Book Notes - The Goal

The Goal by Eliyahu Goldratt [1984]

Summary:
Prime measurements should be: Throughput (sales), Inventory (valued as raw material) and Operating Expense (everything that doesn’t fall into the other two).

Steps for a Process of Ongoing Improvement (POGI) in production:
1. Identify the bottleneck(s) – Find Herbie.
2. Exploit the bottlenecks – Work out how to make Herbie Produce the maximum amount possible.
3. Subordinate Everything Else to the Constraint – Keep the kids together with Drum Buffer Rope, have Herbie keep pace on a drum and tether him to the front person with a rope of a fixed length.
4. Elevate the Bottleneck(s) – Lighten the load in Herbies backpack
5. If the constraint is broken go back to step 1 and repeat.

Rules of managing a bottleneck:
1. Balance flow through your plant (not capacity).
2. The value of parts waiting at a bottleneck is equivalent to the sale price of the products that are waiting for the parts.
3. Never lose time on a bottleneck.
4. Never have a bottleneck work on a part that isn’t required immediately.
5. Never have a bottleneck work on a potentially bad part.
6. Redistribute work from the bottleneck to non-bottlenecks even if it seems like they cost more.

Notes:
Page 40: “The goal is to make money.” While elaborated up on It’s Not Luck this is still the primary goal of every company and the other two goals are complimentary (like the golden triangle).
Page 46: Primary measurements of making money; Total Profit, Percentage Profit and Cashflow.
Page 51: The above measurements have no meaning to people on the shop floor, so other measurements are needed to convert the management metrics to shop floor ones. The meaning is probably lost, the conversion results in local optima rules.
Page 60: The three operational measures Goldratt advocates are:
1. Throughput – The rate at which the business generates money through sales.
2. Inventory – All the money the system has invested in purchasing things which it intends to sell.
3. Operational Expense – All of the money the system spends to turn Inventory into Throughput.
Page 61: Inventory is deliberately only the price of raw goods and does not include cost of ‘value added’ activities to eliminate the confusion of whether a dollar spent is an investment or an expense.
Page 87: The reason no plant can ever be perfectly balanced is a combination of dependant events and statistical fluctuations. I.e. As the events are dependant the statistical fluctuations do not average out, delays are passed on but shortened times are not, therefore lead times stretch out.
Page 135: Any incentive system based on absolute output over a day or a week is fundamentally flawed, it encourages ‘hero syndrome’ at the end of the shift to meet the quota. Instead the incentive system should be based on how consistent they are in achieving the quotas on an hourly basis. Reduce statistical fluctuations as much as possible.
Page 217: Need to implement Drum Buffer Rope system to prevent an increase in inventory on the shop floor. Use a ‘drum beat’ to signal when to release raw materials into the process. Use a ‘buffer’ of a fixed size to ensure that the bottleneck always has material to work on, the buffer should be twice the statistical fluctuations in predicting when material will arrive at the bottleneck. Finally use a ‘rope’ so that there is a maximum amount of inventory between raw materials and the bottleneck.
Page 230: Benefits of cutting batch sizes in half:
1. Half the WIP
2. Half the cash tied up
3. Lead time is reduced as wait and queue time are halved
Page 238: Halfling batch sizes should increase efficiencies as the next steps will no longer be waiting for parts from preceding steps.
Page 269: For the Socratic method to be successful you must know what questions to ask the people you are trying to teach. To anticipate their questions and issues so that you can pose the right answers to point them in the right direction. The basis for these questions might come from a CRT.
Page 272: While every manager knows that inventory is a liability – cash tied up in the system, things you might not sell – on a balance sheet it is classed as an asset. Therefore by reducing your inventory it can show up as a loss in your P&L. Fortunately this only shows up as a one-time reduction in your assets.
Page 289: Example of Mendeleev and the periodic table, identified an underlying pattern in atoms that not only fit the existing data but was used to determine where there was missing or incomplete data. Rather than imposing an arbitrary order on the table he revealed and intrinsic order in nature.
Page 299: Key parts of POGI are; Improvement, you need the right measurements to know that you are improving and Process, it needs to be a step by step repeatable process.
Page 300: Chain analogy; in the cost world you are trying to trim the weight of the whole chain, in the throughput world you are trying to strengthen the whole chain.
Page 301: Steps for TOC production improvement:
6. Identify the bottleneck(s) – Find Herbie.
7. Exploit the bottlenecks – Work out how to make Herbie Produce the maximum amount possible.
8. Subordinate Everything Else to the Constraint – Keep the kids together with Drum Buffer Rope, have Herbie keep pace on a drum and tether him to the front person with a rope of a fixed length.
9. Elevate the Bottleneck(s) – Lighten the load in Herbies backpack
10. If the constraint is broken go back to step 1 and repeat.
Page 312: If you have spare capacity you can sell that capacity at any value above cost of materials because all of the other costs are taken into account already, the one proviso for this is that your market must be segmented so you do not have to lower the prices for everyone.
Page 317: Pick a hypothesis and then try to rigorously link it with other things using deductive logic.
Page 336: The questions that all managers should be able to answer are:
1. What to change? – Current Reality Tree + Conflict Resolution Diagram
2. What to change to? – Future Reality Tree
3. How to change? – Transition Tree + PreRequisites Tree

Quotes:
Page 41: “An action that moves us towards making money is productive.”
Page 88: “Most of the factors critical to running [a] plant successfully cannot be determined precisely ahead of time.”
Page 138: “Some resources have to have more capacity than others. The ones at the end of the line should have more than the ones at the beginning – sometimes a lot more.”
Page 158: “An hour lost at a bottleneck is an hour lost for the entire system.”
Page 210: “Making an employee work and profiting from that work are two different things”
Page 268: “Don’t give the answers, just ask the questions.”