The Goal is a very compelling novel. Novel, HUH!! Who ever heard of a novel about a production plant? Well, Eli has made the production managers have quite an epiphany. In one book he might have changed the whole world of cost accounting. Eli approached the production world with a common sense view. Using just one goal, making money, he referenced every activity to it. Eli said, "I view science as nothing more than an understanding of the way the world is and why it is that way." You see, Eli is a physicist, and in being one, has to understand why things work the way they do. His common sense approach is illustrated beautifully in this novel. He has looked at cost accounting from the outside and has developed a whole new system because of it.

Everyone from accountants to production managers to CEO’s should read this book. Because of its fundamentals, it should be part of the curriculum of every accounting program. This novel has and continues to help the industry to make strides toward continuous improvement.

Chapter One 

The first chapter gets the reader acquainted with Mr. Alex Rogo and his apparent problems with his production plant. This is shown through a confrontation between Mr. Rogo and his boss Mr. Peach, the Division Vice President. The dispute is over an overdue order #41427. Through their conversation it’s learned that Mr. Peach will not settle for anything less than the order being shipped today, and since the plant is neither productive nor profitable, Alex has three months to show an improvement or the plant will be shut down!

Chapter Two 

This chapter gives insight to Alex’s home life. Since moving back to his hometown six months ago, it seems adjustment isn’t going well for his family. It’s great for Alex, but it’s a big change from the city life that his wife is used to. You also experience Mr. Rogo’s background through his reflections back on his travels to eventually find himself back where he started. "He’s now 38 years old and a crummy plant manager". By the way, the order #41427 does get shipped, but not very efficiently. All hands in the plant are working on one order with forbidden overtime to boot.

Chapter Three 

Mr. Peach calls a meeting at headquarters for all plant managers and his staff. At the meeting everybody finds out how bad things are and are given goals to achieve for the next quarter. Through the grapevine Mr. Rogo finds out perhaps why Mr. Peach has

been acting so erratic lately, the Division has one year to improve or it’s going to be sold, along with Mr. Peach.

Chapter Four 

While at this meeting, Alex thinks back on a recent business trip where he ran into an old physics professor, Jonah, at the airport. Jonah puzzles Alex with how well he knows how Alex’s plant is doing. Jonah has no knowledge of where  Alex is employed. Johan predicts the problems of high inventories and not meeting shipping dates. He also states that there is only one goal for all companies, and anything that brings you closer to achieving it is productive and all other things are not productive. (SeeWhat is this thing called Theory of Constraints for more on Alex's encounter with Jonah.)

Chapter Five 

Alex decides to leave the meeting at the break. He has no particular place he would like to go; he just knows this meeting isn’t for him, not today. He needs to understand what the "goal" is. After a pizza and a six pack of beer it hits him, money. The "goal" is to make money and anything that brings us closer to it is productive and anything that doesn’t isn’t.

Chapter Six 

Mr. Rogo sits down with one of his accountants and together they define what is needed in terms of achieving the goal. Net profit needs to increase along with simultaneously increasing return on investment and cash flow. Now all that is needed is to put his specific operations in those terms.

Chapter Seven 

Alex makes the decision to stay with the company for the last three months and try to make a change. Then he decides he needs to find Jonah.

Chapter Eight 

Alex finally speaks to Jonah. He is given three terms that will help him run his plant, throughput, inventory, and operational expense. Jonah states that everything in the plant can be classified under these three terms. "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." "Operational expense  is all

the money the system spends in order to turn inventory into throughput." Alex needs more explanation.

Chapter Nine 

Alex fresh off his talk with Jonah gets word that the head of the company wants to come down for a photo opportunity with one of Alex’s robots. This gets Alex thinking of the efficiency of these robots. With the help of the accountant, inventory control woman, and the production manager, Alex discovers the robots increased costs, operational expenses, and therefore were less productive. Implementing the robots increased costs by not reducing others, like direct labor. The labor was shifted to other parts of the plant.

