Book Summary- The Goal: A Process of Ongoing Improvement by Eliyahu M. Goldratt and Jeff Cox

Publication Details:

“The Goal: A Process of Ongoing Improvement” by Eliyahu M. Goldratt and Jeff Cox; Productivity and Quality Publishing Private Limited, Madras; Special Edition, 2013 (First Published 1984); Rs. 495; 342 pages (299 pages of the novel per se).

Introduction:

          “The Goal” is a physicist- turned- management guru’s explanation of his Theory of Constraints (TOC) in the physical transformation process of manufacturing, through the medium of a business novel. This book also inaugurated a trend for his subsequent novels, which applied and extended this theory. It doesn’t need an intellectual to read and understand this book- it is written for the layman, and therein lies its biggest advantage. This eight million copy best seller is said to be widely used as a case study in Operations Management, and in helping students grasp the importance of strategic capacity planning and constraint management.

a. Plot Summary:

The protagonist of this novel is one Alex Rogo, Plant Manager at the Bearington Plant of UniCo, a UniWare manufacturing unit. He is married to Julie, from a higher economic class, for a decade and a half, and is blessed with Dave and Sharon.

The novel opens in the plant, with Alex walking in to an explosive situation manifesting the bullwhip effect- a long overdue order, an unpleasant visit from a headquarters official, his divisional manager, Bill Peach, who usurps his parking space and his chair for the time being and even causes a sensitive workman to quit, the subsequent breakdown of a machine, changes in set-ups even as one was under process, etc. His divisional manager gives him an ultimatum to turn the plant around in three months. It is coincidental that Bearington is losing its economic activity- another plant had moved southward and the tallest building in the city is up for sale.

Then Alex recollects a conversation with his physics teacher, Jonah, during which the latter was utterly unimpressed either with Alex’s command over robotics or the efficiencies of his plant ( the professor seems to opine that Alex’s organization is an EOO (Expensive Old Organisation, resulting from the combination of an old organisation and new technology). He figures out what the goal of his organisation is, and then involves his team of Bob Donovan, the Production Manager, Lou, the Plant Controller, who measures efficiency, Stacey Potazenik, the Materials Manager, and Ralph Nakamura, the data processor, at different times, sometimes together, sometimes on a one- to- one basis, to find answers to Jonah’s probing questions, asked from time to time, and fish the plant out of trouble as well as make a plan for scaling up. This also means violation of extant procedures.

Meanwhile, just as he’s unable to cope with official requirements and pressures, he fails to keep up his family commitments- repeated defaults on together time, delayed appreciation of child’s progress, neglect of mother who lives in the same city, etc. – some of which Julie cannot take and leaves home as a consequence. He tries to find her out in vain. He tries to manage things on his own, again in vain.

When Alex goes out on a hike with the boy scouts, he is able to place his official troubles in perspective, in the light of his discussions with Jonah- he understands the triad of concepts most important to move towards the goal- throughput, inventory, operating expense- as well as factors limiting these- bottleneck, statistical fluctuations and dependencies- and the way out of the whiplash effect- de-bottlenecking, etc.

Alex now brings in his mother to mind the children, who get calls from Julie once in a while, even as they are in the dark about where she is calling from. When the plant’s problems are discussed, each one suggests measures, but to no avail. Based on a clue from Sharon, Alex figures out that Julie is at her parents’ place and works hard to save his marriage. He gets back in touch with her and wants to know if she were involved with someone else; Julie, naturally, feels she has not been understood but then, later, she is willing to engage him, even if undecided on the future of the marriage . When things seem to have been settling down, a mix-up causes Julie to suspect Alex and Stacey, but the latter speaks to her and puts her doubts to rest.

Even after an outstanding performance by the Bearington plant, the headquarters does not want to withdraw the closure threat. They want at least 15% on the bottom line consistently. Alex is doubtful about it, if it will be without additional business.

On the personal front, Alex now applies his ‘gyan’ and asks Julie to understand the goal of marriage, so that they can get along despite differences in their upbringing. After this, she shows interest in his work to the extent that she starts to read Socrates.

