The Goal

A Process of Ongoing Improvement

Eliyahu M. Goldratt and Jeff Cox
The Goal
Characters:
Alex Rogo Plant Manager
Jonah Physicist/Production Consultant
Bill Peach Division VP of Manufacturing
Bob Donovan Plant Production Manager
Lou ____ - Plant Controller
Stacey Potazenik Production Control Manager
Ralph Nakamura data processing manager
The Goal
Setting:
City of Bearington location?
Pennsylvania, Ohio, Indiana manufacturing
town

UniCo Corporation Manufacturing Plant
probably 15 years old
other impressions?


The Goal
Introduction: Whats your first impression of the
manufacturing plant?

Plant out of control
VP of manufacturing expediting an order
New robots
Controlled chaos
Good at fighting fires
Excellent at getting order filled when pressed
Lots of inventory

The Goal
Alex travels to corporate meeting with a
bunch of corporate speak.

Alex begins daydreaming.
The Goal
Alex/Jonah Chance Meeting in Airport

Alex Robots increased productivity by 36% in
one department
Jonah Are plant inventories down? : No
Is employee expense less? : No
Shipping more product?: No
Alex Must keep robots running to maintain
efficiencies.
Jonah Then Inventories must be sky high and
orders must be late.
The Goal
Alex/Jonah Chance Meeting in Airport
cont.
Jonah In your own words, what is productivity.
Alex Accomplishing your goals.
Jonah Correct, then what is the goal of your
company?
Alex To be more productive? : No
To produce products? : No
To increase market share?: No
Jonah How can you be productive? You dont
know the goal.
The Goal
What does Alex determine The Goal is?
To make money!!

How do you know you are making money (Alex
and Lou)?

Net profit (Income-Expenses)
Return on Investment
Cash Flow

Why are each of these important?
The Goal
How do the making money measures
translate to the production environment?
(Jonahs translation)
Throughput Is the rate at which the
system generates money through Sales
Inventory all the money that the system
has invested in purchasing things which it
intends to sell.
Operational Expenses all the money the
system spends in order to turn inventory
into throughput.
The Goal
What was the common word in all three
measurement definitions?

Money going into the system
Money stuck inside the system
Money flowing out of the system
The Goal
Throughput Is the rate at which the system generates
money through Sales
Inventory all the money that the system has invested
in purchasing things which it intends to sell.
Operational Expenses all the money the system
spends in order to turn inventory into throughput.

Where do the following fit?
Raw materials
Direct labor
Indirect labor
Tooling, machines, building
Knowledge gained by employees
The Goal
Alex meets Jonah in New York seeking help
to determine steps to take in achieving
the goal:

Jonah Do you run a balanced plant? Do
you have any idle workers and is it good
or not?
Alex We try to keep all our employees
productive

The Goal
Jonah Impossible to perfectly balance capacity
to demand, there even exists a mathematical
proof showing if you did, inventories go through
the roof?
Alex Hows this possible
Jonah Due to two phenomenon:
1. Dependent events a series of events must
take place before another begins.
2. Statistical Fluctuations the length of events
and outcomes are not completely deterministic.
The combination of these phenomenon are the
issue.
The Goal
Dependent events Statistical Fluctuations

Q. - Where does Alex first come to grips with this
(i.e. sees this first hand)?

A. During the boy scout hike.
The Goal
Analyzing the boy scout hike

Observations:
the walking speed of individuals fluctuate
All may have the same average walking speed,
but gaps continue to lengthen, why?
There is no limit to how much an individual can
slow down, but your top speed is dependent on
the person in front.
Fluctuations are accumulating over time, and
the slow fluctuations tend to accumulate faster
because they are not limited like the fast ones.
The Goal
Boy scout hike > Manufacturing Plant
Observations:
Each boy is an operation
The product is walk the trail
Each boy/operation is dependent on the one in front.
A sale is when the last operation/boy walks the trail.
Throughput is the rate at which the last person walks the
trail.
Operating expense is the energy output of each boy.
Inventory (material inside the plant) is the distance
between the first and last boy.
Fluctuations in operating speed is causing inventory to
increase and causing throughput to decrease. Attempting
to reduce gaps is increasing operating expense.
The Goal
Play the matches game?

Setup: 5 players, 5 bowls, matches, 1 die
Dump all matches in bowl #1
Roll one die (starting with player #1) and pass that many matches
from your bowl to the next person down the line
Pass die to next player who rolls die and moves that number of
matches from their bowl to next player, cannot pass more matches
than what is in your bowl.
Continue for each player, with last player handing die back to player
#1.

What is the average number rolled on a die?
After 20 rounds, how many matches should the last player
produce?
The Goal
Back to the Boy scout hike
After lunch the boy scouts self-arrange so that the fastest is
up front and so on until Herbie is at the rear.
Q. What was the result?
A. Line got even longer.
Q. Did throughput improve (completing more miles)?
A. No, completed miles still dependent on last scout walking
the trail, plus inventory has increased.

Observation: however, everyone is always walking (no one is
idle). But goal is not being achieved.