Chapter Ten

After explaining everything, Alex and his staff (Bob from production, Lou from accounting and Stacey from inventory control) hammered out the meaning of throughput, inventory and operational expense until satisfied. Lou, states the relationships as follows. "Throughput is 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." Bob is skeptical that everything can be accounted for with three measurements. Lou explains that tooling, machines, the building, the whole plant are all inventory. The whole plant is an investment that can be sold. Stacey says, "So investment is the same thing as inventory." Then they decide that something drastic is needed to be done with the machines. But how can they do that without lowering efficiencies? Another call to Jonah is placed and Alex is off to New York that night.

Chapter Eleven 

The meeting with Jonah is brief. Alex tells Jonah of the problems at the plant and the three months in which to fix them. Jonah says they can be fixed in that time and then they go over the problems the plant has. First, Jonah tells Alex to forget about the robots.  He also tells Alex that "A plant in which everyone is working all the time is very inefficient." Jonah suggest that Alex question how he is managing the capacity in the plant and consider the concept of a balanced plant. According to Jonah, this "is a plant where the capacity of each and every resource is balanced exactly with demand from the market." Alex thinks a balanced plant is a good idea. Jonah says no, "the closer you come to a balanced plant, the closer you are to bankruptcy." Then Jonah leaves Alex with another riddle, what does the combination of "dependent events" and "statistical fluctuations" have to do with your plant? Both of those seem harmless and

should work themselves out down the production line.

Chapter Twelve 

This short chapter tries to capture the essence of the problems the job is causing at home with the extra workload. The marriage is very strained because of the devotion Alex needs to give to the plant.

Chapter Thirteen 

Stuck for the weekend as troop master, Alex discovers the importance of "dependent events" in relation to "statistical fluctuations". Through the analogy between a single file hike through the wilderness and a manufacturing plant, Alex sees that there are normally limits to making up the downside of the fluctuations with the following "dependent events". Even if there were no limits, the last event must make up for all the others for all of them to average out.

Chapter Fourteen 

Finally, through the dice game or match bowl experiment, it becomes clear that with a balanced plant and because of "statistical fluctuations" and "dependent events" throughput goes down and inventory along with operating expenses goes up. A balanced plant is not the answer. (See the Dice Game or Match Bowl experiment note).

Chapter Fifteen 

Fully understanding the "dependent events", Alex puts the slowest kid in the front of the hike and he relieves him of extra weight he has been carrying in his backpack. This balances the fluctuations and increases the kid’s productivity, which increased the throughput of the team.

Chapter Sixteen 

Well, after the camping trip the boys arrive home to find the mother has disappeared. All the stress of his job was too much for her so she left. Now the kids and the job are all Alex’s responsibility. This was supposed to be a weekend for Alex and his wife, but when the hike came up it seemed to be the last straw for her.

Chapter Seventeen 

Alex tries to portray his new revelation to his team at the plant. Nobody seems interested. But the walk in the woods becomes apparent when it is put to the test for an overdue order in the plant. Now even the production supervisor agrees. Now what?

Chapter Eighteen

In this chapter Jonah introduces Alex to the concept of bottlenecks and non-bottlenecks. Jonah defines these terms as follows. "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." Jonah explains that Alex should not try to balance capacity with demand, but instead balance the flow of product through the plant.  Later, Alex and his team recognize the bottlenecks, the areas where capacity doesn’t equal demand, like the slow kid Herbie on the hike. With this discovery goes the ideas related to reorganizing the plant like Alex did with the hike. Production is a process and it cannot be moved around so easily. Many processes rely on the previous one to be able to complete the next. Alex would need more machines, which takes more capital, and division is not going to go for that.

Chapter Nineteen 

Well, Jonah makes a visit to the plant. Jonah tells Alex that a plant without bottlenecks would have enormous excess capacity. Every plant should have bottlenecks. Alex is confused. What is needed is to increase the capacity of the plant? The answer is more capacity at the bottlenecks. More machines to do the bottleneck operations might help, but how about making them run more effectively. Jonah tells them that they have hidden capacity because some of their thinking is incorrect. Some ways to increase capacity at the bottlenecks are not to have any down time within the bottlenecks, make sure they are only working on quality products so not to waste time, and relieve the workload by farming some work out to vendors. Jonah wants to know how much it cost when the bottlenecks (X and heat treat) machines are down. Lou says $32 per hour for the X machine and $21 per hour for heat treat. How much when the whole plant is down? Around $1.6 million. How many hours are available per month? About 585. After a calculation, Jonah explains that when the bottlenecks are down for an hour, the true cost is around $2,735, the cost of the entire system. Every minute of downtime at a bottleneck translates into thousands of dollars of loss throughput, because without the parts from the bottleneck, you can’t sell the product. Therefore, you cannot generate throughput.