Alex, with additional planning and overcoming of constraints, is doing roaring business (which wins the appreciation of the client) when his applecart is upset by the chance visit of his divisional productivity manager, who finds no work happening on a robot and finds out more. This is followed by the visit of the audit team which plays by the extant system and hauls the team for faulty reporting and deviance from the existing efficiency parameters. The recalculated figures fall short of the 15% increase in bottom line.

The headquarters meeting that Alex dreads, shortly after he makes up with Julie, turns out to be a congratulatory one- he is promoted as Divisional Manager, with two months to join. Alex promptly seeks further guidance from Jonah who advises him to learn things on his own, like understanding techniques for effective management.

The common reader wonders why 20% of the book remains to be read after Alex’s promotion. But, scaling up needs to be done- different challenges, different constraints and different actions to overcome them. The climb happens in respect of Alex’s team mates, as well.

The process of ongoing improvement is noted and updated, as a mark of improvement. The book finally ends with Alex and his team zeroing upon techniques for effective management.

b.  Theory of Constraints- from Chaos to Clarity:

The opening scene in which Bill Peach plays expeditor takes the cake in depicting the total lack of control, demonstrates the bullwhip effect perfectly - no one knows the status of order number 41427 (ironically and aptly named the Burnside order!)- while it ultimately turns out that there were mountains of inventory of all parts but one, because of which the assembly could not be done, and the order, shipped. That scene depicts that the plant had no control on what was happening but for daily fire fighting, which shows up different constraints by the minute, as happened in the first scene.

One gets to know that the entire plant’s operations run on the basis of urgency, and not as per a system. In fact, Alex points to the second round of layoffs as the constraint to prompt production.

When Lou gets to know of the three month deadline, he opines the union and quality were the constraints, while Alex wonders if it were the top management.

As the novel progresses, one gets to know of the regular irregularity in which the plant works- frequent machine break downs, availability of certain parts in excess, in contrast to absolute scarcity of other parts required to complete the assembly, long queues before vital machinery bloating the queue time, etc.

After the hiking trip, Alex is able to prove whatever clarity he got when that the 100 sub- assemblies due to Hilton Smyth, the Divisional Productivity Manager do not get shipped at the end of the day.

Further ‘gyan’ from Jonah makes the team aware that the flow of product and not capacity should be balanced with market demand. When the concept of bottleneck is told to them, they go in search of it, first by poring through piles of data, and making further calculations over a few days, which turns out to be an exercise in futility. They then try to understand it by parts short in supply, and succeed in identifying the NCX- 10 and the heat treat.

Once identified and gone into in detail, the team realises that it was a hassle to find a trained person to handle the NCX and that the union came in the way of paying more to the people handling it; it also comes out that though the NCX did the work of three machines and even saved minutes of time, some of those machines had excess capacity; the heat treat was either starving or had parts in queue before it, and that the knee jerk reaction of trying to add another furnace was turned down before.

When other ideas like making the bottlenecks lead the production (like it worked on the hike) and stepping up capacities from beginning to end run into a dead end, the guru’s knowledge is invoked- and, as always, he doesn’t disappoint. He makes a visit to the plant and suggests more efficient ways of utilising capacity to meet the backlog of orders. He questions their assumptions on the cost of idle time and makes them realise that an hour lost on the bottleneck amounted to the same on the entire system. The plant’s compliance to his suggestions to better utilise the two bottlenecks are detailed under ‘c’ below. He enlightens that instead of piling inventory, it was better to get it done outside or even put scrapped machines back to work, since the amount expended for that and the consequent increase in cost- per- part was minor vis- a- vis the increase in throughput it would cause(p.139). The guru also makes his sishya learn to prioritize, by making the bottleneck process parts which can become throughput immediately and process only what are required.

They find it hard to let go (of the mental constraint) of efficiencies, which they got fixated with, but realise that backlog clearance was the priority.

