“The Goal” is a business novel written by Eliyahu M. Goldratt. In the book the author uses an easy-to-read story line to explain the Theory of Constraints (TOC) as it applies to the problems of meeting demand at UniCo, the manufacturing plant run by the protagonist, Alex Rogo. The book opens with the division vice president, Bill Peach, visiting the plant to investigate a late order. His visit brings to light the problems of late shipments, massive backlogs, and production inefficiencies at the plant. The pressure to turn the plant around is exacerbated because it is rumored that the company plans to close one of its under-performing plants to cut costs. Consequently, Rogo has 90 days to turn the plant around to avoid being the plant that is closed. He gets help from an old friend, Jonah, who imparts his wisdom throughout the novel.
Jonah is a physicist who consults with corporations to make process improvements. He is a very busy man who appears sparingly in the book but each time he imparts a little nugget of knowledge for Rogo to use at the plant. Rogo and the reader are forced to figure out how to apply this knowledge to the problems at the plant. In the forward of the book, Goldratt states that he uses the Socratic Method to explain the main points of the book because he believes that it is an effective teaching and learning tool. These occasional pronouncements form the “take a ways” from the book and are what I will attempt to discuss in this paper.
The first point Goldratt makes through Jonah is that the number one goal of an organization is to make money. Everything else that an organization does should be a means to achieve that goal. Accountants express that goal, i.e. making money, as increasing net profit, ROI, and cash flow. For example, Goldratt explains that when UniCo installs robotic machines in the plant that results in a 26% increase in productivity of an operation but does not result in a 26% increase in customer orders, the company is not making any more money. Further, what appears to be a productive piece of machinery is causing inventory to increase with out sales, hence, the company is not making money.
The goal of making money in a manufacturing environment can be expressed in the following three measurements:
(1) Inventory (money already in the system) is all the money that the system has invested in purchasing things it intends to sell, i.e. investment that the organization has already made.
(2) Operating Expenses (money going out of the system) is all the money the system spends in order to turn inventory into throughput, i.e. scrap, tooling, supplies, direct and indirect labor.
(3) Throughput (money coming into the system) is the rate at which the system generates money through sales.
Goldratt further states that if inventory is made but does not sell the firm is not making money. This is what is happening at UniCo. Inventory is going up because the work-in-process (WIP) is increasing for the sake of machine efficiencies as a result of inflated batch quantities. The conventional wisdom is that less set ups (a fixed cost) on the machine results in a lower cost per unit, which accounting equates to improved efficiency. Also the warehouse is filling up with products the firm cannot sell which means throughput is decreasing. Eventually the inventories in the warehouse become throughput. As inventory sits, it increases carrying costs and overhead, there by increasing operating expenses. Further, if UniCo is making inventory/products it cannot sell; those products it does sell have to be made on an expedited basis. As a result the expedited orders cost more then they should. All three of these measurements are interdependent, which means that changing one will result in a change to the others. Thus, to improve an organization’s processes using Goldratt’s TOC one must consider all three measurements at the same time.
This introduces the second point that Jonah discusses with Rogo. The TOC is a principle which provides that all processes have impediments in the system. It is important to recognize the impediments or constraints and develop a plan to minimize their impact on the entire system. TOC also states that the output of a process which consists of multiple and independent operations are limited to the least productive or most constrained operation. The book illustrates constraints on a system with two examples; (1) a linked chain that is only as strong as the weakest link in the entire chain and (2) taking scouts on a hike.
On the hike Rogo is the leader of a bunch of boys that need to get from point A to point B in time to make camp for dinner. On the first half of the hike the boys get spread out over time because the faster boys are way out in front and the slower ones get farther behind. The boy who is restraining the whole operation is Herbie. He is overweight and carrying more then his physical capacity allows. Rogo realizes the whole scout troop is only as good as the weakness link in the entire chain which is Herbie. By placing the bottleneck, Herbie, at the front of the line and off loading some of what is in his pack to other boys with more capacity, Rogo can level the load on the whole system. The result is that the whole group makes it to camp in time for dinner. Rogo takes this knowledge back to the plant and applies it to the production process from one operation to the next.
The third major point that Jonah imparts are the two phenomena found in every plant. The first phenomenon is that there are always dependent events in any process flow. This is an event or series of events that must take place before the next event can happen. Thus, each successive event or downstream event is dependent on what has already occurred. The second phenomenon is statistical fluctuation. This is when different outcomes occur even though the same process is followed. Thus the results or the process are not absolutely predictable, but rather they are within a range of outcomes that can be forecasted to get a general idea of the most probable outcome. Unfortunately, most of the factors critical to running a plant successfully cannot be determined precisely ahead of time.