Chapter Twenty

Alex organizes the bottlenecks to work on only overdue orders from the most overdue to the least. He then finds his wife. She is at her parent’s house. Through their conversation it is learned that she still needs to be away from everybody, even the kids.

Chapter Twenty-One

The crew works out some of the details for keeping the bottlenecks constantly busy. In the process they find that they need another system to inform the workers what materials have priority at non-bottlenecks. Red and green tags are the answer. Red for bottleneck parts to be worked on first as to not hold up the bottleneck machine, and green for the non-bottleneck parts. That concludes another week. The true test will be next week.

Chapter Twenty-Two 

Great, twelve orders were shipped. Alex is pleased, but he definitely needs more. He puts his production manager on it. His production manager rounds up some old machines to complement what one of the bottlenecks does. Things are looking up.

Chapter Twenty-Three

They are becoming more and more efficient, but lag time arouse with the two bottlenecks because of workers being loaned out to other areas and not being at the bottlenecks when needed to process another order. It seems there was nothing to do while waiting for the bottleneck machine to finish the batch. Therefore, in keeping with the notion that everybody needs to stay busy, workers were at other areas between batches. Alex decides to dedicate a foreman at each location all the time. Then one of those dedicated foreman, the night foreman, discovers a way to process more parts by mixing and matching orders by priority, increasing efficiency by ten percent. Finally, one process being sent through a bottleneck could be accomplished through another older way and therefore free up time on the bottleneck.

Chapter Twenty-Four

Now that the new priority system is in place for all parts going through the bottlenecks, inventory is decreasing. That’s a good thing right? But lower inventory revealed more bottlenecks. This intrigues Jonah so he’s coming to take a look.

Chapter Twenty-Five

 "There aren’t any new bottlenecks", says Jonah. What actually has happened is a result of some old thinking. Working non-bottlenecks to maximum capacity on bottleneck parts has caused the problem. All parts are stacked up in front of the bottlenecks and others are awaiting non-bottleneck parts for final assembly. There needs to be balance. The red and green tags need to be modified. It seems as if the bottlenecks will again control the flow, by only sending them exactly what they need and when they need it.

Chapter Twenty-Six

Ralf, the computer wiz, says he can come up with a schedule for bottleneck parts and when they should be released. This will alleviate any excess inventory in front of the bottlenecks, but what about the non-bottlenecks? Jonah says with the same data out of the bottlenecks to final assembly, you should be able to predict non-bottleneck parts as well. This will make some time, but there are enough parts in front of the bottlenecks to stay busy for a month.

Chapter Twenty-Seven 

There is another corporate meeting. Mr. Peach doesn’t praise Alex like Alex thinks he should. Alex decides to talk with him in private. Mr. Peach agrees to keep the plant open if Alex gives him a fifteen percent improvement next month. That will be hard because that relies heavily on demand from the marketplace.

Chapter Twenty-Eight

Fifteen Percent!! Fifteen Percent!! Just then Jonah called to let Alex know that he will not be available to speak with in the next few weeks. Alex informs him of the new problem of more inventories and less throughput. Jonah suggests reducing batch sizes by half. Of course, this will take some doing with vendors, but if it can be done, nearly all costs are cut in half. Also, they get quicker response times and less lead times for orders. Sounds good.

Chapter Twenty-Nine

Alex is propositioned with a test. They can greatly increase sales, current and future, if they can ship a thousand products in two weeks. Impossible without committing the plant to nothing but the new order? Wrong! How about smaller batch sizes. Cut them in half again. Then promise to ship 250 each week for four weeks starting in two weeks. The customer loved it.

Chapter Thirty

Seventeen percent!! That’s great, but it’s not derived from the old cost accounting model. The auditors sent down to the plant from Division find just 12.8% improvement. Most of it accounts from the new order. Which by the way, the owner of the company that placed the order came down personally to shake everybody’s hand in the plant and to give a contract to them for not a thousand parts but ten thousand. Anyway, tomorrow is the day of reckoning at division.