The Goal
Continuing with the Boy scout hike

Q. How does Alex fix the boy scout hike?
A. Puts kids in order from slowest first to fastest last. The line
then stays compressed (i.e. inventory has gone down and
progress has improved because Herbie is setting the
pace and doesnt have to exert energy to catch up).
Q. How do they further improve throughput?
A. Off-loaded Herbies backpack. In oherwords, they
improved Herbies throughput so the entire boy troops
throughput improved.

The Goal
Alexs First Chance to Test the Boy Scout Theory

Hilton Smyths order
needs 100 parts by end of day
Parts require 2 operations, fabrication then weld by robot
Each department averages 25 units per hour, with robot
working at almost exactly 25 unit pace.
Start fabrication at noon, transferring parts on the hour,
every hour.

Fabrication
(25/hour)
Weld
(25/hour)
Transfer
(once/hour)
The Goal
Alexs First Chance to Test the Boy Scout Theory



Expectation:




Hourly Part Count

Fabrication
(25/hour)
Weld
(25/hour)
Transfer
(once/hour)
noon 1:00 2:00 3:00 4:00
Fabrication 25 25 25 25
Welding 25 25 25 25
The Goal
Alexs First Chance to Test the Boy Scout Theory



Realization:


100
90
Hourly Part Count

Fabrication
(25/hour)
Weld
(25/hour)
Transfer
(once/hour)
noon 1:00 2:00 3:00 4:00
Fabrication 19 21 28 32
Welding 19 21 25 25
The Goal
Q. So what have they learned to this point?

A. Have more capacity at downstream operations.

The Goal
Q. What does Jonah suggest they do next?

A. Distinguish between bottleneck and non-bottleneck
resources.

Definition:
Bottleneck any resource whose capacity is equal to or less
than the demand placed upon it.
Non-bottleneck any resource whose capacity is greater
than the demand placed upon it.

The Goal
Jonah then suggests balancing the flow of product through
the plant with demand from the market. Not to balance
the capacities of operations with demand.

Q. What determines the flow of product through the plant.

The bottleneck resources.

The Goal
The next step for Alex and company is to identify the
bottlenecks (i.e. find Herbie).

Q. So how do you find a bottleneck in a manufacturing plant?

A. Go out on the floor and find the operation with the most
inventory sitting in front of it.

Q. Is having a bottleneck a bad thing?

A. Not necessarily, all plants have to have a bottleneck.


The Goal
The next step for Alex and company is to identify the
bottlenecks (i.e. find Herbie).

Q. Once the bottleneck is identified, can you simply move the
machines/operations around like Herbie was moved to
the front of the line?

A. No, production steps often cannot be reorganized.

Q. So how do you solve the problem of moving Herbie to the
front?
A. Find more capacity for the bottleneck, dont try to move
them. Have enough capacity to meet demand.
The Goal
The next step for Alex and company is to identify the
bottlenecks (i.e. find Herbie).

Q. How do you find more capacity?
Make sure it is never idle (focus your attention on it).
Increase cycle time on the machine
Add another duplicate machine
Outsource to another vendor
Reduce the demand (process change)
Inspect part quality before bottleneck (make sure bottleneck only
works on good parts)
Ensure process controls on bottleneck are good so bad parts arent
produced
Dont let it work on parts that arent needed.
The Goal
Back to the story:

Q. Where does Alex and company find the bottleneck?
A. They find two bottlenecks, NCX-10 and Heat Treat

Q. What is thier first approach to improving the flow through
the bottlenecks and ultimately improving productivity.
1. Move QC in front of bottlenecks.
2. Make a list of all late jobs and what components from those
jobs flow through the bottleneck machines. They then
create a schedule/list in due date order and instruct the
bottleneck operators to only work on those jobs in that
order.
The Goal
Back to the story:

Q. Does this scheduling system work (e.g. get late jobs completed
while always keeping bottleneck running)?
A. No, because the late job components are not always waiting in
front of the bottleneck machines.

Q. What do they do to rectify this?
A. Create a red tag (parts that travel through the bottleneck) / green
tag system for all jobs throughout the plant such that any job
with a red tag which arrives at a machine is given priority. If
they are in the middle of a run, then if the run takes longer than
30 minutes to complete, stop that job and start the red tag job.
If no red tags, then ok to process green tag jobs. If more than
one red (or green tag), then process job with lower number on
tag.
The Goal
Back to the story:

Q. What do they do next to further off-load the Herbies / bust the
bottleneck?
1. Gold tags placed on parts that have traveled through the
bottleneck everyone extra careful not to damage.
2. Dedicate personnel at NCX-10 and Heat Treat even though
they are idle much of the time, just dont let machine idle.
3. Send out some portion of heat treat parts to vendor in town.
4. Found old equipment (that is less efficient) to run in parallel to
NCX-10.
5. Fully load furnace when possible (e.g. mix batches).
6. Reduce setup time with new fixtures.
7. Were able to process some parts differently so heat treat
wasnt required.
The Goal
Back to the story:

Q. What were the results of these bottleneck busting tactics?
1. New monthly shipping record from old record of 2 million to
new record of 3 million.
2. 57 customer orders shipped versus old record of 31.
3. WIP Inventories reduced 12%.
The Goal
What happens next?

