Goldratt’s Major Concepts in The Goal: The Foundations of Theory of Constraints

The Goal is a novel which introduces Eliyahu Goldratt’s Theory of Constraints – which itself has several major components.  Goldratt’s novel beats home the point through the way it is constructed and written.

  • The narrator, Rogo, is a plant manager.
  • He experiences several problems, including a primary challenge with his plant’s performance.
  • He has a consultant, Jonah, a former professor, who serves as Goldratt’s proxy.
  • Jonah, and later Rogo, help explain the Theory of Constraints through the Socratic method of questioning to educate.

The major concepts that Goldratt places in Rogo’s hand to explain and solve problems are; Goals, Constraint, Dependence, Fluctuations, Metrics, Batch Size, Throughput Accounting, Priority and Local Optima (a trap to be avoided).

Goals

To study a system and measure performance, a goal is required.  Clear goals are required to measure success.

With many of the concepts that Goldratt promotes, he also gives rules for their application.  Goals create a great rule;

“When you are productive you are accomplishing something in terms of your goal, right?” Jonah to Rogo, Ch 04, Pg 31

The corollary to this insight is that activity away from the goal doesn’t accomplish anything.  Focus on the goal.  If you don’t have a goal, then the first goal is to have a goal.

Constraint

A process or system is made up of steps – the slowest step is the Constraint.  The term bottleneck is often used for a constraint.  A constraint is a bottleneck – but not all bottlenecks are constraints.  In The Goal, the primary system Goldratt describes is Rogo’s Bearington plant.  The plant’s Goal is to make money – which it does by taking raw materials and converting them to goods that are sold.  Production processes within the plant that enable making money move at different speeds.

Dependence

Jonah introduces the concept of Dependent Events to Alex Rogo over breakfast in Chapter 11 of The Goal.  It is paired with the concept of Statistical Fluctuation.  Dependent Events is straight forward – some future event can only happen if specific previous steps happen.  First grade happens after kindergarden.  Products ship only after they’ve been produced.

Combined with Fluctuation, Dependence explains why so many organizations make mistakes when estimating project complexity and completion:

“Why do you think it is that nobody after all this time and effort has ever succeeded in running a balanced plant?” Jonah to Rogo, Ch 11, Pg 86

Fluctuation

Goldratt introduces Statistical Fluctuation and highlights it most clearly in Chapter 17.  Trying to get an order shipped, the team rallies around their goal and tries to make a 5 PM ship time.  While the average result of their completions is good – the fluctuations compound and the goal is missed.  The NCX-10 runs with smaller batches.

When combined with dependence, fluctuations accumulate.  No negative time can occur.  Like the drunkard’s walk in finance, the process can never go below the wall.

What’s happening isn’t an averaging out of the fluctuations in our various speeds, but an accumulation of the fluctuations.

Metrics

Ralph Nakamura is the plant’s loyal data analyst.  Lou is the loyal plant controller who pushes aside corporate’s meaningless utility metrics to focus on numbers that help the plant achieve its goal.  The book swims in data.  At only one point is data resisted – and that worldview is quickly corrected.

Metrics should measure progress towards the goal.  Other metrics can be a distraction.

“Alex, you cannot understand the meaning of productivity unless you know what the goal is. Until then, you’re just playing a lot of games with numbers and words.” Jonah, Ch 4, Pg 33

Batch Size

Goldratt’s main message in metrics is a push towards throughput based accounting methods.  If the system is analyzed as a fluid flow, then the constraint is the narrowest portion – a literal bottleneck.  Batches are the particles that make up the fluid.  Fluids flow fastest with small particles.  The system’s volume is maximized with small particles.

Goldratt shows Rogo using smaller batches to great effect in Chapter 28 to hit his 15% growth target.  Batch sizes are cut in half again to get big orders out and win business.

Batch sizes can apply to more than just plant operations, and Theory of Constraints methods would be applied to them in Critical Chain Project Managment, which is the ToC approach to projects.  Here, smaller batch sizes mean smaller more easily managed projects.  Cutting batch size can often lead to improved quality and reduced uncertainty in new products and processes.

Throughput Accounting

Rogo pushes Alex towards a different view of accounting, which is labeled “Throughput Accounting.” Rogo includes three primary metrics – Inventory, Revenue and Operating Expense.  Goldratt’s goal with this concept appears to be simplicity.  The operating environment of a plant can be very data driven – and sometimes tedious.  In that setting metrics can multiply.  The financial analyst and plant manager can play the role of artist – interpreting each new metric as the stroke of a brush in a masterpiece painting.

Throughput Accounting corrects many cost accounting sins that are already addressed elsewhere in finance.  The simplification of costs to estimate the future leads to bad results when overhead allocations shift.  Accounting is always happening with an eye on the past, so forecasting will always have difficulties.

Goldratt’s great move with Throughput Accounting was simplicity.  There is no DuPont decomposition of ROE – it is simply how much Revenue can be brought in, how much Inventory exists that can be converted to Revenue, and how much Operating Expense is required to generate more Revenue.  All expenditures fit to one of these categories (as shown in the discussion about where to put the limo driver for Granby, the UniCorp CEO).

Priority

The word priority is used 40 times in The Goal.  The point is that there is a primary goal – and that everything else is dependent on that.  By focusing, that goal is made possible.  If you get more sophisticated, we can look at secondary and other goals – but there exists some form of prioritization.  Without prioritization, unimportant goals proliferate and entangle a system.  This happens to the plant in Chapter 24 and 25 – after setting aggressive goals but not stopping ineffective action – ineffective inventory continues to be built, accumulating and choking progress.

