In unstable, fast-changing environments, flexible operations and quick turnaround can offer real competitive advantages by allowing you to respond quickly to the market. In “The Goal: A Process of Ongoing Improvement”, Eliyahu Goldratt uses a story to explain several inter-related management concepts which are especially useful for operations management and strategic planning. You can also apply the ideas in general management and in your personal life. In this summary, we’ll outline some of these key ideas, including the Theory of Constraints and the Socratic approach.
The story centers around Alex Rogo (“Al”), a plant manager at UniCo Manufacturing who had been transferred to a loss-making manufacturing plant that was perpetually late with its orders. Six months into the job, Al was shocked to hear that every plant in the division was losing money. If things didn’t improve in a year, the entire division would be sold off. Alex was in turn given a moratorium: if he couldn’t turn his plant around in 3 months, it would be closed down.
Alex had no idea why his plant was losing money even though it had the technology, people, materials and market demand. Fortunately, he bumped into his ex-Physics teacher, Jonah, who was now a specialist in organizational science. With Jonah’s help, Al’s plant became profitable, and achieved unparalleled quality and delivery times. Jonah also used the Socratic approach to help Al work out the solutions with his team and to improve his marriage.
We’ll now summarize some of the key ideas and steps behind the Theory of Constraints. In our full 12-page summary, we share more detailed tips, including highlights of the story to illustrate how the concepts can be applied in real-life. You can also read the full story/details from The Goal book.
Knowing the Goal
Many companies use the term “productivity” to refer generically to efficiency or resource utilization. In this book, productivity is defined as bringing your organization toward its goal. To become more productive, you must first know your goal.
The goal of any manufacturing plant is to make money. If the plant can’t stay afloat, no other goals—be it to provide jobs, produce quality products or deliver customer satisfaction—would matter. In operational terms, “making money” can be translated into 3 key measures:
Throughput = the rate that the system generates money via sales. Producing products alone isn’t enough—the products must be sold.
Inventory = all the money that has been invested by the system to buy things intended for sale. It includes everything that you can sell (e.g. parts, finished products, and equipment less depreciation costs).
Decrease Operating Expense
Operational expense = all the money that has been spent by the system to convert inventory into throughput. This includes all the money you’ve lost, e.g. labor and depreciation of tools and equipment.
These 3 measures jointly account for how money flows in, out, or gets stuck in a manufacturing system. The goal is to concurrently increase throughput and reduce inventory and operating expense.
The 5-Step Process of Ongoing Improvement
The story traces how Jonah guides Al’s team to apply these 5 steps to transform his loss-making plant into a profitable one that creates real competitive advantages for the company. We’ll briefly outline the steps here—do get the book or our complete summary for more details.
STEP 1: IDENTIFY YOUR CONSTRAINT(S)
Identify your bottleneck resources (where capacity is less than or equal to the demand placed upon it). This is typically where work is piling up.
STEP 2: FIND WAYS TO EXPLOIT YOUR CONSTRAINT(S)
Start by finding ways to unlock capacity at the bottlenecks without additional investments (i.e. without buying new equipment or hiring new staff). In the book / full book summary, we explore some strategies to do so.
STEP 3: SUBORDINATE EVERYTHING TO THE CONSTRAINT(S)
Let the bottlenecks set the pace for the entire system. In the book / complete 12-page summary, we elaborate on (a) why you should not match resource capacity exactly with market demand and (b) why you must allow the bottlenecks to dictate the pace for the whole system and have a buffer at the bottlenecks.
STEP 4: ELEVATE THE SYSTEM CONSTRAINT(S)
A bottleneck is broken once it’s wide enough to meet existing demand. If the constraint is still not broken after the first 3 steps, then it’s time to elevate it by investing extra resources to boost the bottleneck’s capacity.
STEP 5: REPEAT FOR NEW CONSTRAINTS
Once a bottleneck is broken you should move on to the next bottleneck and repeat the process from step 1. This includes reviewing all measures that were put in place earlier, as they may no longer be relevant.
In the story, the original bottlenecks were 2 machines in the manufacturing process and poor use/prioritization of resources, leading to a backlog of customer orders. Once this choke point was addressed, the next constraint was actually sales–the team had to find ways to help bring in more sales to use the excess capacity in the plant. In the book / full summary, we share how Al’s team improved profitability and turnaround time by reducing batch sizes and tailoring their processes to clinch more sales and open up new markets.
Other Details in Eliyahu Goldratt’s “The Goal”
Applying The Process of Ongoing Improvement
Although the 5-step process above can work in any organization, the exact details and application must be tailored to the specific circumstances and challenges in your organization.
The constraints that you face may not always be physical. There could also be intangible constraints, such as attitudes and deeply-entrenched practices from long-standing policies and procedures. Goldratt used the story to illustrate how factors like accounting principles, silos (different departments focusing on their own goals rather than the big picture), and metrics and data, can all affect the way resources are allocated and what people focus on. You can also get a detailed overview from our full summary.
The Art of Problem-Solving and Management
In the story, Jonah also used the Socratic approach to help Al’s team to challenge their assumptions, find solutions and develop critical thinking skills. In our complete summary, we touch on how this approach works and why it’s critical to effective management.
Other Details in “The Goal”
The TOC was introduced in 1984 in the first edition of this book. This third edition of the book was published 25 years later, with additional Q&As and an article (“Standing on the Shoulders of Giants”) to discuss the relevance of TOC today and how it compares against other methods such as Six Sigma and LEAN. Do get a copy of the book for the full details, get The Goal summary bundle for an overview of the various ideas and tips.
Learn how to apply the process of ongoing improvement to improve your competitive advantage!