Book Review: The Goal
After reading the book entitled The Goal: A Process of Ongoing Improvement by Eliyahu M. Goldratt and Jeff Cox, I became aware and have gained valuable insights on addressing chronic productivity and quality problems. Thus it has expanded my business world view or perspective. It is a fiction but it depicts real processes and practices.
The main character of the story is Alex Rogo, a plant manager for Unico. The story opens with Alex experiencing financial problems in his factory and has been given a 3- month ultimatum to turn his plant around to prevent it from closing. Desperately trying to figure out how to save his plant, he approaches his former physicist teacher Jonah for help after an initial hesitation based on his being an academic person, that he may not understand the business world. Over time Alex realizes that science can be interwoven with business. With Jonah’s guidance, Alex is able to cope and overcome the financial problems.
The heart of Jonah’s business model is explicated by these three definitions: throughput, or “the rate at which the system generates money through sales,”; inventory, or “all the money that system has invested in purchasing things which it intends to sell,”; and operational expense, or “all the money the system spends in order to turn inventory into throughput”. In other words, throughput is the money coming in. Inventory is the money currently inside the system. And operational expense is the money we have to pay out to make throughput happen. Alex has always used these three definitions as a basis to determine if his decisions are helping the plant move towards the goal- to make money, which can be expressed by “increase throughput by decreasing inventory and operational expense simultaneously.”
According to Jonah, 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 closer to the goal is not productive. The long delay in delivering products at Alex’s plant to their customer is their major constraint to be productive. Customers want their products to be delivered on time. If this expectation is not met by the company, its customers will lose faith in the company and will no longer place orders. The late delivery of products denotes non-productivity because the company will not gain money from this. Guided by this productivity concept, Alex and his team have decided to focus entirely on their operations so they can come out with a system that would address this problem.
Alex and his team have initially blamed the robots for the plant’s non- productivity because there has been no increase in sales for any product with robot- made parts. However, Jonah has made them realize that it is not the robots that should be blamed but they should be blamed. Robots are just following orders from their operator. It is the operator’s job to know when to make units and how many units need to be produced. If the operator keeps on feeding the robots, the effect is over-production which will cost them a lot of money if these are not sold. Jonah reminds them that the goal is not to make the robots productive; it is to make the whole system productive.
The first task that Jonah has asked the team to do is to look for bottleneck and non-bottleneck resources. A bottleneck is any resource whose capacity is equal to or less than the demand placed upon it. Non-bottleneck is any resource whose capacity is greater than the demand placed on it. 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. According to Jonah, once they have recognized these two types of resources they will begin to see vast implications. They need to compare these resources against market demand and look for one in which demand is greater than capacity. They will adjust capacity so the bottleneck is at the front of production. This concept reminds Mr. Rogo of the boy scout hike with his son. In the hike, he has observed that the lines/gaps were getting bigger as they walked further. To compress the line, he put the slowest person first, which is Herbie (bottleneck), and the fastest person to the last of the line. Mr. Rogo now brings his boy scout hike observations to the real manufacturing plant:
• 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 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.
Putting Herbie in front of the line helps the team improve their productivity because Herbie is setting the pace and does not have to exert energy to catch up. They even further improvements by Off-loading Herbie’s backpack. Both Herbie and the entire troop’s throughput have been improved thereby reducing inventory (distance) and operating expense (energy).
After initially struggling to search for a bottleneck, throwing things literally in the office to look for their own “herbie”( bottleneck resource), Mr. Rogo and his team, over time, have found it with the help of Bob Donovan who has been working in the plant for 20 years and knows exactly where the problems usually seem to start. They have to go on the floor to find the operation with the most idle time sitting in front of it. Finally, they have successfully found not one but two bottlenecks: the NCX-10 and the Heat treat.