Local Optima (vs System Goals)

This is a minor point – but Goldratt beats home the point of ‘avoiding local optima.’  Local optima are side quests to the goal.  In a plant, this is a localized activity that runs perfectly – while the overall plant does poorly.

“We are not concerned with local optimums.” Jonah to Rogo, Ch 8, Pg 61

Local optimums create vanity metrics.  Elevate the goal – local optima are a trap.

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Goldratt’s The Goal: Chapter by Chapter Review

Written in 1984, The Goal lays out Eliyahu Goldratt’s Theory of Constraints (“ToC”) in the format of a novel.  ToC was first used into improve production plant manufacturing, but as Goldratt and his co-author Jeff Cox show in The Goal – it has broader applications.

Readers of The Goal experience a unique combination of styles:

  • This is a first person novel told from the point of view of Alex Rogo, the narrator.
  • The author explains complex topics about manufacturing through the characters’ dialog and activities.
  • The manufacturing topics are introduced through the tutelage of Jonah, a consultant and former professor to the main character, Alex Rogo.
  • As a novel, it includes family and parenting plot arcs that are also framed within ToC.
  • If written in 2018 – nearly 25 years later – a shorter book would be expected.  Goldratt’s treatment of the components of ToC are very thorough and are demonstrated to the reader in many ways.

Books may pursue one of these styles, a few may pursue two of them, but even fewer pursue all of these methods at once.  The Goal stands out because it did all of them and was successful in the pursuit.  In my re-reading, what stood out was that Goldratt really put forward just a few limited topics, but showed all of the arguments around them in several ways.

The Goal’s persuasion around the usefulness of the Theory of Constraints is built on a thorough discussion of a limited number of topics, but each is debated in rich detail and in many scenarios.

First 10 Chapters

Chapter 01

The book drops us in to the life of Alex Rogo, our narrator, who is over-whelmed with issues as he begins his day as a plant manager at UniCo’s Bearington Plant.  Rogo is flustered.  The plant is not performing well.  Three of his team members are looking for guidance, and at the same time Rogo’s boss, Bill Peach, is on site from corporate complaining about a late order for a big customer, Bucky Burnside. Rogo’s newest tool – the NCX-10 robot, should be having a more positive impact than it is.  Rogo expresses a desire to have a shot at being a CEO someday, but that is difficult to envision given his current position.

Goldratt’s tone is set right away – he focuses on the sensations of being in a plant and his writing devices, including character names can be transparent.  The story and cadence of the book are established.

Chapter 02 – Process

Rogo’s wife, Julie, is unhappy.  Rogo is nervous because other nearby plants have closed down.  Rogo visits home for a late dinner, returns to the plant where his team, led by Bob Donovan, has managed to get the Burnside order out, and then closes out the chapter pondering their daily chaos at a diner with Bob.  Rogo is reflecting on their daily struggle to get things done.

“Why can’t we consistently get a quality product out the door on time at the cost that can beat the competition?” Rogo, pg 18

Chapter 03

Goldratt opens the third chapter with Rogo in a stereotypical corporate meeting – where Rogo learns that the clock is ticking on his plant.  We learn the backstory of his and Peach’s relationship – what was once good rapport has soured as Peach feels the stress of his role managing the division.  The whole of UniCo is in trouble, and the daily challenges that Rogo feels are part of poor overall corporate performance.  The chapter closes with Rogo finding a cigar that leads to a flashback introduction of his former professor and soon-to-be-mentor, Jonah.

Chapter 04

Two weeks earlier, Rogo had bumped into Jonah at an airport.  Rogo provides Jonah with a career update – Jonah plays it straight and asks common sense questions to Alex which he finds awkward and difficult to respond to.

“Alex, I have come to the conclusion that 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.” Jonah, pg 32

Jonah asks common sense questions about the NCX-10 robot – and Alex fumbles through the answers.  Jonah is established as the professor, the guide, the Yoda, the instructor very quickly.

“Alex, you cannot understand the meaning of productivity unless you know what the goal is. Until then, you’re just playing a lot of games with numbers and words.” Jonah, pg 33

Chapter 05

Rogo begins this chapter enacting an employee’s fantasy – he excuses himself from a corporate meeting that he realizes is a waste of time.  Emerging out of his flashback with Jonah, Rogo knows that he must find a new way to evaluate his plant.  He ducks out, grabs food and beer, and returns to his hometown and a scenic overview that looks down on his plant.  Rogo literally takes a high level view of his plant.  Goldratt’s writing techniques are simple and effective.  Rogo debates himself – serving up strawmen to help the reader see that technology is not a goal into itself, endless production of inventory is wasteful, and that many of the actions suggested by corporate are fruitless.

“Our tribe is dying and we’re dancing in our ceremonial smoke to exorcise the devil that’s ailing us.” Rogo pg 34

Chapter 06

Rogo debates plant accounting with his controller, Lou.  Rogo has been pencil-whipped and smothered in vanity metrics at his corporate meetings. He is internalizing Jonah’s insistence on pursuing a clear goal and realizes that his accounting and financial numbers must support that effort.

“Would you say the goal of the company is to make money?” Rogo to Lou, pg 45

Rogo can’t just optimize one metric – he has to optimize at least three – 1/ net profit (aka net income), 2/ ROI, and 3/ cash flow.  If you improve just net profit, you may be wasteful with money and have low ROI and cash flow.  If you harvest cash flow, you may damage your ROI by selling off assets and not generate net income.  All three measures must be considered together – it is not acceptable to optimize just one.