Identifying the parts which went through the bottlenecks from the bills of material is a tall order, but is not enough-   people stop work if the priority listed parts are not around, rather than work on the next available part and parts meant for the bottleneck don’t get due importance- one more lash. That is sorted out by tagging the parts red or green and holding 15- minute meetings in all the shifts to help both the foremen and hourlies understand the importance of the parts bound for the bottleneck- the red tagged ones. The parts coming out of a bottleneck are differentiated from those going into it with a yellow mark, without actually interfering with work. To pull up production, a scrapped Zmegma machine is brought in, luckily just for the cost of transportation and put into action.

The team celebrates improvement in productivity, but there is room for improvement. When it comes to light that the bottlenecks are being underutilised, dedicated manpower is allocated, as against making the people work elsewhere when the machines were running and thereby lose the available time on them. And this is done, with full knowledge that it would increase direct labour on them and that non- bottlenecks could become bottlenecks.

Innovative thinking by a foreman and review of procedures release 20% more capacity for the heat treat.

After this round of capacity augmentation and increase in throughput, non- bottlenecks become constraints, since the red tagged parts got priority and the inventory of green tagged parts piled up, demonstrating how communication gap can distort proceedings and create the bullwhip effect, yet again, in an area thought to have been addressed.  Though it was not a bottleneck, it requires the guru to make his sishya(s) understand the four fundamental linear combinations and appreciate that the non- bottlenecks should never be utilised to their potential but be driven only by some other constraint. Ultimately, the team agrees that proper sequencing, without tagging, eliminates confusion for the worker, and therefore, works better.

Inventory control is made easier by the ideas of Sharon and Dave- holding the scout boys together by drum- beat marching or by tying them together with a rope- signals that can be managed with a computer; when the team plans to set up a system to schedule material release to bottlenecks, Jonah fine-tunes the idea to make the team calculate backwards and determine release of material to non- bottlenecks, right up to the assembly line. To cater to the requirements of reporting, the team is also ready to temporarily fudge the efficiency data; it is not that bad, it later turns out. Nevertheless, the plant is able to predict the probable date of shipment with decent accuracy.

Efficient Batch Quantity is given up next to reduce queue and wait times, which increase inventory. Smaller batch size increases throughput, ensures a more even flow of work, faster movement between work stations and even makes idle time less noticeable.

The team resorts to further reducing batch size and staggering of receipts and deliveries, to overcome capacity constraint and raw material deficiency to succeed in a million dollar deal (coincidentally from Burnside) without a hitch, with existing capacity- a proper answer to the bullwhip. During this order period, competitive dimensions like delivery speed and reliability and coping with demand by a win- win staggering come to the fore. If Re- engineering meant “the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service, and speed”, the team had done it.

In due course, holes in buffers reveal Capacity Constraint Resources as possible obstructions to the goal. But tagging is the cause for that, and the once acclaimed tagging is given up in the light of the new situation.

Then it turns out that effectiveness is lost in that the market does not deplete their finished goods fast enough. This happens because the materials managers issues materials, riding on the wave of increased throughput (poor demand forecasting and ‘push’ing of inventory).

When a huge export order lands in their lap, they not only have overcome the ‘constraint’ of ‘cost plus’  and ‘product cost’ thinking, but also find that the old ghosts return (elaborated in ‘d’ below) and they are forced to abandon a sales pitch of a three- week delivery.

Subsequently, transfer pricing, project delays, obsolescence, etc. emerge as possible constraints.  

After having gone through the understanding of constraints, the ultimate learning from this theory is that

                                         i.    "Whenever the constraint is broken it changes conditions to the extent that it is very dangerous to extrapolate from the past”.