Chapter Thirty-One 

Well the meeting at Division started out rough. Alex thought he would be meeting with Mr. Peach and other top executives. Instead, he met with their underlings. He decides to try and convince them it doesn’t work. Just before leaving he decides to see Mr. Peach. It’s a good thing he did, because he just got promoted to Mr. Peach’s position. Now Alex has to manage three plants as the whole division. He calls Jonah desperately and asks for help. Jonah declines until he has specific questions.

Chapter Thirty-Two 

Alex has a nice dinner with his wife. Through the veal parmesan and cheese cake it is decided that Alex should ask Jonah how he can get other people to understand these techniques that his team has discovered without being condescending.

Chapter Thirty-Three 

Now is the time to assemble Alex’s team for Division. Surprisingly the accountant with two years to retirement is on board, but the production manager isn’t. He wants to be plant manager to continue their efforts. Everything is totally into place at the plant but more is needed for division.

Chapter Thirty-Four

Alex is firmly engrossed with the problems of taking over the division. With advice from his wife he decides to enlist the help of his team at the plant. Every afternoon they will meet to solve the problem. After the first day it is obvious , they will need them all.

Chapter Thirty-Five 

The second day they are led in a discussion about the periodic table of elements, and

how the scientists actually got a table of any sort. Maybe that is how they will solve the massive problems of division, by understanding how the scientists started with nothing and achieved order. A way to define them by their intensive order is needed.

Chapter Thirty-Six 

The team finally comes up with the process: Step one – identify the system’s bottlenecks; Step two- decide how to exploit those bottlenecks; Step three- subordinate everything else to step two decisions; Step four- evaluate the systems bottlenecks; Step five- if, in a previous step, a bottleneck has been broken, go to step one. It seems so simple, just different.

Chapter Thirty-Seven

The team decides to revise the steps: Step one – identify the systems constraints; Step two – decide how to exploit the systems constraints; Step three – subordinate everything else to step two decisions; Step four – evaluate the systems constraints; Step five- warning!!! If in the previous steps a constraint has been broken, go back to step one, but don’t allow inertia to cause a system constraint. It also has been discovered that they have been using the bottlenecks to produce fictitious orders in an effort to keep the bottlenecks busy. That will free up twenty percent capacity, which translates in to market share.

Chapter Thirty-Eight 

Talking with the head of sales. Alex finds out that there is a market order to fill the capacity. It’s in Europe, so selling for less there will not affect domestic clients. If it can be done, will open a whole new market. Then Alex ponders Jonah’s question, to determine what management techniques should be utilized. Alex determines how a physicist approaches a problem. Maybe this will lead to an answer.

Chapter Thirty-Nine 

Alex experiences a problem at the plant. It seems all the new orders have created new bottlenecks. After analyzing the problem, they agreed to increase inventory in front of the bottlenecks an tell sales to not promise new order deliveries for four weeks, twice as much as before. This will hurt the new relationship between sales and production, but it is needed. Production is an ongoing process of improvement, and when new problems arise they need to be dealt with accordingly.

Chapter Forty

Finally, struggling with the answer to Jonah’s question, Alex comes up with some questions on his own: What to change? What to change to? How to cause the change? Answering these questions are the keys to management, and the skills needed to answer them are the keys to a good manager and ultimately the answer to Jonah’s question.

_________

- See more at: http://maaw.info/ArticleSummaries/ArtSumTheGoal.htm#sthash.l4hOpBJR.dpuf

Key Takeaways from the Goal: A Process of Ongoing Improvement

The Goal: A Process of Ongoing Improvement, by Eliyahu M. Goldratt, is a book pretty

much every business school student is required to read.  Below are the key takeaways

from this book:

Accounting vs. Operational Measures

Accounting cost figures misleading for operations purposes

Productivity per machine is meaningless; bottleneck should drive metrics

Linking Financial – Marketing – Operations Measures

Often mismatch top-level and lower-level metrics across departments (ROI vs. Sales

vs. Productivity on non-bottleneck)

Managing by Bottlenecks

“An hour lost on the bottleneck is an hour lost for the entire plant”

Bottleneck has no “slack capacity”