The chapter wraps up with Rogo calling home to a disappointed wife, and then taking his anger out on a second shift supervisor.  The anger at Eddie is a nice point – it is out of line with management best practices, but it shows the degree of frustration that Rogo is dealing with.

Chapter 07

In this four page chapter, Rogo debates simply leaving UniCo or committing and staying.  Goldratt takes a job search off of the table and sets the stage that Rogo won’t create different results by following the same old methods.

Chapter 08

Rogo takes flack from Peach for bailing out of the meeting in Chapter 4 and realizes that he must track down Jonah.  Rogo heads to his childhood home, upsetting his wife, Julie, once again, and finds a number for Jonah.  Finally, they speak late in the morning, and Jonah confirms Rogo’s musings with Lou about balancing at least three metrics to measure plant performance.

“Their names are throughput, inventory and operational expense.” Jonah, pg 60

Chapter 09

Late is better than wrong, but both can be the bridge to a deal.  Rogo wakes up at his childhood home and returns to the plant.  He asks questions of his team to confirm that the NCX-10 robot hasn’t led to improved plant throughput, but instead has been a localized optimum.  The NCX-10 has had inventory build up in front of and behind it, making the plant metrics worse.  Rogo is beginning to understand theory of constraint thinking and is trying to help his team see the mistakes they have made.

Chapter 10

We begin ten where nine ended; Rogo has explained the basic principals of throughput accounting:

  • Local optimums don’t matter.
  • Results should be measured against the goal.
  • Throughput, inventory and opex should be reflected in the financial metrics – and all should be optimized.

The chapter continues with the team debating and classifying different types of expenses.  How should they classify education expenses?  Different kinds of inventory?  The list goes on.

Second Ten Chapters: 11 – 20

Chapter 11 – Dependent Events and Statistical Fluctuations

Rogo flies up to New York to meet Rogo in a hotel, where Goldratt has him explain two of the most important concepts in The Goal and in the Theory of Constraints.  GANTT charts don’t complete on time – a delay early causes delays later.  Later events are dependent on earlier events.

If an activity has a mean time to completion, then it will complete around that mean.  The time to complete experiences statistical fluctuations.  Those fluctuations are additive if the events are dependent – early finishes do not create negative time.

“Why do you think it is that nobody after all this time and effort has ever succeeded in running a balanced plant?” Jonah to Rogo, pg 86.

For the reader that has not worked in a plant or been involved with large project management, it can be easy to believe their smartsheet or .xls. It takes some further data work to show a mean time to completion with a standard deviation.  Re-running the data (I would have done it with Crystal Ball earlier in life) with this included would show that the time to completion for the whole project would continue to creep out.

Just as with the financial metrics – local optima – completion of a single step, is not what matters.  The goal is the completion of the whole project, not just one project.  The goal is not just one financial metric, but the optimization of all three.

Racing through one step at the expense of others does not create a finished good capable of creating revenue – the whole process must be complete.

Eleven explains two of the most important concepts in the book – thirteen provides more detail on the same subject, but with a real world example.

Chapter 12 – Singles Bar

Seven, at four pages, was our first throw away chapter.  Twelve has two pages.

Rogo recalls another UniCo colleague whose wife left with a lipstick message of, “Goodbye, you bastard.”  Julie foreshadows to him with her comments about going to a singles bar with her friend, Jane.  Jane is the tiny devil sitting on Julie’s shoulder asking for a divorce.

Chapter 13 – Herbie’s Hike

Herbie’s hike is the most known lesson taught by the goal.  Herbie is a, “fat” [Goldratt’s term] boy scout, and as a good father, Alex is leading his son Davey’s troop on an outing.

Herbie walks slow.  He is the slowest walker.  The goal is for the whole troop to finish the hike.  But the troop does not finish until Herbie, the slowest walker, finishes.

“You’re doing great, Dad,” he says.  David (aka ‘Davey’) Rogo to his father Alex after the scout hike. Pg 98

The troop’s completion time is a Dependent Event on Herbie’s Completion time.  Each hiker’s completion time has statistical fluctuations.  Herbie’s completion time is the optimal finishing rate, but the troop’s completion time will never be better than Herbie’s.

Chapter 13 is a real world example of the concepts explained by Jonah in Chapter 11.

Chapter 14 – Boring Dice Game

If Eleven and Thirteen haven’t made the concepts of Dependent Events and Statistical Fluctuations clear enough – 14 gives the reader a stick and points you towards a dead horse to beat.

Rogo works with the scouts to show mathematically how statistical fluctuations cause delay by creating a boring dice game.  The dice game shows that statistical fluctuations around the value of a role of the dice stack up – and if you make their total values dependent, then the sum of a series will always be more than the sum of the expected means of a series.

Chapter 15 – Herbie and Teamwork

Herbie is the slowest hiker and he knows it.  Herbie feels bad that he slows down the whole troop. Herbie wants to go faster. The whole troop wants Herbie to go faster. How does the troop help Herbie go faster?

  1. Admit that Herbie is slowest.
  2. Discuss why Herbie is so slow.
  3. OODA loop – help Herbie go faster.
  4. Implement the solution and get it done.

Herbie has a bunch of stuff in his bag. Split his stuff up, share the load. Helping Herbie (the constraint) go faster helps the whole troop go faster.

The slowest operation is the constraint.

