IDENTIFY the system’s constraint(s).
2. Decide how to EXPLOIT the system’s constraint.
3. SUBORDINATE everything else to the above decision.
4. ELEVATE the system’s constraint.
5. If a constraint is broken, go back to step (1), but do not allow INERTIA to cause a system’s constraint.
VI. CONTINUOUS INQUIRY
On the Scientific Method
- “The secret of being a good scientist, I believe, lies not in our brain power. We have enough. We simply need to look at reality and think logically and precisely about what we see. The key ingredient is to have the courage to face inconsistencies between what we see and deduce and the way things are done. This challenging of basic assumptions is essential to breakthroughs.
- “I’ve started to see something interesting.” “Yes?” she says encouragingly. “It’s how physicists approach a subject; it’s so vastly different from what we do in business. They don’t start by collecting as much data as possible. On the contrary, they start with one phenomenon, some fact of life, almost randomly chosen, and then they raise a hypothesis: a speculation of a plausible cause for the existence of that fact. And here’s the interesting part. It all seems to be based on one key relationship: IF … THEN.”
- “What they actually do is to derive the unavoidable results logically from their hypothesis. They say: IF the hypothesis is right THEN logically another fact must also exist. With these logical derivations they open up a whole spectrum of other effects. Of course the major effort is to verify whether or not the predicted effects do exist. As more and more predictions are verified, it becomes more obvious that the underlying hypothesis is correct.””
On the Role of Management
- “That brings us to the real question, how does one go about identifying the system’s constraint? How can we zoom in on the most devastating erroneous policies. Or, to use your term, how does one go about identifying the core problem, the one that is responsible for the existence of so many undesirable effects?”
- “What are we asking for? For the ability to answer three simple questions: ‘what to change?’, ‘what to change to?’, and ‘how to cause the change?’ Basically what we are asking for is the most fundamental abilities one would expect from a manager. Think about it. If a manager doesn’t know how to answer those three questions, is he or she entitled to be called manager?”
- “At the same time,” I continue, “can you imagine what the meaning is to being able to hone in on the core problem even in a very complex environment? To be able to construct and check solutions that really solve all negative effects without creating new ones? And above all to cause such a major change smoothly, without creating resistance but the opposite, enthusiasm? Can you imagine having such abilities?”
This was a great read. The authors provide an insightful perspective on elevating the productivity of an organization as a whole; as a means to identify and exploit the system’s constraints, through a process of ongoing improvement.
All content credit goes to the author. I’ve simply shared the bits I’ve enjoyed the most and found most useful.
Cheers ’till next time!