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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