The Goal

The Goal by Eliyahu M. Goldratt and Jeff Cox, North River Press, Inc., Second Revised Edition (1992).

Set the Stage

Alex Rogo, plant manager of the Bearington plant Bearington plant, part of the UniWare Division, part of the conglomerate UniCo Alex meets Jonah, his college physics professor, at the airport

Interchange between Alex and Jonah at Airport

Jonah Alex I'm going to speak at a Robots So your plant uses robots for Productivity Conference Have they increased productivity? Yes Sure - 36% in one area

36% more money?

You didn't increase productivity

Airport conversation continues

Jonah
Did you ship one more product? Alex Not sure. Probably not

Did you fire anybody?

Did your inventories go down?

Then you didn't increase productivity.

No

Alex But we run at 90% efficiency with a low cost per part.

Alex and Jonah: a conflict

Alex: I am running an efficient plant. Jonah: You are running an inefficient plant. Data

Machines run 90% of the time. Unit costs are low. More products are not shipped. No one is fired. Inventory is not decreased. Inventories are high. Can't ship on time.
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What is the source of the conflict?

Productivity: Anything that moves toward the goal is productive. Anything that moves away from the goal is not productive. Alex and Jonah have different definitions of the goal. What is the goal?

Question left by Jonah: What is the Goal?

Make product Increase market share Produce quality products Produce efficiently Hire workers Support the city, state and national economy Increase stockholder value

Why is a goal important?

Directs decisions Allows Measurement of accomplishment Without goals we are moved by the current requirements to the exclusion of concerns for the future. What would Deming say is the Goal?

Point 1: Constancy of Purpose for the Improvement of Product and Service.

We need one goal not many

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What is the goal of a public company?

Make money now and in the future

How do we measure progress toward the goal?

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Financial Measures

What Financial Measures Describe the Goal of Making Money?

Net Profit (NP) Return on Investment (ROI) Cash Flow (CF)

Are these sufficient for making decisions?

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Can NP, ROI and CF be used to make decisions?

Engineering Economics says yes

Accept the project if the IRR of the cash flow is greater than the MARR. It is difficult to see how the global measures are affected by individual design and operating decisions.

Goldratt would say no

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What Operational Measures Describe the Goal?

Throughput (TP)

Rate at which system generates money through sales. Sales Revenue - Raw material Expense

Inventory (I)

All the money that the system has invested in purchasing things which it intends to sell All the money that the system spends in order to turn inventory into throughput
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Operational Expense (OE)

How do these measures relate financial measures?

NP = TP - OE ROI = NP/I Cash flow is OK if

cumulative income + initial cash > cumulative costs.

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How do the measures relate to decisions?

Operational
NP ROI CF

Financial

TP I
TP I OE

NP NP NP

ROI ROI ROI

CF CF CF

OE

An effective decision simultaneously increases TP, decreases I, and decreases OE.

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Was the decision to add robots a good idea?

Jonah Alex

Did you ship one more product? (did you increase throughput?) Did you fire anybody? (did you decrease cost?) Did your inventories go down? Did the robots increase productivity?

Not sure
Probably not No

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The Goal
The goal is to reduce operating expense, reduce inventory while simultaneously increasing throughput. The most powerful effect is to increase throughput.
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