The problem with their NCX-10 is its production time. It takes a long time approximately 14 minutes to finish a certain part as compared to a new NCX-10 machine which can do for only 10 minutes per part. However, their old NCX-10, is cost-effective because it only needs two guys to set up and operate it. Thus, it is the most economical way for them to produce their products. It is not only production time which is problematic but also the training of new operators of this machine which normally takes six months. This machine is run in three shifts; if someone suddenly quits his job, management will have problems of getting immediate replacement as qualified and experienced as the former.
The other “ herbie” in the plant is the Heat Treat. After the parts have been machined or cold-worked at ordinary temperature, no further work can be done to them anymore unless they have been treated with heat for an extended period of time. The heat allows the metal parts to soften, allowing more machining work be done to them. It takes 6 to 16 hours to fire up the machine and cook the parts. Afterwards, the parts have to go through a further cool-down to air temperature outside the furnace. Thus, a lot of time is lost in this process alone.
The initial plan of placing the bottlenecks in front of the production has turned out to be a disaster for there is no way to change the position of the machines. The sequence of operations has to stay the way it is and there is nothing they can do about it. In anxiously trying to look for an answer to solve the problem, they have again turned to Jonah for help.
Though originally bound for Los Angeles, Jonah has decided to spend a night at Bearington to meet the team and see for himself exactly how they manage their bottlenecks. Picked up by Mr. Rogo at the airport, Jonah is brought immediately to the plant and introduced to Alex’s team. As they walk towards the production floor, he gives them a little insight on how they will be able to increase throughput and improve their cash flow inspite of the problem they are encountering in their two bottlenecks. Jonah suggests that since their bottlenecks are not maintaining a flow sufficient to meet demand and make money, the only thing they can do is to find more capacity to become more equal to the demand. To be able to advise them on the best way to go about finding more capacity, he needs to see first their bottlenecks.
Upon reaching the NCX-10 machine, Jonah has immediately noticed that the machine is not currently running. He asks why, and Bob says that the setup people are on break and they will be back in about 20 minutes. Alex suddenly butts in and also explains to Jonah that there is an agreement with their union contract that there must be a half-hour break after every four hours of work. To Jonah, this is a no-no. He points out that the machine has only 585 hours available per month for production. If they lose one of those hours, or even half of it, they will lose it forever. They cannot recover it someplace else in the system. Their throughput for the entire plant will be lower by whatever amount the bottleneck produces in that time making it the enormously expensive lunch break. He then suggests to talk to the union and make them understand that the bottleneck’s time should not be idle.
Moving right along to Heat treat, they gather in front of the furnaces. The first thing that Jonah has noticed are the stacks of parts. He then asks Bob if these inventories require heat treat and if there is an alternative that prevents the need for heat treat on at least some of those parts. Bob’s answer is in the affirmative—all of those inventories require heat treat. But as for the alternative, he blames their engineers for not being responsive to change. They are observed to be not happy about changing requirements and even when they agree to cooperate, it takes months for them to give their nod. Jonah, therefore, suggests that the team look for outside vendors in the area who can heat-treat parts for them.
Next, the team is requested by Jonah to show him the quality inspection on bottlenecks parts. Arriving at the area where they do quality inspections, Jonah asks about the bottlenecks parts that are rejected. On top of them is a pink sheet of paper, which indicates rejection by Quality Control. The parts are shown to him by Bob, further informing him that these parts come through a bottleneck. At this point, Jonah wants them to realize what the rejection by Q.C. has done to their plant. They have lost the time on the bottleneck which means they have lost throughput. He suggests that they use quality control in a different way. He wants to put the Q.C. in front of the bottlenecks to make sure it works only on good parts by weeding out the ones that are defective. He further explains that if they scrap a part before it reaches the bottleneck, all they will lose is a scrapped part. But if they scrap the part after it has passed the bottleneck, they lose time that can not be recovered. The one thing that concerns the team is where to get inspectors to which Jonah offers the suggestion that they shift the one they already have to the bottlenecks.
Gathered inside the conference room for final recommendations after touring around the plant, Jonah recalls and highlights to the team what they have learned a while ago in the plant- the capacity of the plant is equal to the capacity of its bottlenecks. 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.