Goldratt teaches ‘dependent events’ and ‘statistical fluctuations’ because all events depend on the constraint.  Each event has an expected value, but all of those expected values fluctuate.  The constraint is the slowest, or max value for a time series, event.  All other events depend on the constraint to complete.  Each event has its own expected time to complete, but those expected value experience their own statistical fluctuations.

He says, “You know, Dad, I was really proud of you today.” David Rogo to his father, Alex. Pg 119

Chapter 16 – Why hate Julie?

Rogo returns from the scout hike to find his wife has moved out and his daughter was left at his parents home.  This chapter is two pages long, and other than his wife’s departure, it serves as a transition point like twelve and seven.

Chapter 17

Rogo starts the chapter at home, a scurrying single father getting his kids out the door to school. The bulk of the chapter is spent at the plant, where he works through four big concepts with his team:

  • Goals: The team’s goal is to ship intermediate parts to a sister plant run by Hilton Smyth – the closest thing to a protagonist we find in the book.  Every activity that doesn’t achieve the goal is a waste of time.  Only pursue activity that achieves the goal.
  • Constraint: The parts must pass through the NCX-10 robot, which can only handle 25 parts per batch.  Not 26! If 24 are run, then one empty slot wasn’t run.
  • Dependent events: The pre-robot step is human operator driven.  Parts arrive to the NCX-10 in an irregular fashion.  The NCX-10 depends on the upstream processing – so if that step is uneven, then so too will the loading be of the NCX-10.
  • Statistical fluctuations: The NCX-10 has a tight performance window with little fluctuations – but the upstream processes are much more variable.

Rogo’s team has a clear goal, and they celebrate almost achieving it before realizing that ‘almost’ doesn’t matter for their customer.  They miss their target because they feel to;

  1. Recognize the constraint – the 25 unit cap at the NCX-10.
  2. Map the dependent events.  The NCX-10 is last in line, which makes it subject to…

Anticipate statistical fluctuations.  The upstream step ahead of the NCX-10 has high variability – and this causes delays at the NCX-10.

Chapter 18

Rogo walks through the previous days’ results with his team and phones Jonah for advice.  Jonah coaches them that constraints aren’t bad – they are simply a reality that must be identified and dealt with. Every system has a constraint. The team is surprised to find two constraints – the foreshadowed NCX-10 robot and a newly discussed heat finishing step.

In the same way that Goldratt assumes a culture of teamwork and data use – he gifts Rogo with a talent for change management.  Rogo listens and prioritizes change based on customer need and team receptivity.

Chapter 19 – Change

Jonah flies in to help the team develop their approach to managing the constraints.  For the plant to increase its output, the constraint must increase output.  Any other activity is a waste of time in regards to total plant output.  Jonah reinforces the team’s understanding of; Goals, Constraints, Dependency, and Fluctuations.

Chapter 20 

“Why don’t we go ahead with the easier things right away and see what kind of effect they have while we’re developing the others.” Donovan to Rogo, pg 163.

Julie Rogo remains at her parents and Alex fights to get her back.  Donovan, his earnest help at the plant, coaches him on managing change.  Change starts with small wins that show everyone the benefit of changing.

Chapters 21 – 30

Chapter 21

The team continues to work their constraints.  Rogo finds the NCX-10 idle.  An idle constraint means the process is not working towards its goal.  Diving into the problem, they find that parts upstream of the NCX-10 are delayed.  A constraint should not be idle.

Chapters 21 – 23 identify the following methods to improve a constraint:

  • A constraint should not be idle.
  • A constraint should have enough feedstock to avoid being idle.
  • Adding incremental capacity with different equipment, opens up the constraint.
  • Data drives constraint improvement.
  • Tee up work ahead of the constraint.
  • Staff the constraint with the best people.
  • Modify products to minimize use of the constraint.

Chapter 22 – Constraint Tactics

Our heroes continue to focus on the constraints – they locate an old tool, a Zmegma, that will unburden the heat treatment step.  Even small additions of capacity, which might look silly to do, improve overall output if they are done at the constraining process step.

Chapter 23 – Goldratt on Data

Focus on the constraint continues.  Ralph Nakamura, the plant data manager, realizes he needs better data – and fights to get it. Rogo realizes that his 2nd shift manager, Mike Haley, has been aggressive in keeping the constraint moving.  Other changes in how the constraints are approached create more capacity – constraints should be staffed by the best team members, and modifying processes to shorten exposure at the constraint should be approved wherever possible.

Chapter 24

The plant’s focus on constraints through Chapters 21 – 23 leads to record shipments.  This leads to a night of celebrating, wherein a drunken Rogo is driven home by Stacey.  A sleeping Julie – who has surprised him by returning home, jumps to conclusions.  Stacey calms down Julie.  The team then worries that their constraints are wandering.

Chapter 25 – Stop Futile Work

Jonah returns to help the team understand their wandering bottlenecks.  By focusing on the cadence and capacity of the constraints – the team has been mistakenly releasing too many inventory requests.  This other inventory buildup is choking up the plant with material.

With this chapter, Goldratt gives some items to avoid doing:

  • Do not build inventory that doesn’t flow to the constraint.
  • Do not overbuild inventory.
  • Do not optimize vanity metrics.
  • Do not pursue activity that does not lead to achieving the goal.

Chapter 26 – Results > Vanity Metrics

Rogo and his kids debate ways to keep Herbie on pace with the troop during their hike.  They debate a ‘drum-and-rope’ system to keep the troop with Herbie by binding them together and helping call out Herbie’s cadence.