                                        ii.    "even the things that … put in place in order to elevate the constraint must be reexamined."

c.   Redefining Concepts through the Socratic Method as opposed to spoon-feeding:

Traditional accounting and cost control concepts, which ruled the world of business for long, are seen in a different light and their inadequacies are noted. Several concepts are discussed and redefined in this novel in a novel way. And, they are dealt with by the Socratic Method, by which the teacher clarifies the student’s doubt by asking a thought- provoking question, which does not have an immediate answer. The student goes through a process of thought, trial and error to zero in on the answer, which is told by the teacher in case the student is lost. Jonah, the teacher, is ready with his questions as well as his student’s. Having said that, I seek to concentrate on the redefinitions with allusions to the Socratic Method occasionally. For example, productivity, instead of being defined in terms of the margin or average, or as a ratio of output and input, 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”.

Likewise, when Alex tries to understand the one goal his organisation, UniCo, stands for, he carefully considers and rationally rules out cost-effective purchasing, employing good people, high technology, producing products, producing quality products, selling quality products, capturing market share, communications and customer satisfaction, before correctly identifying money- making.

Similarly, Alex and his team try to determine various measures of money making- net profit, ROI, cash flows, etc.,  before Jonah specifies his three measures, and defines throughput, not in terms of production, but as “the rate at which the system generates money through sales”, thereby implying that if something is produced and not sold, it cannot be throughput.

Inventory is not classified as raw material, work- in- progress and finished goods, but as “all the money that the system has invested in purchasing things which it intends to sell”, and hence, lower the better. Value addition through direct labour doesn’t get added to inventory. From a book- keeping perspective, it sounds counter- intuitive, and may, at an efficiently low level of inventory, show a net loss being the difference between the product cost and material cost of inventory. This definition helps Alex identify the myth of the efficiencies of the robots, which were behind the build-up of inventory and the loss of effectiveness. The team figures out by combined effort that if the market price was higher than the inventory and operational expenses per unit combined, they made profit. Investment is inventory, as per this definition and the robots were inventory. If knowledge as a patent is used to sell, it is inventory, while knowledge used in manufacture was an operational expense.

The redefinition of an operational expense as “all the money the system spends in order to turn inventory into throughput”, rouses the fighting spirit of a conventional accountant. The purchase of robots by UniCo only increased operational expense as none of the workers was laid off. Overheads were an operational expense.

The thrust this book lays on global optimum rather than local, gives the reader an insight into the perils of pursuing efficiencies as ends in isolation rather than means to an end. The idea is to increase throughput, and decrease inventory and operational expenses. The 36% efficiency increase in parts manufactured by the robots (which Alex proudly spoke of, to Jonah) was achieved partly because the batch sizes were inflated with a view to bring down cost- per- part ( and thereby causing a whipsaw effect), and partly because there was less than optimal replacement (one NCX-10 replacing ten machines of three varieties; perhaps, in the days of the NCX’s predecessors, the unit may not have been a bottleneck at all, with the first and third machines having excess capacity), while robots did not increase sales or speed up production. No wonder, the plant is an Expensive Old Organisation! However, as the reader realises later, this less than optimal replacement ceases to be an issue when seen from different perspective. Further, the tendency to keep every resource (the non- bottlenecks) utilised at its respective optimum leads to total inefficiency, as is evidenced from the milling machines being converted into a bottleneck- one more lash.

Alex and his team, taking a cue from the scouting expedition and Jonah’s guidance, spend a considerable amount of time and paper on identifying a bottleneck by comparing capacity with market demand (or Herbie, as they referred to it) and find excess capacity for most machines. The inaccuracy of data also leads them to a dead end – one more lash- before Alex suggests they identify the machine with the maximum work- in- process inventory. Then two bottlenecks show up- the NCX- 10 and the heat treat. Extending the idea of it being the resource that limits the capacity or maximum output of the process, a bottleneck is defined as “any resource which is equal to or less than the market demand placed on it”. Rather than increase physical capacity (and thereby cause resource availability), Alex learns that better utilization of the existing resources works more efficiently and that an hour lost on the bottleneck is equal to the loss of entire production . With this knowledge, the teacher also enlightens the team of three ways to optimise the use of one of the bottlenecks, the NCX- 10- to make it work at lunchtime, to process only Q. C. cleared parts and to utilise it only where necessary, while the team and Mike Haley, the third shift foreman of the heat treat, find other means, by redeployment and by overlapping respectively.