With that in mind, there are, according to Jonah, two principal themes which they need to focus on. First, make sure the bottlenecks’ time is not wasted. Bottlenecks that are sitting idle during a lunch break is one example of time wasted. Another is the processing of parts that are already defective or which will become defective through the hands of a careless worker or poor process control. A third way to waste a bottleneck’s time is to make it work on parts that they do not need- that is not within the current demand. What Jonah is trying to say is when they build inventory that won’t sell for months in the future they are sacrificing present money for future money. Since their cash flow cannot sustain it they have to make the bottlenecks work only on what will contribute to throughput today not nine months from now.
The other way to increase bottleneck capacity is to take some of the load off the bottlenecks and give it to non-bottlenecks. If some of the parts need not be processed by the bottleneck they can shift those parts to non-bottlenecks for processing. If they have machines to do the same process or if they have a vendor with the right equipment, they can offload from the bottleneck. Again they gain capacity which enables them to increase throughput.
Inspired by what they have learned from Jonah, the team begins to implement the new ideas the next day. Moving the Quality Inspectors infront to check parts going into the bottlenecks, talking to the unions about the new rules for lunch breaks and lastly, reorganizing and prioritizing first late orders over the others to improve their overdue performance are the three tasks the team considers essential to be immediately put into action. A list of all overdue orders and have them ranked up in priority ranging from the most days overdue to the least days overdue is made. Then a schedule/list in due date order is created and the bottleneck operators are instructed to work only on those jobs in that order.
The next morning, Alex meets with Mike O’ Donnel, the union local president, to talk about the new lunch rules in heat treat and NCX-10 machine. O’Donnell has countered that the contract is being violated and he has even pointed out where the violation can exactly be found in the contract – Section 7, Paragraph 4. But Alex has immediately interrupted him and explained why management is now changing the rules. He first describes to him the unproductive situation happening in the plant. Then he tells him some of what they have discovered and explains why the changes are necessary. At first Mike does not understand and still insists that the union has a contract but eventually he agrees. He must have realized that Alex is not asking for cuts in wages or concessions on benefits. He is simply asking for flexibility. They do not have much people to operate the machines and the company does not want to hire anymore new employees because of budget constraints. Management has to have the leeway necessary to make changes that will allow the plant/company to make money.
By early afternoon, Alex is anxious to find out how the priority system is working so he goes to the production floor to have a look. The first place to check is the NCX-10. But lo and behold, there is nobody there working and the worst part is the machine is not running. This makes him really mad. One of the foreman is confronted and asked why the machine isn’t working. The foreman replies that they have run short of materials after the third part of the list. When called up by Alex to explain what has gone wrong, Bob explains that the parts needed by the operators at the NCX-10 have been sitting there for a week. Otto, the foreman who’s in charge of giving the parts needed for NCX-10, is busy running other batches of parts. Obviously, Otto does not realize the importance of the parts destined for the NCX-10. To him they are like any other batch- and a rather unimportant one judging from the size. He cannot distinguish between an important batch of parts and unimportant one.
The scheduling system that they have created does not work exactly the way they want because of late job components. They are supposed to be always waiting infront of the bottlenecks machines. To rectify this mistake, a red/green tag system is created for all jobs throughout the plant such that any job with a red tag which arrives at a machine is given first priority. The red tags go on any materials needing to be processed by a bottleneck. When a batch of parts with that color marker arrives on someone’s work station, the operator is required to work on it right away. If he is in the middle of a run, it is okay to finish what he is doing as long as it doesn’t take more than 30 minutes to complete. Before an hour has passed, he stops what he is doing and starts working with the red tag job. If the work with the bottleneck parts is finished, he can continue with the unfinished work he has earlier stopped. The second color is green. When there is a choice between working on parts with a red marker and a green marker, they should work on the parts with the red marker first. They worked on green orders only if they don’t have any red one in queue.