At the plant, Ralph worries that building inventory ahead of the constraint to ensure that it is not idle will ruin local metrics.  Reducing inventory away from the constraint will also hurt utilization.  Rogo shows leadership, saying;

“And I’m not about to stand by and let that happen just to maintain a standard that obviously has more impact on middle management politics than it does on the bottom line. I say we go ahead with this. And if efficiencies drop, let them.” Rogo to Nakamura pg 219

Chapter 27

Rogo delivers much improved results to Bill Peach at corporate. Still under threat of plant closure, he guarantees a 15% improvement – what does he have to lose, when his other option is a shutdown?  With Goldratt’s Theory of Constraints showing results, Rogo now knows that he has the tools to succeed.

The chapter resolves with Alex and Julie discussing relationships, marriage and goals.  Alex wants the same re-evaluation of ‘the rules’ in his personal life, while Julie remains cautious.

Chapter 28 – Cutting the Batch Size

Rogo and his team understand constraints, dependencies, fluctuations and the importance of a goal.  Their new goal is to achieve 15% growth. Jonah advises to cut their batch size. If our plant is a system, and if our goal is throughput – then smaller batches flow through faster. Smaller batches get results faster, can get tested faster and can accelerate pacing – provided the three cost metrics (throughput, inventory and opex remain optimized).  The team cuts the batch size.

Chapter 29 – Nightmares and Sales

Rogo’s batch size cutting works.  His WIP is now 100% focused on customer orders.  Now he reaches out to sales and says, “get me some business.”  Rogo negotiates with sales – rather than just taking orders, he negotiates what the plant can do.  The customer takes the negotiation and the order is won.

Only sign up for contracts where you know you can deliver.

Chapter 30 – Bucky Burnside’s Helicopter

Corporate finagles a press event to showcase the NCX-10 robot, and in doing so realizes that the metrics they care about (the vanity metrics Rogo’s term has been taught by Jonah to ignore) are all off.  This is balanced out by a surprise helicopter visit from Bucky Burnside – our first customer exposure who is now giddy with the sales he has won thanks to the Bearington plant’s focus on the goal and persistent batch size cutting.

Rogo translates his plant learnings into commercial wins.  When plant and commercial combine, businesses are capable of phenomenal growth.

Chapters 31 – 40

Chapter 31 – Defending Performance and a Promotion

Rogo is back at corporate, defending his metrics to a snippy Hilton Smyth.  Smyth cannot reconcile good financial performance with wasting efficiency metrics.  Rather than search for understanding, he pursues a blistering critique of Rogo.  Rogo sits with Peach as he exits – and instead of learning that he has more tongue lashings ahead, discovers that he will soon be given Peach’s job as a promotion.

In many ways, Chapter 31 ends a major portion of the book.  Goldratt’s major lessons have been taught – we understand the improtance of a goal, dependence, fluctuation and batch size cutting.  Goldratt’s chapters through Rogo’s promotion become more philosophical and internally focused.

Chapter 32 – Change Management

Rogo reflects on his promotion, and Goldratt uses this to lay out a framework for change management.  Rogo faced urgency to turn his plant around. His team created consensus around the Theory of Constraints by experiencing the results and seeing that it explained their situation and prescribed how they should behave.

“If it weren’t for the conviction that we gained in the struggle—for the ownership that we developed in the process—I don’t think we’d actually have had the guts to put our solutions into practice.”

Chapter 33 – Sales & Growth

Rogo continues to prepare for his next role, and as he does so he explores the relationship between sales and operations.  The capabilities of the Bearington plant are now known – by following the Theory of Constraints, UniCo now knows how much capacity it has available to sell.  Further, by understanding the benefits of the Throughput Accounting method (focusing on throughput, inventory and opex), as opposed to backwards looking cost accounting and vanity metrics – Rogo knows that he can bid mor eaggressively on business and still have it create cash flow.

Rogo works with Johnny Johns to negotiate for new business.  By starting with his capabilities, which he knows from his work with constraints, he is able to bid and come to terms with customers in new ways.

The team has managed the constraint to the point that it exists at the boundary between Bearington and its customers.  By documenting their internal processes, the constraint has been pushed outside.

Chapter 34 – Promotion and Reflection

Rogo asks his team to think about the best ways for him to walk into his next position.  They talk through re-organizations, fact-finding and the faddish nature of management practice.  Goldratt positions these as activities that do not serve a goal – they are action for the sake of action and not necessarily effective.  There are echoes of modern data-mining, where teams look backwards at data and farm it for results – rather than beginning with a hypothesis and proving it.

Goldratt builds a lot of momentum with this chapter, but it isn’t neatly channeled into a resolution.

Chapter 35 – Prediction and Practice

Rogo’s exposition and debate with his team about what to do with his next job continues.  As in the previous chapter, Goldratt brings out many interesting topics, but there isn’t a satisfying resolution.  The conversation focuses on the value of data and models of systems.  Having a model or framework for how a system works is very valuable – without that model it is hard to predict how change can occur.  Having an idealized model of how a system should work makes it possible to move towards that system.

Data, without an understanding of how it works within a system isn’t very valuable.  The combination of data and a model of the system that generates the data is extremely valuable.  (Goldratt built the whole book off the foundation of teamwork and data – without these two concepts Rogo could not have succeeded.)

Chapter 36

Rogo was promoted in Chapter 31 and we’ve read through four chapters of introspection and team preparation about how he should go about dealing with his new role. Goldratt is using this transition to help the reader take the Theory of Constraints and apply it to any new situation – not just a promotion.  As in past chapters, the plant team serves up strawmen, draws from their experiences focusing on the constraint and the tools they took to setting and achieving their goal.