Fourth, Jonah instructs that there are impediments within the process flow of dependent events, which are called bottlenecks. A bottleneck is any resource whose capacity is equal to or less than the demand placed on it. Conversely, a non-bottleneck is any resource whose capacity is greater than the demand placed on it. The plant should not balance individual resource capacity with overall market demand for its product. Rather, it needs to balance the flow of product through the plant with overall market demand for its product. To be more precise, the flow should be slightly less than the demand. If the flow is equal to market demand and the market shrinks, then the plant have too much excess capacity. Fundamentally, the bottleneck(s) should be on par with the market demand. Additionally, working at maximum efficiency can result in excess inventory, and a plant that is working at maximum efficiency all the time is very inefficient. Use of plant resources means taking into consideration the entire system when making process decisions.
At UniCo, Rogo finds that he has two bottlenecks in the middle of the process. Unlike the hike example where Herbie can be moved to the front, Rogo is unable to move the bottlenecks at the plant to the front of the chain. Instead Rogo must find other solutions to improve throughput at the two bottlenecks. The first bottleneck is at the NCX-10 machine. The potential solutions to improve process flow and capacity at this operation are: (1) place quality control upstream from NCX-10, which will ensure that all work being done at this operation is on known good parts; (2) use old machines to increase capacity, which are not as efficient but which prove their worth by getting parts through the bottleneck; (3) assign a full time set up crew, to the NCX-10, which eliminates any downtime on the machine; and (4) mark orders to be processed through a bottleneck, which makes all the upstream operations aware of the order’s importance. The second bottleneck is at heat-treat. The solutions to improve process flow and capacity at this operation are: (1) use outside venders for extra capacity; (2) use time during baking cycle to set up parts in queue for the next run; and (3) remove heat-treat routing from parts that do not need it.
Focusing on these bottlenecks is the key to solving a lot of what is wrong with the processes at the plant. Jonah tells Rogo that to increase the capacity of the plant he must improve the capacity of the bottleneck. If it loses one hour in the bottleneck, it is lost forever and may not be recovered elsewhere in the system.
Jonah also instructs that Rogo can get into trouble by focusing too much on the bottlenecks and ignoring the rest of the process. He explains that activating a resource and utilizing a resource are not synonymous. Utilizing a resource means it is being use in a way which mirrors the overall goals of the whole system. Activating a resource means turning it on and running it without regard to whether it is needed. Activating a resource and increasing throughput can cause additional bottlenecks to appear. However, most plants have enough extra capacity that the increase would have to be large to make an impact.
In the book, both bottlenecks provided Rogo and his team a place to focus their energies and refine some of the plants’ processes. One of these processes is the four stages that a work order goes through when it travels from one operation to the next. These stages are:
(1) Setup is the time the part spends waiting for a resource, while the resource is preparing itself to work on the part.
(2) Process time (run time) is the amount of time the part spends being modified into a new, more valuable form.
(3) Queue time is the time the part spends in line waiting for a resource while the resource is busy working on something ahead of it.
(4) Wait time is the time the part waits, not for a resource, but for another part so they can be assembled together.
Also, the economic batch quantity (EBQ) is a critical decision made by the shop planner. However, the EBQ only takes a single work center or operation into consideration, not the whole system. A large batch will reduce set up time and increase inventory. The small batch size that Rogo switched to has several benefits, such as; smoother work flow, decreased inventory, reduced process flow times, improved machine utilization, and increased product quality.
Jonah points out that cutting order quantities increases the flow of product through the system which increases throughput and the company makes money. The additional set up time that a non-bottleneck performs because of the smaller batch size would not add to the overhead cost because the non-bottleneck has idle time anyway. An hour saved at a non-bottleneck is an allusion. With the increase in throughput a company can market its significant cut in lead-time, to obtain new business.
The easy sell to sales and marketing is a hard sell to accounting. The accountants are used to the traditional method of accounting, which is a total of the raw material costs, direct labor costs, and burden (which is direct labor times a determined factor). With the decrease in batch sizes the part cost increase using this method because the additional set ups have added to the direct labor charge. But this thinking does not take the entire process into account. It assumes that all workers in the system are working at full capacity all the time. Hence, the added set up time does not require additional workers as accounting would have you believe.
The result of the smaller batch sizes is a reduction in finished and WIP inventory and increased sales, which means more money coming in. Consequently, the same direct labor cost spread over more product. By making and selling more products with the same costs the system makes money and the shareholders are satisfied.
By following Jonah’s advice and addressing the bottlenecks Rogo was successful at turning around his failing plant. He improved throughput, cut inventories, and reduced operating expenses, which translated into making money. He got the promotion to run the division and, most importantly, his wife moved back home.
Source by Peter Foehl
The post The Goal Overview appeared first on Big Financial BLOG.
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http://blog.bigfinancial.co.uk/the-goal-overview/