Solution

Increase capacity

longer hours

more machines

more workers

outsource

Larger batches at the bottleneck

“An hour lost on a non-bottleneck is a mirage”

Do not overrun to be efficient: excess WIP chocks up the bottleneck

Do not optimize a non bottleneck at the expense of a bottleneck

Shorter and smaller batches at non bottleneck

“Manage the plant by the bottlenecks”

“Manage flows not capacity”

Quality control before and during the bottleneck

Make sure it is always running (have buffers)

Make sure most profitable product goes through

Throughput is profitable, efficiency is not

Additional Notes on Bottlenecks

Keep bottleneck running, subject the rest to the bottleneck

Batch sizes: Long on bottleneck, short elsewhere

Five steps of bottleneck management

Identify the system’s bottlenecks

Decide how to exploit the bottlenecks

Subordinate everything else to the bottlenecks

Remove the system’s bottlenecks

Identify the system’s new bottlenecks

Note: Bottleneck may be external (such as demand)

Gains from bottleneck management in The Goal

Increased revenue from $2 million and 31 orders to $3 million and 57 orders

Reduction of WIP by 12%

Bucky Burnside was delighted – 5 month order in 5 weeks

Order for 10,000 model T’s ensures survival of the plant for one year

Additional Takeaways

Always challenge the status quo and use a pragmatic approach

There’s always room for improvement

Look at overall system, not just the individual parts

When Operations is effective, you work better, not harder

Make sure to have the right metrics in place

Work as a team, foster the sharing of ideas

Importance of coordinating between Operations and Marketing

Summary

In his book ´The goal´, Eliyahu Goldratt describes a new method to optimize production environments:

the Theory of Constraints (TOC). Where traditional efficiency theories are focused on maximizing

machine outputs to gain advantages of large scale production, the TOC focusses on the utilization of the

Bottleneck machines only, to help the organizations reach its goal: generating money to make sure the

company can exist in the nearby future. In this novel, a production manager (Alex Rogo) is mentored by

management guru (Jonah) to help optimizing Alex´s Plant and prevent it from closing down.

In our current economic system, one only needs one type of asset to be able to exist: Money.THE

GOAL of every company or plant should therefore be to keep generating money, to make sure the plant

can still be there tomorrow to generate jobs and welfare. This book starts off with a lot of discussion on

how the generation of money can be measured. Goldratt proposes THREE MEASURES FOR

GENERATING MONEY:

1. Turnover, which is the speed in which money is generated by means of sales

2. Inventories, which are investments the company makes to be able to produce products

3. Operational Expenses, the costs necessary to turn the inventories into sellable products

One of the first Lessons Jonah teaches Alex is the myth of advantages of scale; also known as large-

sclae production. When a product is not sold directly after producing it (generate turnover), production

only leads to unnecessary inventories and operational expenses. When these two types of costs rise, how

can the cost price of a product decline? Luckily, Jonah also knows another method of production which

will help a company to generate money in a more efficient way.

The THEORY OF CONSTRAINTS is based on the possibility that the output of different machines in one

production process can differ from one another. The slowest machine will always determine the speed in

which products can be produced and therefore also the speed in which sales can be realtized, the

turnover. This slowest machine is called the Bottleneck. The costs of one lost production hour on the

bottleneck machine can calculated by determining the output of the machine (number of products) and

multiply it with the sales price of the end product.

How is the TOC put to practice? Goldratt describes the DRUM-BUFFER-ROPE principle to optimize

efficiencies of bottlenecks.

DRUM describes the speed in which machines should produce. This speed is based on both custumer

demand and the bottleneck. By allowing no machine to produce faster than the bottleneckmachine,

one prevents the built-up op inventories.

A BUFFER is placed before the bottleneck machine to prevent it from starving, or idling, for material.

one hour of not producing costs the company one hour of sales which can be produced in one hour.

The ROPE represents a maximum amount of Work In Process (WIP) in the line. During a hiking trip,

Alex discovers that the difference in speed in which the kids walk lead to growing distance between

the first and the last kid in line. This distance represents the Inventory in a factory. By binding the boys

together with a rope, the faster boys are forced to walk slower and the maximum distance between the

first and the last boy is managed. By determining the length of the rope, the so called WIP-cap, one

can prevent different workstations from overproducing.