Chapter 37

Chapter 36 ended with a rough draft of Goldratt’s guidance for new situations, which are finalized here as:

1. IDENTIFY the system’s constraint( s).

2. Decide how to EXPLOIT the system’s constraint( s).

3. SUBORDINATE everything else to the above decision.

4. ELEVATE the system’s constraint( s).

5. WARNING!!!! If in the previous steps a constraint has been broken, go back to step 1, but do not allow INERTIA to cause a system’s constraint.

Rogo’s team identified that their constraint was not within the Bearington plant.  Customers had plenty of demand for their products, the team had to be more effective with their constraint.  Once the production process was understood, Rogo worked with marketing to pursue deals and opportunities that made use of their increase in throughput to increase their cash flow.

Chapter 38

Two concepts drive this chapter; 1/ marginal revenue and marginal cost should drive business decisions, and 2/ systems are often best changed by outsiders.

Early in the chapter, Rogo leaps at a commercial opportunity:

“We’ll take it,” I say.  – Rogo to Johns, pg 312

This might seem pretty flip – and a reader who had picked up the book and started reading at this page would think any manager who was so cavalier with his business was being too commercially aggressive.  However, at this point we’ve been through Rogo’s journey from not being able to ship parts on time to knowing exactly what has to be done to increase his plant’s capacity.

Throughout these challenges Rogo has had great plant data from Ralph Nakamura.  He’s had a competent and commercially savvy controller who was willing to look at his performance numbers in a different way.  Rogo never deals with a bad actor – he’s had sufficient delegation of his plant and the closest to corporate politics he’s had to deal with is a suspicious Hilton Smyth.

Rogo knows he cannot win the business unless he goes for it – and he has confidence in his numbers.  He’s also developed a feel for change management that he is excited to employ in his promotion.  For his new division to grow, he doesn’t expect change to come from people within the system – if they need marketing growth, he expects that to come from ideas generated outside of his marketing team.

Chapter 39

As the plant chews through the new business that Rogo’s aggressive bid brought in they encounter new challenges.  Systems that worked with less volume struggle to convert the orders into throughput – processes have to be updated.  Inventory wobbled through the plant – too much of things that weren’t needed, too little of items that were essential which resulted in starved constraints.

Rogo reflects on his pursuit of the business and realizes that the challenges they face now could have been anticipated.  Once a system is mapped and the constraints are known, then that same map can be used to model what is needed in the future!

“We’re reacting rather than planning.”  Rogo to Donovan, pg 326

Chapter 40 

Rogo and Lou discuss the division’s state of affairs in a drive back from corporate.  Goldratt has tough task in front of him with this final chapter – he’s brought us through Rogo’s journey to understand constraints and save his plant and expounded on the Theory of Constraints as Rogo prepares for his promotion.  The Goal must have been a hard book to finish.  Goldratt has promoted some complex ideas and succeeded in making them easy to digest – but it is easy to imagine that he found it difficult to bring everything to a close.

There are several big points brought up in the dialogue between Rogo and Lou:

  • Causing change (the “How?”) is as important as what to change and what to change to.
  • Leaders and their priorities are a constraint within the organization.
  • Teams are a series of operations – and just like the plant floor – there is a constraining capability within any team.
  • There are many organizational red flags (sloppy reporting, tolerance of late projects, under performing teams) that can be addressed with the Theory of Constraints.
  • Prioritization determines output.  Goals must be prioritized – otherwise minutia can absorb all of the time.

Yes, many small actions are needed, but that doesn’t mean that we can afford to be satisfied with actions that improve the situation.

Goldratt’s point here makes an interesting contrast with how he prescribes change management.  Teams need small wins – but they need to not get wrapped up in small wins and not address an organization’s bigger challenges.

Small wins are necessary to create change – but small wins are not sufficient to create broader organizational growth.  Leaders must be constantly looking for a higher order change to promote in order to find bigger constraints to unlock greater throughput.

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The Goal: Based on Teamwork & Data

Goldratt takes several approaches to showing how Constraints impact a plant and even personal lives. Several approaches are used to educate the reader;

  • Jonah serves as a mentor to Alex Rogo, educating him on what is going on.
  • Rogo adopts Jonah’s Socratic method in his dealings with his employees, peers and family.
  • Rogo also exists in a world where some fundamental assumptions are never stated but are just true – like a fish not recognizing the water around it.
  • Teamwork

  • Rogo has a great team. Bob Donovan can over almost any plant issue. His boss, Bill Peach, is providing him coverage – despite the fact that he chases annoyance. Stacey knows the inventory issues, and his problem solving at the plant level is driven by confidence in the team.
  • Rogo is not an individual actor. This is not a Lone Ranger engineer providing brilliant insight and fixing problems by themselves. Teamwork is a fundamental part of the success created within The Goal.
  • Data

  • One of the most valuable team members at Goldratt’s side is Ralph Nakamura – who is responsible for collecting plant data. At every turn the team gets insight out of Ralph’s analysis. Colleagues who slow down his measurement efforts are corrected. Data is fundamental to unlocking a constraint. If you don’t have data, then that is the first constraint to address.
  • Conclusion

  • Goldratt doesn’t build any backstory to how Rogo built his team, or how Ralph came to know Bearington’s plants data systems so well. Teamwork and access to data are necessary conditions to unlocking the value of the Theory of Constraints.
  • The whole book is very different if Rogo has a bad actor that must be fired. If there was no data, the batch size cutting that dominates the later chapters isn’t possible. Without Ralph, there are no schedules to coordinate.
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    The Goal – Chapter 40 – Culture and Constraints

    Like Chapter 39, I find this final chapter unsatisfying. It must have been hard for Goldratt to bring the book to a close.  The character and plot arcs through the ‘fixing’ of Rogo’s plant are great – the chapters afterwards are less so.  The information they deliver is great – but it now feels more like a standard business book and it moves away from the novel format that was so effective.