He and his team also learn about the difference between resource availability, resource activation and resource utilisation and also four fundamentals of linear relationships. The counter- intuitive requirement of underutilising the non- bottlenecks, as their productivity depends on that of the bottleneck holds all concerned in awe.

Understanding statistical fluctuations and dependencies through the climb to Devil’s Gulch is a painstaking job done by Alex after Jonah drops a hint. Statistical fluctuations are understood as the differences in the speed of the hikers, while dependencies are understood by the limitation imposed by the fluctuations. Alex also understands that the result is not an averaging of speed (balancing of demand) but an accumulation of slowness (inventory), as dependency limits scope for higher fluctuations. This is proved by the game of dice and match- sticks played with the kids, when Alex gets the mathematical proof of the peril of balancing, that Jonah talked about (Alex actually remembers the concept of covariance, the impact of one variable upon others in the same group and its underlying mathematical principle- that in a linear dependency of two or more variables, the fluctuations of the variables down the line will fluctuate around the maximum deviation established by any preceding variables). (The accumulated slowness is nothing but a mature presence of the whiplash effect). Armed with this, Alex wins a $10 bet with Bob by proving that robots are not immune to fluctuations and dependencies.

Capacity Constraint Resources (CCR) are identified by one of the team members, Stacey, with all the scientific spirit imbibed from Jonah. She identifies them as those work centres which have capacity, but cannot handle increased load punctually, a situation which could lead to an interactive bottleneck. She also finds a solution to the problem, which will be elaborated under the item ‘d’, infra.

When Alex gets a promotion and seeks the help of Jonah, the latter only advises him to help himself; when the former does not relent, the latter mentions that it doesn’t stop with managing a division rather than a plant, so the former should know what he wants to learn, which could mean as much as learning how to manage life). It takes Alex an unintended question- answer session with Julie to understand what he wants to learn- how to persuade other people, how to peel away the layers of common practice and how to overcome resistance to change. But that is not the ultimate answer, which comes out on the last page of the novel, again by discussion and refinement (discussed under ‘e’ below) - what to change, what to change to and how to cause the change.

                  

The time- tested Economic Batch Quantity (EBQ) goes for a toss following a hint from Jonah- if batch sizes are halved, the queue in front of the bottleneck (which determines inventory as well as throughput) halves as well, which has other beneficial consequences- reduction in lead time, better flow of parts, faster shipment of orders, increase in market share, etc. - indicating limiting of the bullwhip effect. This is despite the fact that set up time goes up; apparently, the rule of loss of time on bottleneck and the fact that labour is an operational expense, count!

By the end, the team comes up with the steps to the process of on-going improvement, it happens through a thought process which is a recollection of what happened and is akin to annual self- appraisal.

d. Scaling it up:

The issues in scaling up from backlog clearance to the million dollar deal and the export order require zero based relook, as the challenges demonstrate. CCRs, mentioned under the previous heading, are an issue to be looked into while scaling up, at the plant level. This can be pre-empted by making production track down missing parts while there was still time and also focus on improvements that will prevent them from becoming bottlenecks. Ultimately, it comes to light that proper sequencing, without the green or red tags, works even better.

The steps in the process of on- going improvement (elaborated in ‘e’ below) can be scaled up.

When Alex gets the French order, it is of such scale that fluctuations and dependencies crop up- either bottlenecks are starved or they cannot handle it, which also results in unplanned overtime, a manifestation of the whipsaw effect. Then the team understands that in order to handle such high volume with less spare capacity, more inventory needs to be stacked before the non- bottleneck resources upstream.

At the highest level, rather than collecting data to comprehend issues, it helps to be effective with an understanding of what to change, what to change to and how to cause the change.

e.   Other Fine Points:

The likening of the gaps in the climb on the scouting trip to the production process is very endearing. The general chaos in the plant is represented by easy- to- miss trivia which include bills of material which do not match routings, routings without current timings or the correct machines, etc.  

