The Goal

by Eliyahu M. Goldratt, Jeff Cox, and David Whitford

I sincerely believe that the only way we can learn is through our deductive process. Presenting us with final conclusions is not a way that we learn. At best it is a way that we are trained. That’s why I tried to deliver the message contained in the book in the Socratic way.

Our textbooks should not present us with a series of end results but rather a plot that enables the reader to go through the deduction process himself.

here. But I’m doing the best I can.” “If you want the bottom line, Al, this is it: You’ve got three months to turn this plant around,” Peach says. “And suppose it can’t be done in that time?” I ask. “Then I’m going to go to the management committee with a recommendation to close the plant,” he says.

“Alex, I have come to the conclusion that productivity 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. Do you follow me?”

“What I’m telling you is, productivity is meaningless unless you know what your goal is,”

“Do you know what your problem is?” he asks me. “Sure,” I say. “I need better efficiencies.” “No, that is not your problem,” he says. “Your problem is you don’t know what the goal is. And, by the way, there is only one goal, no matter what the company.”

I see it now. The goal of a manufacturing organization is to make money.

Money must be the goal. Nothing else works in its place. Anyway, it’s the one assumption I have to make. If the goal is to make money, then (putting it in terms Jonah might have used), an action that moves us toward making money is productive. And an action that takes away from making money is non-productive.

I would want to see increases in net profit and return on investment and cash flow—all three of them. And I would want to see all three of them increase all the time.

So this is the goal: To make money by increasing net profit, while simultaneously increasing return on investment, and simultaneously increasing cash flow.

“They’re measurements which express the goal of making money perfectly well, but which also permit you to develop operational rules for running your plant,” he says. “There are three of them. Their names are throughput, inventory and operational expense.”

“Throughput,” he says, “is the rate at which the system generates money through sales.”

says. “Through sales—not production. If you produce something, but don’t sell it, it’s not throughput. Got it?”

“The next measurement is inventory,” he says. “Inventory is all the money that the system has invested in purchasing things which it intends to sell.” I write it down, but I’m wondering about it, because it’s very different from the traditional definition of inventory. “And the last measurement?” I ask. “Operational expense,” he says. “Operational expense is all the money the system spends in order to turn inventory into throughput.”

“But the value added to the product by direct labor has to be a part of inventory, doesn’t it?” “It might be, but it doesn’t have to be,” he says. “Why do you say that?” “Very simply, I decided to define it this way because I believe it’s better not to take the value added into account,” he says. “It eliminates the confusion over whether a dollar spent is an investment or an expense. That’s why I defined inventory and operational expense the way I just gave you.”

One of them, I remember as I’m driving, was whether we had been able to sell any more products as a result of having the robots. Another one was whether we had reduced the number of people on the payroll. Then he had wanted to know if inventories had gone down. Three basic questions.

did we sell any more products (i.e., did our throughput go up?); did we lay off anybody (did our operational expense go down?); and the last, exactly what he said: did our inventories go down?

So the way to express the goal is this? Increase throughput while simultaneously reducing both inventory and operating expense.

If you’ve got a machine, the depreciation on that machine is operational expense. Whatever portion of the investment still remains in the machine, which could be sold, is inventory.” “Inventory? I thought inventory was products, and parts and so on,” says Bob. “You know, the stuff we’re going to sell.” Lou smiles. “Bob, the whole plant is an investment which can be sold—for the right price and under the right circumstances.”

“Any money we’ve lost is operational expense; any investment that we can sell is inventory.” “The carrying costs have to be operational expense, don’t they?” asks Stacey. Lou and I both nod in agreement.

Money for knowledge has us stumped for a while. Then we decide it depends, quite simply, upon what the knowledge is used for. If it’s knowledge, say, which gives us a new manufacturing process, something that helps turn inventory into throughput, then the knowledge is operational expense. If we intend to sell the knowledge, as in the case of a patent or a technology license, then it’s inventory. But if the knowledge pertains to a product which UniCo itself will build, it’s like a machine—an investment to make money which will depreciate in value as time goes on. And, again, the investment that can be sold is inventory; the depreciation is operational expense.

He says, “A balanced plant is essentially what every manufacturing manager in the whole western world has struggled to achieve. It’s a plant where the capacity of each and every resource is balanced exactly with demand from the market.

What’s happening isn’t an averaging out of the fluctuations in our various speeds, but an accumulation of the fluctuations. And mostly it’s an accumulation of slowness—because dependency limits the opportunities for higher fluctuations.

how much distance each of us has to make up tends to be a matter of where we are in the line. Davey only has to make up for his own slower than average fluctuations relative to Ron—that twenty feet or so which is the gap in front of him. But for Herbie to keep the length of the line from growing, he would have to make up for his own fluctuations plus those of all the kids in front of him. And here I am at the end of the line. To make the total length of the line contract, I have to move faster than average for a distance equal to all the excess space between all the boys. I have to make up for the accumulation of all their slowness.

At the end of two rounds, this is what the chart looks like. We

After five rounds, the chart looks like this: “How

A mathematical principle says 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.

whoever is moving the slowest in the troop is the one who will govern throughput. And that person may not always be Herbie. Before lunch, Herbie was walking faster. It really wasn’t obvious who was the slowest in the troop. So the role of Herbie— the greatest limit on throughput—was actually floating through the troop; it depended upon who was moving the slowest at a particular time. But overall, Herbie has the least capacity for walking. His rate ultimately determines the troop’s rate.

“What you have to do next, Alex, is distinguish between two types of resources in your plant. One type is what I call a bottleneck resource. The other is, very simply, a non-bottleneck resource.

“A bottleneck,” Jonah continues, “is any resource whose capacity is equal to or less than the demand placed upon it. And a non-bottleneck is any resource whose capacity is greater than the demand placed on it. Got that?”

you should not balance capacity with demand. What you need to do instead is balance the flow of product through the plant with demand from the market.

Balance flow, not capacity.”

Dividing the total of work center hours needed, by the number of resources in it, gives us the relative effort per resource, a standard we can use for comparison. Yesterday, for instance, we found the demand for injection molding machines is about 260 hours a month for all the injection molded parts that they have to process. The available time for those machines is about 280 hours per month, per resource. So that means we still have reserve capacity on those machines.

If you scrap a part before it reaches the bottleneck, all you have lost is a scrapped part. But if you scrap the part after it’s passed the bottleneck, you have lost time that cannot be recovered.”

“What you have learned is that the capacity of the plant is equal to the capacity of its bottlenecks,” says Jonah. “Whatever the bottlenecks produce in an hour is the equivalent of what the plant produces in an hour. So . . . an hour lost at a bottleneck is an hour lost for the entire system.”

the level of utilization of a non-bottleneck is not determined by its own potential, but by some other constraint in the system.”

“The rule he gave me last night is that an hour saved at a non-bottleneck is a mirage.”

An hour saved is an hour saved!” “No, it isn’t,” I tell him. “Since we began withholding materials from the floor until the bottlenecks are ready for them, the non-bottlenecks now have idle time. It’s perfectly okay to have more setups on non-bottlenecks, because all we’re doing is cutting into time the machines would spend being idle.