A week has passed, Ralph and Stacey have been discussing about improvements in their overdue performance. They are ectastic and pleased with the result that they have shipped their 12 most overdue orders last week and now their worst overdue order is downed to forty days compared to 58 days. This means that their red/green tag system has been working fairly well. The bottlenecks are getting their parts promptly. In fact, the piles of inventory in front of them have grown. Following bottleneck processing, the red-tagged parts have been getting to final assembly faster.
After putting Q.C. in front of the bottlenecks, they have discovered that about five percent of the parts going to the NCX-10 and about seven percent going to heat treat did not conform to quality requirements. This means they have effectively gained that time for additional throughput.
The combination of these factors has allowed them to ship their most critical orders on time and to ship a few more of them than normal. But they still want to accelerate the progress more. Bob has been planning some refinements on what they have already done to move their production faster.
That afternoon, Alex sets up a meeting with the Q.C. manager, Elroy Langston and employee communications Head, Barbara Penn who is in charge of the newsletter which explains the background and reasons for the changes taking place in the plant. The purpose of the meeting is to assign the two to work collaboratively on a new project.
It is observed that after parts exit the bottlenecks, they often tend to look almost identical to the parts going into the bottlenecks. Only a close examination by a trained eye will detect the difference in some cases. The problem, therefore, is how to make it easy for the employee to tell the two apart and to make it possible for him to treat the post-bottleneck parts with extra care to increase the number of parts making it to assembly and are ultimately shipped as quality products. There must be a simple way to show people the parts they need to treat with special attention- the ones they need to treat like gold. Langston and Barbara are being consulted for their recommendations regarding this matter. Their suggestion is to mark the tags with pieces of yellow tape after the parts are finished by the bottlenecks. They will disseminate the information in all bulletin boards, announcements and the company newsletter to make sure that the employees know what the tape means. Mr. Rogo accepts their recommendation with the expressed condition that it does not slow down their operations.
A few minutes after the meeting, Alex has received a call from Bob Donavan requesting him to go outside to the receiving dock. Alex then walks down to the dock to meet Bob. When he gets to the dock, he notices that there is a large object covered with a gray canvas tarp. Bob walks over and removes the cover while informing Alex that he has found a Zmegma, their old equipment, and two other machines capable of doing all the things the NCX-10 can do. If the machines still work, with just one shift a day they will be able to increase the capacity of the bottleneck to about 18 percent. To check whether or not the machines are still okey, the maintenance man is summoned to connect the power cable of Zmegma to an outlet after which Bob reaches for the power switch and hits the ON button. For a second, nothing happens. Then suddenly, a sound somewhere in the guts of the old machine is heard, prompting Alex and Bob to believe that the old machine still works after sitting idle all this time. Excited and enthusiastic, they want the machine to be brought inside the plant to get it ready for setup.
After setting up the old machine, Bob sees Alex again to inform him of his new observation that NCX-10 is still sitting idle for as much as half an hour. The problem, according to Bob, is not lunch breaks. He tells Alex that if the machine stops in the mid-afternoon, it may sit there for twenty to forty minutes before anyone gets around to starting a new setup. The reason is the setup people are busy with other machines, with non- bottlenecks. The solution offered by Alex is to assign a dedicated personnel for NCX-10 to work on the machine immediately after it stops. The idea, then, is even if the dedicated personnel may be idle at times, the machine must not be idle.
Alex and his team also send out some portion of heat treat parts to a vendor in town. They have piles of inventory in the heat-treat department and usually it takes hours to complete the heat-treat process. With outsourcing, they are able to offset the surplus of the heat-treat department and possibly reduce the heating and cooling process. It enables them to save a lot of money as compared to incurring extra expenses in hiring new employees as well as in purchasing new equipments.
