I just finished reading a book called “The Goal” by scientist/philosopher and “Business Guru” Eliyahu M. Goldratt. Its a book that explains a type lean manufacturing theory called The Theory of Constraints – but in a fictional format.
I loved the idea of learning about a fairly dry topic via story telling! With a main character who has a mission to accomplish – Save a failing manufacturing plant within 3 months – otherwise everyone loses their jobs and the plant is sold!
Before I begin, here are 2 limitations of this book
- The book is mainly written for production / manufacturing environments. Where you have a flow of separate work stations / processes that are in series and separate from each other. (A -> B -> C ->D) It would be challenging to extrapolate the learnings for my work (which is more project based). However, this book would be highly relevant for managers of a large production or manufacturing company.
- The book was first written in 1984. Foundational concepts don’t ever go out of date. However there is definitely more recent material and refinement that one should go through.
Lets get to the key leanings;
What is the REAL goal of any business?
Some may say the goal of a business is producing quality products. Or perhaps customer satisfaction? Capturing market share?
All those essential to running a successful business but they are not the goals themselves – only a means of achieving the goal.
None of that matters if the company isn’t making money. Money is the goal
Any action that moves us toward making money is productive. Any action that takes us away from making money is non-productive. Easy as that!
To be more specific, “making money” is defined by simultaneously doing the following three things.
- Increase net profit
- Increase return on investment
- Increasing cash flow
Now.. how do we connect the above measurements to the operations in your production plant?
Goldratt suggests these three measurements that express the goal of making money perfectly:
- Increase Throughput – the rate at which the system generates money through sales (NOT productions, but sales, this is important) – Money coming in.
- Decrease Inventory – all the money that the system has invested in purchasing things which it intends to sell. – Money stuck inside.
- Decrease Operational Expense – all the money the system spends in order to turn inventory to throughput. – Money going out.
Everything you manage in a plant is covered by those measurements.
High efficiencies does’t mean you are making money
As a manager, when I see employees idling or a resource not being used to its capacity – I get a heightened sense of anxiety. Isn’t there work to do? The rule has been; keep every person and machine working all the time. Keep pushing products/services out the door. Shift work around to ensure this happens. When there isn’t enough work, make some work! Can’t make the work? Lay people off!
The assumption has been that if we don’t have enough capacity, we are missing out on throughput (sales). If we have excess capacity, we’re wasting money!
But according to Goldratt, this is bullshit.
When you try to match capacity to market demand, your throughput actually goes down and your inventory goes up. This is due to 2 phemonena;
- Dependencies; Step C depends on Step B being completed, which in turn depends on Step A.
- Statistical Fluctuations: Although each step takes an average time to complete, this time can sometimes be higher or lower.
When you combine the two, you realize that all the steps will slow down to the rate of the previous step. Above average speeds of each machine don’t get passed down the process, but the delays definitely accumulate. Inventory is going up (resources are getting stuck in the system) and so is operational costs (carrying costs of this inventory).
Its bottleneck (the slowest step) which governs the final rate of production.
Balancing non-bottleneck areas to be highly efficient has no positive effect on throughput (or making money). All it does is increase inventory and operational expense to mange more products being produced and kept aside – while everyone waits for the bottleneck to catch up.
Yes it feels great to see everyone working all the time. It feels like we’re being very efficient. But the goal is not being achieved. People feel productive and are rewarded. But this isn’t right.
Don’t look at one area and try to maximize it; look at the whole system. Don’t attempt to balance capacity with demand. Balance FLOW OF PRODUCT through the plant with demand instead.
Balance flow. Not capacity.
Use the bottleneck to control flow through the system and into the market.
Bottlenecks
Bottleneck: Any resource whose capacity is less than or equal to the demand placed upon it.
Time lost on a bottleneck process is extremely expensive. It will not be recovered in any other place or time. Your throughput for the entire plant is completely dependent on the efficiency of the bottleneck – its the slowest person in line.