The inefficient timing of the headquarters meeting to review the divisional performance is a humourous yet subtle indicator of the lack of proper planning of UniCo.

The story of the Periodic Table is a subtle reflection of the journey of the team – from laughing stock to celebrities!

The plant is so full of machines that people are “almost hidden among the machines”.

“Idling” employees sit together and read the newspaper, even as they wait for work.

The quick passage of time is subtly put by indicating that the day was dark after a conference call and five and a half meetings.

The faceless industrial robots’ chores figure in the conversation between Alex and his mother.Another fine point is the mother advising the son to keep away from worry, as it “killed” his father, who was actually run over by a bus.

The banter about the games different departments play (reducing expenses by cutting R & D, creating complex accounting procedures, turning idle time into process time and the latter into inventory) gives one a good idea of what can go wrong.

Team spirit is understood from the following: “And the team does not arrive in camp until all of us arrive in camp."

Lou’s fixation with accuracy is known when he corrects the real value of an hour lost on the bottleneck to $2188 from $2735, since only 80% of the parts went through the bottlenecks.

The ups and downs of professional and personal life go hand-in- hand for Alex.

The meeting point of Socratic philosophy and scientific method, the “If- Then” analysis, is brought out in a conversation between the Rogos.

The argument over whether their journey was a project or a process is thought- provoking, before the team identifies the Process of On-going Improvement:

Steps	Initial	Refinement1	Refinement 2 #
Step 1	Identify the system’s bottlenecks/ constraints*	IDENTIFY the system's constraint(s).	IDENTIFY the system's constraint(s). Mandatory demand for a technique by which to do it (p.297).
Step 2	Decide how to exploit the bottlenecks/ constraints*	Decide how to EXPLOIT the system's constraint(s).	Decide how to EXPLOIT the system's constraint(s). Helps only if it is a physical constraint. (p.297)
Step 3	Subordinate everything else to the above decision.	SUBORDINATE everything else to the above decision	SUBORDINATE everything else to the above decision Helps only if it is a physical constraint. (p.297)
Step 4	Elevate the system's bottlenecks/ constraints*	ELEVATE the system's constraint(s).	ELEVATE the system's constraint(s). Change the policy by the ability to trigger such ideas, otherwise those techniques can't be used by mere mortals.  (pp.297-98)
Step 5	If, in a previous step, a bottleneck/ constraint* has been broken go back to step 1.	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.	What to change, what to change to and how to cause the change (p.299).

*The realisation that the bottleneck can even be outside of the plant or in systems, makes the team replace the word bottleneck with constraint.

# The further refinement is given in green.

The fact that the huge increase in the throughput occurs after the plant transforms itself from a make- to- stock to make- to- order organisation is worth noting. The first refinement in step 5 to continuous improvement originates, in my opinion, from an indirect acknowledgement of this fact, though it outwardly points to the dangers of the return to old habits.

f.    What got missed out:

Jonah, who makes a serious- looking deal with Alex that the latter should pay him the value of what he learnt from the former, and even clarifies it by saying that he need not pay if the plant winds up but pay according to what he earns, if it is billions, neither waives his claim in the end nor gets paid with Alex offering to pay him. This does not seem to be in order. If the message were to drive home the pricelessness of his lessons, either the initial situation should not have looked too serious or some hint should have been given about its light-heartedness, either ab initio or later.

g.  Conclusion:

The Theory of Constraints takes the reader from confusion to clarity, broadening the horizon of thought process, and, giving her a taste of myriad concepts, said or unsaid, or related to other techniques of efficiency. This book is a wonderful read, and, even if one does not want to look at this book from a purely professional lens, it provokes myriad thoughts in the mind of the reader. It cannot be read just once, unless one is blessed with flawless memory. Its principles need to be reinforced time and again either by re- reading the book or recalling from memory. One can view one’s life’s progress with respect to the goal and make further progress, just like Alex did, both professionally and personally. There is no ultimate constraint. One has to cope with the changing circumstances.

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