    Highlights

    “Every report is missing at least back-up details.”

    If a team cannot report, that is a first constraint that must be addressed.

    “Since the strength of the chain is determined by the weakest link, then the first step to improve an organization must be to identify the weakest link.”

    How do you do that?

    “Don’t you realize that the attitude in engineering, claiming that the basic rule of nature is that a project never finishes on time, is an even bigger problem.”

    Accepting mediocracy is a culture problem.

    “And what about marketing, have you seen any marketing plan that has any chance of turning the situation around?”

    Cultural infighting is a major culture problem as well.  It cannot be tolerated.

    “The lack of sensible long-term strategy, the measurement issues, the lag in product design, the long lead times in production, the general attitude of passing the ball, of apathy, are all connected.”

    A company’s outputs are the result of; 1/ resources (people and assets), 2/ systems, and 3/ priorities.  [Originally from Christensen.]

    “That brings us to the real question, how does one go about identifying the system’s constraint?”

    This is the role of the leader – the answers to finding the constraint start outside the company, not within it.

    Page by Page

    P328 – Only when we went through the elaborate work of separating out Donovan’s plant was the real picture exposed.

    “Frankly, I’ve never seen such a sloppy place. Every report is missing at least back-up details. You know what I found today? They don’t even have a report on late receivables. The information is there but—can you believe—it’s scattered in at least three different places. How can they operate this way?”

    By how much will throughput, inventory, and operating expense be improved?”

    P329 –

    Yes, many small actions are needed, but that doesn’t mean that we can afford to be satisfied with actions that improve the situation. We must carefully choose which ones to concentrate on, otherwise. . . .

    How much time will it take you to change, for internal purposes only, the way that we evaluate inventory?”

    “I see very clearly the impact on cash, on inventory, and on operating expense, but not on throughput.”

    P330 –

    “So, we continue to offer the old stuff rather than the new. We continue to lose market share, but it’s better than to bite the bullet of write-offs. Do you understand now the impact it has on throughput?”

    P331 – “Identify the system’s constraint( s),” Lou reads from the board.

    If any organization was built for a purpose and any organization is composed of more than one person, then we must conclude that the purpose of the organization

    P332 –

    “Requires the synchronized efforts of more than one person.”

    “If synchronized efforts are required and the contribution of one link is strongly dependent on the performance of the other links, we cannot ignore the fact that organizations are not just a pile of different links, they should be regarded as chains.”

    “Since the strength of the chain is determined by the weakest link, then the first step to improve an organization must be to identify the weakest link.”

    P333 –

    “Don’t you realize that the attitude in engineering, claiming that the basic rule of nature is that a project never finishes on time, is an even bigger problem.”

    “And what about marketing, have you seen any marketing plan that has any chance of turning the situation around?”

    “The lack of sensible long-term strategy, the measurement issues, the lag in product design, the long lead times in production, the general attitude of passing the ball, of apathy, are all connected.”

    P334 – “That brings us to the real question, how does one go about identifying the system’s constraint?”

    P335 – “What is the point in trying to exploit an erroneous policy?”

    P336 – “If the first thinking process should lead us to answer the question ‘what to change?’ the second thinking process should lead us to answer the question ‘what to change to?’ I can already see the need for a third thinking process.”

    “For the ability to answer three simple questions: ‘what to change?’, ‘what to change to?’, and ‘how to cause the change?’”

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    The Goal – Chapter 39 – Planning

    The plant is having hiccups.  Rogo is no longer the plant manager and has to help at a higher level.  This chapter lacks the ‘aha’ moments that have driven the cadence of the book until now. It seems our author, Goldratt, wants to have the reader leave the book with a sense of having survived a socratic education system. Goldratt doesn’t want to have a, “happily ever after” resolution for Rogo – that would be contradictory to his goal in writing the book.

    Highlights

    “We’re reacting rather than planning.”

    Time spent planning is rarely wasted.  Futile paths can be identified.  Knowledge can be shared.  Unknowns can be highlighted and addressed.

    Plan, plan, plan.

    Page by Page

    P319 – “I told you that those indicators are based on local optimum and that they have nothing to do with the global picture.”

    Yes, you’ve told them – but have they learned it for themselves?

    P320 – “Alex, I think that we simply accepted more orders than we can process.”

    Problems can have many origins.

    P321 – “It is obvious that we tried to swallow more than we can chew.”

    Just because something is obvious doesn’t mean that it is the only source of a problem.

    P322 – “From time to time the bottlenecks are starved. Then the work comes to them in a big wave.”

    P323 – “We wanted three days’ inventory in front of each bottleneck. I started with releasing material two weeks before it was due at the bottleneck. Then it turned out that that’s too much, so I cut it to one week and everything was okay. Now it’s not okay.”

    Compare this conversation from Rogo’s team to the conversations they had in the first chapter.  This is a much more educated team.  Leaders build competent, engaged teams.

    P324 – “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.”