Alex, while sitting in his office with nothing to do, decides to see how the machinists are doing in the heat treat. He noticed last week that the scheduled workers in the third shift were able to push ten percent more parts than the others. Curious to know how they were able to do it, he goes out of his office to see the machinists. He asks one of the foremen, Mike Haley the “how” of their increased capacity. Mike readily informs him that they simply fill up the furnace with a full load. If only 50 percent of parts is needed to be heated that day, they get the remaining 50 percent in the retaining parts as long as they take the same temperature cycle. Fired with enthusiasm for this successful procedure, Mr. Rogo decides that this idea be put into operation in the first and second shifts.
The next morning, Mr. Alex Rogo receives a good news from Mr. Donovan. He has found out that if they can change back the way they process their parts in the heat treat five years ago, some parts do not need heat-treat. Five years ago, a group of employees tried to improve the efficiencies of several of the machining centers. To speed up the processing, the cutting tool “bite” was increased. Instead of shaving the chip a millimeter thick, the tool took off three millimeters. Increasing the amount of metal taken off on each pass made the metal brittle. And this necessitated heat-treating. Therefore, If they opt for slower processing, they can eliminate the heat-treat. According to Donovan, this can take about 20 percent of the current load off the furnace. Mr. Rogo sends his blessings Bob to implement the change immediately.
A few days have passed. Hearing a loud sound outside his office, Alex has thought something fell off the ceiling tiles. He goes out to check it and is a bit surprised to see his team holding up a champagne bottle and celebrating. He asks the reason for the celebration. One member of his team, Lou steps up and tells him that they have discovered that they have made a new plant record in shipments of products- fifty seven customer orders with a value of about three million. Stacey also informs him that there is a twelve percent decline in work-in process inventory. Mr. Rogo is very happy with the results and spends the night celebrating with his team.
However, Stacey comes the next day with the information that a new problem has cropped up. Lately, there have been shortages in the non-bottleneck parts. Last week, they had to fill an order for 200 DBD-50’s. Out of 175 different parts, 17 were missing. Only one of them was a red tagged part and the rest, green tagged. The red part came out of heat treat on Thursday and was ready by Friday morning but the others were still missing. This time, Mr. Rogo has run out of ideas to solve the current problem prompting him to call up Jonah again for help. After having been informed by Mr. Rogo of the strategic operations they have done since his last visit as well as the symptoms of the newly encountered problem, Jonah agrees to visit again and have another look at the plant’s operations.
Mr. Rogo picks up Jonah at the airport and head straight to the plant. After meeting first with the team in the conference room, Jonah is escorted to the production floor to have a first hand look at the problem. Faced with the problem, he brings to the team’s attention the relationship between bottleneck and non-bottleneck machines to make them understand clearly what they have done in their productions. Jonah believes that the “new bottlenecks” are not real bottlenecks, but self-created bottlenecks. The culprit is the constant release of materials to the plant just to keep the non- bottleneck machines busy. This improves the efficiency of the machines, but does not help the goal. The important lesson to learn is to try not to make non-bottlenecks work all the time. They can sometimes be idle. What Jonah is suggesting to the group is that they need to find a way to release the materials for the red parts according to the rate at which the bottlenecks need the materials. Ralph, the computer wizard, tells everyone that he has been keeping data on the bottlenecks which can be used to predict when to release the needed materials. He shares his observation that it takes about two weeks for the materials to reach the bottlenecks from the first operations. By adding two weeks to the setup and process times of what is in queue at the bottleneck, they can calculate how long it will take until the bottleneck actually works on the released materials. As each batch leaves the bottleneck, they can update their information and calculate the date when Stacey should release more red-tag materials. Everyone seems impressed with Ralph’s idea. Jonah further suggests to Ralph that the inventory problems in front of assembly can also be attacked if Ralph, aside from determining a schedule for releasing red-tag materials based on the bottlenecks, can also determine a schedule for final assembly. Once he knows when the bottleneck parts will reach final assembly, he can calculate backwards and determine the release of the non-bottleneck materials along each of their routes. Doing this, the bottlenecks will be determining the release of all the materials in the plant.