The Drum-buffer-rope principle helps the organization to maximize PRODUTION THROUGHPUT. A

possible measure for throughput of a factory is the Lead time, which is the total time a product spents in

the factory, from raw materials to end product. Goldratt describes four types of time:

1. Change-over times, the time a product(part) has to wait before it can continue being produced

2. Process time, the time necessary to alter the products and add value to it#

3. Queue time, the time a product spends waiting for other products in the same batch which need to be

processed on a machine

4. Waiting time, the time a product spends waiting for other parts or materials.

These different  times of time are interrelated. Reducing batch size by 50% for instance, can lead to

twice as many change-over-times but at the same time also to a reduction of waiting-times by 50% on

different workstations. Reducing Batch sizes is thus not per definition an improvement, but needs to be

evaluated for every situation.

Goldratt´s Theory of Constraints describes managing production processes by managing bottleneck

machines. It is possible though, that a process has multiple bottlenecks. The three measures Turnover,

inventories and Operational Expenses are optimized when the productivity of the bottleneck machines are

maximized, while for all other machines, the batches and inventories are kept as low as possible

This way of optimizing production processes requires a different method of measuring efficiency. One

example is the cost per part produced, which is traditionally (but  onterecht) increased when change over

times increase. A second example is the result of lowering ´assets´ on the balance sheet when

inventories are reduced.

Implementing Goldratt´s tools, as well as Lean Tools, ask for a radical change in organizations, both in

terms of production management as well as accounting.

The Goal is a management-oriented novel by Dr. Eliyahu M. Goldratt, a business consultant

whose Theory of Constraints has become a model for systems management. It was originally

published in 1984 and has since been revised and republished in 1992 and 2004. This book is

usually used in college courses and in the business world for case studies in operations

management, with a focus geared towards the Theory of Constraints, bottlenecks and how to

alleviate them, and applications of these concepts in real life.[1] This book is widely used in leading

colleges of management to teach students about the importance of strategic capacity planning and

constraint management.

Contents

  [hide] 

1 Setting 2 Bottlenecks 3 Socratic Method 4 Characters 5 See also 6 References

Setting[edit]

Like other books by Goldratt, The Goal is written as a piece of fiction. The main character is Alex

Rogo, who manages a production plant owned by UniCo Manufacturing, where everything is always

behind schedule and things are looking dire. At the beginning of the book, Bill Peach, a company

executive, tells Alex that he has three months to turn operations at his plant around from being

unprofitable and unreliable to being successful.[2] His distant acquaintance, Jonah (a physicist),

whom many believe represent Goldratt himself, helps him solve the company's problems through a

series of telephone calls and short meetings. A second story line, which only occasionally intersects

with the main topic of the book but to which concepts Jonah teaches are also applied, describes

Alex's marital life.

Bottlenecks[edit]

The book goes on to point out the role of bottlenecks (constraints) in a manufacturing process, and

how identifying them not only makes it possible to reduce their impact, but also yields a useful tool

for measuring and controlling the flow of materials. Alex and his team identify the bottlenecks in their

process and immediately begin to implement changes to help speed up capacity. In response to

questions about the logic of using outdated technology in modern manufacturing, Alex's team

brought in an old machine they received for free (which had previously been used at their plant in

conjunction with two other machines) in order to increase the capacity of the NCX-10 machine,

which had been identified as one of the two bottlenecks. Further more, they identified processes at

the heat treat, identified as their second bottleneck, that caused massive delays in their getting

product through the heat-treat and which had also caused some products to be heat-treated multiple

times (to make softer and then harder again) instead of just once or not at all.

Socratic Method[edit]

In the book, Jonah teaches Alex Rogo by using the Socratic method. Throughout the book,

whenever a meeting or telephone call dialogue happens with Jonah he poses a question to Alex

Rogo or a member of his crew which in turn causes them to talk amongst themselves to come up

with a solution to their problem. When Alex Rogo is with his wife, he finds the Socratic method to be

a way to fix his marriage which he then uses, with his crew, to come up with the five steps they

should use to fix problems in the plant which ultimately leads him and Lou to think up the three

things every division manager, the position Rogo is promoted to, should be able to do.