The bottlenecks are apparently expanding material is backing up
at the milling machines, and non-bottleneck parts (green tags)
are not reaching assembly even though all bottleneck parts
(red tags) are available at assembly.
The Goal
What happens next?

Jonah revisits plant and discusses relationship between
bottleneck(X) and non-bottleneck(Y) machines.

1) Y X 3) Y A 4) Y Product A
2) X Y X S X Product B
S
E
M
B
L
Y

The Goal
Jonah believes the new bottlenecks are not real bottlenecks, but
self-created bottlenecks. Why?

A. Material is being released to the plant just to keep the non-
bottleneck machines busy. This improves these machines
efficiency measures, but does not help the goal.

Jonah: A system of local optimums is not an optimum system at all;
it is a very inefficient system.

Lesson: Do not try to make non-bottlenecks work all the time. They
should be idle some of the time!
The Goal
So how do you go about fixing the problem of keeping the non-
bottleneck machines working at the same rate as the
bottleneck?

Recall the boy scout hike: Herbie is in the middle of the line and
cannot be moved, so how do you keep the kid in the front
walking at the same pace as Herbie?

Alexs kids: use a rope and a drum.

Rope: Attach a rope from Herbie (bottleneck machine) to the kid at
the front (assembly). The length of rope represents inventory.
Drum: Herbie tells the kid at the front to slow down or speed up
(beats the drum). Need some kind of signaling or
communication between assembly and the bottleneck.
The Goal
How is the rope and drum concept implemented in the plant?

Identified it takes about 2 weeks from when parts are released
to the floor until they get to bottleneck.
Setup system that monitors when inventory is processed at the
bottleneck. Material required 2 weeks later is then released to
the floor.
Non-bottleneck parts are released according using the same
principle but tied to assembly.
Bottleneck
Material Release
2 weeks lead time
Communicate release
The Goal
What is the result of this new release system?

WIP is down.
Revenues are up.
Efficiencies dropped initially, but have come back up.
The backlog of orders is completely gone (satisfied customers).

How does management respond?

Happy
Somewhat skeptical success will last
Wants 15% more revenue next month!!
The Goal
In order to improve by another 15% what does Jonah suggest as the
next logical step?

Cut batch sizes for non-bottleneck parts in half.

What is the impact of reducing these batch sizes?

WIP for non-bottleneck parts reduced by half.
Significantly reduce time parts spend in plant. Leads to
increased responsiveness (from 6-8 weeks to 3-4 weeks).

What about the time to handle increased number of setup? Doesnt
matter if occurs on non-bottleneck operations.

Process Time Setup Time Queue Time Wait for Assembly Time
Time parts spend in the plant
The Goal
Also to help get the 15%, Alex calls the marketing/sales
manager and bets him he can reduce lead time to fill
orders. What does Alex expect to gain by reducing
lead times to ship from what used to be 4 months to
4 weeks?

Increased sales!!
The bottleneck had moved to customer demand.
Quick response on promised due dates should
translate to a competitive advantage.
The Goal
Everything is going good now except it looks like part costs are
going up. However, in reality all costs have gone down. How
can this be?

The accounting rules:
Cost per part = raw material + direct labor + burden cost
Burden cost is all the indirect labor costs.
Burden = direct labor x burden factor

Cost per part has risen because more setups are occurring because
of smaller batch sizes.

However, workers were idle, so the increased number of setups
didnt really increase costs.
The Goal
What other performance measure made them not look as
good as they actually were.

Answer: Inventory

Inventory is counted as an asset on the balance sheet.
When the plant worked hard to reduce inventories to
improve their throughput and responsiveness, it
looked as if their assets had fallen.
The Goal
Sacred Cows Slaughtered:

Worker efficiency
Optimal batch size
Releasing work to the floor to keep people busy
Accounting rules
The Goal
Why Alexs plant was successful:

Change in Focus
from the cost world to the throughput world


Cost
Throughput
Inventory
Throughput
Inventory
Cost
The Goal
What process did they use to shift their focus to the throughput
world?
The Theory of Constraints

Step 1: Identify the systems constraints (NCX10 and oven)
Step 2: Decide how to exploit the systems constraint (dont take
lunch break on bottleneck machines)
Step 3: Subordinate everything else to the above decision (red tags
and green tags)
Step 4: Elevate the systems constraint (bring back old Zmegma
machine, outsource heat treat)
Step 5: Warning!! If in a previous step, a bottleneck has been
broken, go back to step 1 (material release system, marketing),
but do not allow inertia to cause a systems constraint (red and
green tags eventually caused problems).
The Goal
Final words from Alex on how to be an effective
manager:

Help people to identify:
what to change?
what to change to?
how to cause the change?
The Goal
Finally some Philosophy:

What approach did Jonah use to help Alex and the plant succeed?
Find the answers/solutions by asking questions, the Socratic
approach. Let others convince themselves of the answers,
dont just give it to them.

Also used a common sense approach which went against
common practice. In other words, think!!