Do anything and everything to “break the bottleneck” even if it seems super inefficient.
- Outsource the process to take the load off the bottlenecks – even if its expensive – every hour of a bottleneck is too precious, it makes sense.
- Put quality control checks BEFORE the bottleneck, so defective parts are thrown out before they get to the bottleneck
- Make strong process controls on the bottleneck parts so they don’t get damaged later on.
- Keep bottleneck processes running 24/7 if you can (hire people to run them)
- Dont increase batch quantities through bottlenecks for “future” products, simply for efficiencies if they are not immediately needed.
- Put in a priority system on all bottleneck and non-bottleneck parts so workers know what work on first.
- Create a signal to link the bottlenecks with the release-of-materials schedule. (Keep a limit on how much material is getting released, time it to allow twice the length of lead time, nothing more)
- Reduce batch sizes – it reduces queues in front of bottlenecks and wait times for bottleneck parts, reduces total time parts spend in a plant. Its totally ok if this increases set-up times on non-bottlenecks
- Sales team should be working closely with manufacturing team to determine demand
- When a constraint is broken (fixed) it changes conditions to the extent that it is very dangerous to extrapolate from the past.The inertia causes more issues to be aware of
Pretty much, put your best people and process into your bottlenecks. Elevate it, outsource it, prioritize it. It may seem inefficient but in the big picture you are directly affecting sales!
Reducing efficiencies in some areas of operations makes the whole plant productive.
Process of ongoing improvement
The over-concern of the ‘proper way to arrange things’ manifests itself in harmful ways. Its the merry-go-round that we’re all too familiar with arranging the company according to product lines and then changing it according to functional capabilities – and vice versa. Deciding that the company is wasting too much time on duplicated efforts and thus moving to a more centralized mode. Ten years later, we want to encourage entrepreneurship and we move back to decentralization. Almost every big company is oscillating every five to ten years from centralization to decentralization, and then back again… When things are not going well, you can always shuffle the cards, reorganize.
Eliyaho M. Goldratt, The Goal pg 286
Whats the point of collecting all this data if you don’t know what to do with it?
The Periodic table of elements is organised according to ascending atomic weight, and in each column you will find elements that behave (react) in a similar way, also in ascending order of intensity. Similarly we should should be looking for an intrinsic order when we look at continuous improvement..
Why do most improvement projects fail? People are sick of hearing “continuous improvement”. Yes first of all, defining measurement of improvement is important. Throughput, inventory and operational expense are more important measurements than cost for example. Secondly the word “process” is key. People focus on the “continuous improvement” part, but you need the right process.. of prioritization??
STEP 1: Identify the system’s bottlenecks (the biggest constraint which also will be the biggest opportunity)
STEP 2: Decide on how to exploit the bottlenecks
STEP 3: Subordinate everything else to the above decision
STEP 4: Elevate the system’s bottleneck
STEP 5: If, in a previous step, a bottleneck is broken, go back to Step 1, but do not allow inertia to cause a system constraint.
Expanding the applications
Common practice gets in the way of common sense.
Identify the real goal. Think about it.
What is the biggest constraint? The underlying thing that is affecting your goals, your life, the most. Is it something common to all the issues? This is also your biggest opportunity. Remember, inefficiencies in your biggest constraint has a massive impact. This is great news. Fixing this is also your biggest opportunity. Identifying the biggest constraint is difficult. Its not about identifying all the bad effects, but the identifying what is causing them all.
Then the next step is coming up with solutions, breakthrough ideas. Verifying that the idea will solve all the problems, and not create new ones.
Simple, fundamental questions but also very very complex: What to change, what outcome to change to and how to effect the change?
Can you imagine what the meaning is to to be able to hone in on the core problem even in a very complex environment? To be able to construct and check solutions that really solve all negative effects without creating new ones? And above all, to cause such a major change smoothly, without creating resistance, but the opposite, enthusiasm? Can you imagine having such abilities?
Eliyaho M. Goldratt, The Goal pg 337