A month has ended and there are no more shortages of non-bottleneck parts—thanks to the new system developed by Ralph Nakamura which is the key to the speed of the bottlenecks. Ralph has a data terminal at both bottlenecks so that while an inventory is being processed, the latest information can be fed directly into the plant database. The system is also integrated into their marketing department to monitor all customer orders and shipment dates. With the new system in place, the team is beginning to see excellent results. Work-In Progress is reduced, revenues are up, efficiency initially down but has now come back, and the best thing, the backlog of orders is completely gone.
Most of the Unico divisions are impressed with the performance of Mr. Rogo’s plant with the exception of his division manager, Bill Peach. He is not yet convinced with the reports Alex has presented him. He believes that a ten or fifteen percent reduction in operating expense is needed to make the plant profitable for the long term. At this juncture, Alex proposes a deal with Bill: If they can deliver an additional fifteen percent next month— more than what they have given this month, Bill must recommend to the Board to keep Bearington open. Bill accepts the agreement with a smile.
On the way home, Alex is worried as he ponders how and where to get the orders that will give them an additional fifteen percent. All their overdues orders have already been shipped and he gets the feeling that orders scheduled for the coming weeks will not be enough to reach the extra fifteen percent. “Call up Jonah again for help” is Alex’s answer to his present predicament. Thus, he calls up Jonah and updates him on the new situation he is faced with in his desire to increase sales. Always ever helpful, Jonah explains the next steps which need to be done.
The next morning, the team gathers in the conference room for a meeting. Alex shares the steps proposed by Jonah for them to take in order to improve their sales. To reach the goal of an additional fifteen percent, they need to cut their batch sizes in half on non-bottleneck parts. By reducing batch sizes by half, they also reduce by half the time it will take to process a batch. As a result, queue and wait time by half is reduced as well. Reduce size and processing time by half, and they reduce by about half the total time parts spend in the plant. Reduce the time parts spend in the plant, their total lead time condenses. With less time spent sitting in a pile, the speed of the flow of parts increases. They can respond faster with shorter lead times and customers can get their orders faster with their faster turn-around on orders. If they are able to shorten shipping lead times from what used to be four months to four weeks, more customers will come to them because they can deliver faster. Quick response on promised due dates will translate to a competitive advantage.
To get an additional help to raise the 15%, Alex calls the marketing/sales departments to convince them that he can reduce lead time to fill orders. Johnny Jons, the sales manager, is convinced and markets the offer to his sales people so they can advertise it right away. Lo and behold, Bucky Burnside, whose last order has been placed long time ago, is now interested in buying a thousand units of Model 12’s with instruction that they must be delivered in two weeks. However, there is no way they can deliver the full thousand units in two weeks. An alternative delivery scheme is proposed instead to Burnside: 250 units will be delivered per week for four weeks. Burnside agrees, setting the order in place.
Mr. Rogo’s plant is able to deliver the one thousand units and consequently, this pleases Mr. Burnside. He is amazed with the fast delivery of the products. In fact, he has signed up a long term contract with them to make and deliver ten thousand units of Model 12 a year.
Everything is running smoothly except the cost part. The audit team from the headquarters has reported that costs have gone up. Based on accounting principles, cost per part has risen because more setups are occurring due to smaller batch sizes. In reality, however, all costs have gone down. Workers are sometimes idle, so the increased number of setups do not really increase costs.
At the end, not only has Alex Rogo saved his plant from closing; he has made it a more profitable company. Bill Peach, his division manager, is promoted to a higher post and he recommends Mr. Alex Rogo to replace him and fill up his vacated position. Alex is given two months to prepare for his new position.
Most of the solutions are common sense. Simple logic still works in all business fields. By recognizing bottlenecks and constraints, you know what you have to offer. They are important in the production of goods and services because they control the inventory and throughput of the company. The correct use of bottlenecks and constraints are major factors in establishing a balance of inventory and throughput, which are both major aspects of the goal.