    P325 – “We took more orders, which by themselves didn’t turn any resource into a new bottleneck, but they did drastically reduce the amount of spare capacity on the non-bottlenecks, and we didn’t compensate with increased inventory in front of the bottleneck.”

    P326 – “It’s obvious who is the boss now.”

    Bob Donovan is stepping in to his leadership role and Rogo is not getting in his way.

    “We’re reacting rather than planning.”

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    The Goal – Chapter 38 – Marginal Profits and Change

    Rogo hits on two fundamental truths while working with marketing to achieve his growth goals; 1/ marginal profitability should guide plant economics, and 2/ change is often driven by those outside of a system.  These are major lessons in two very different areas.

    Highlights

    “You can’t rely on marketing people to solve the marketing problems. They’re captured by old, devastating, common practices to an even larger extent than production.”

    This is an important observation by Rogo – organizations have inertia.  The people in an organization are rarely the right people to change it.  Team members tend to be either system builders or system users – someone who can do both is rare.

    Page by Page

    P309 – “So, squeezing, begging, and pleading techniques will not help.”

    Looking for $10 million in sales, Rogo identifies ways that will block attempts at growth.

    P310 – Sales take time, credibility is not built overnight, it’s a gradual process. Rogo knows this when he asks, “Johnny, do they sometimes demand prices that are lower than our cost?”

    P311 – “Besides, if we lower prices for one client, it’s just a matter of time until the others find out and demand the same. What then?”

    This is a logical fallacy.  There are ways to quarantine pricing changes.  Just because a problem might exist in the future doesn’t mean the status quo should be tolerated today.

    P312 – I turn to Ralph, “What’s our material cost for Model Twelve?” “Three hundred thirty-four dollars and seven cents,” Lou answers without any hesitation.

    “We’ll take it,” I say.

    “What I’m particularly interested in is the products, the quantities per month, and the prices.”

    Rogo wants to know what the marginal impact to his plant will be.  He knows he has capacity – no marginal CapEx or OpEx will be needed.  His only real new cost will be raw materials.  If he has the capacity and if he covers his raw material costs, he should take the work.

    P313 – “Financial calculations, showing the fallacy of the ‘product cost’ concept won’t help, it will just confuse Johnny even more than he’s confused now.”

    Rogo knows that more detail will not help the situation, so he pivots how he persuades Johnny Johns.

    P314 – “Good. Promise your Monsieur that if he commits to the quantities per year, we’ll deliver any reasonable quantity within three weeks of receiving his fax.”

    “You can’t rely on marketing people to solve the marketing problems. They’re captured by old, devastating, common practices to an even larger extent than production.”

    This is an important observation by Rogo – organizations have inertia.  The people in an organization are rarely the right people to change it.  Team members tend to be either system builders or system users – someone who can do both is rare.

    “God have mercy on me,” I say. “Yesterday we were talking about inertia. We were complaining about the inertia that we have. Compare it to the inertia that we are going to face in the division.”

    P315 – Somewhere in the scientific method lies the answer for the needed management techniques.

    P316 – The second time he wanted to know if he could approach our domestic clients with the same concept.

    P317 – “It all seems to be based on one key relationship: IF . . . THEN.”

    As more and more predictions are verified, it becomes more obvious that the underlying hypothesis is correct.

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    The Goal – Chapter 37 – Constraint Rules

    We pick up the team where we closed out Chapter 36.  A set of Steps has been laid out on how to handle new situations.

    Highlights

    1. IDENTIFY the system’s constraint( s).

    2. Decide how to EXPLOIT the system’s constraint( s).

    3. SUBORDINATE everything else to the above decision.

    4. ELEVATE the system’s constraint( s).

    5. WARNING!!!! If in the previous steps a constraint has been broken, go back to step 1, but do not allow INERTIA to cause a system’s constraint.

    Page by Page

    P303 – “And then Jonah came and showed us it wasn’t new bottlenecks, but that the constraint had shifted to being the way we released work to the plant.”

    The goal is to have a balanced method – have a method that recognizes when change is needed.

    P304 – “I made my people obey those computer lists. That was a major change in the way they operate—especially when you consider how much pressure the foremen put on them to supply them with work.”

    Ralph created change with urgency.

    P305 – “I’ll take care of those tags immediately. You won’t see them tomorrow.” – Stacey responds to a new observation with urgency.  She knows her response will create reaction.

    Part of creating change is picking areas where one action can allow everyone to show results.  Picking long lead time areas to create change makes it hart to develop consensus – anyone, any theory, any constraint can be right while results develop.

    P306 – “No more of that awful situation where we hold mountains of some products and not even one single unit of others.”

    Inventory management and traffic is a terrific waste of resources.  This applies to more than plant inventory – unclear projects create mental WIP.  Personally – having loads of stuff in an attic is a weight on your life.

    P307 –

    1. IDENTIFY the system’s constraint( s).

    2. Decide how to EXPLOIT the system’s constraint( s).

    3. SUBORDINATE everything else to the above decision.

    4. ELEVATE the system’s constraint( s).

    5. WARNING!!!! If in the previous steps a constraint has been broken, go back to step 1, but do not allow INERTIA to cause a system’s constraint.

    P308- “Now we know that we have a lot of spare capacity.”

    Companies often fall into a trap where resources are blindly thrown at problems without a focus on creating effective results. This creates more and more waste as uncoordinated actions drag a business into good local decisions that are poor strategic decisions.

    Capacity to do new things disappears if it is not correctly tracked.

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