EP171- Mastering Continuous Improvement – Insights from ‘The Goal’ by Eliyahu Goldratt

Are you interested in understanding how to achieve the primary objective of every business? Today, we are examining “The Goal” by Eliyahu Goldratt. #AdvancedQualityPrograms #TheQualityGuy #TheGoal

Through a fictional story about a manager with 90 days to turn around his plant, author Eliyahu Goldratt teaches the principles of operating and improving a system. This book explains how to implement an ongoing improvement process. Goldratt’s system applies to life and business.

To avoid spoilers, I’ll discuss the takeaways, so you can enjoy the story if you decide to read the book.

The main takeaway is that the goal of a business: to make money.

In business, you have three levers: net profit, return on investment, and cash flow. All three levers should move in the right direction. A common mistake is optimizing one metric, which can negatively impact the others. View your business as a system and improve the three metrics together. The trick, according to the book, is “To make money by increasing net profit while simultaneously increasing return on investment and cash flow.”

Another key aspect is productivity. According to Goldratt, “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.” Productivity is about getting the right things done.

The book breaks down the operating system into throughput, inventory, and operating expense.

The goal is to increase throughput while reducing inventory and operating expenses. This will increase net profit while improving cash flow and return on investment. According to the book, “Throughput is the money coming in. Inventory is the money inside the system. And operational expense is the money we pay to make throughput happen.”

• Throughput: The rate at which the system generates money through sales.
• Inventory: All the money the system has invested in purchasing things to sell.
• Operating Expense: All the money the system spends to turn inventory into throughput.

In a warehouse setting, these metrics represent net profit, return on investment, and cash flow, translating financial terms into actionable parts of the system.

The book also explains that a plan is a system of dependent events. This means that to improve in manufacturing, you must optimize the entire system, not just a local area. Some resources have more capacity than others, and this must be considered when creating efficiencies in the system. At its core, manufacturing is a series of dependent events. Ensuring the right interaction between these events is essential. According to the author, “Dependent events in manufacturing mean that one operation must be done before a second operation can be performed. Parts are made in a sequence of steps. Machine A must finish Step One before Worker B can proceed with Step Two. All parts must be finished before we can assemble the product. The product must be assembled before we can ship it, and so on.”

One big takeaway is the explanation of bottlenecks and non-bottlenecks.

• Bottleneck: A resource whose capacity is equal to or less than the demand placed upon it.
• Non-bottlenecks: Resources whose capacity is greater than the demand placed on it.

Because bottlenecks are constraints in the system, if you waste time on a bottleneck resource, your entire system loses time. The plant’s capacity is equal to the bottleneck’s capacity. If you lose an hour on a bottleneck, you lose an hour in the entire plant.

The book explains these concepts and the theory of constraints through the story to help you improve your system. There are three ways a bottleneck’s time can be wasted accordingly:

• If it’s idle during a lunch break.
• If it processes defective parts or parts that will become defective due to poor process controls.
• If it works on unnecessary parts.

An important idea about non-bottlenecks is that their level of utilization is determined by a constraint in the system, not by their own potential. This leads to the idea of activating versus utilizing a resource.

Utilizing a resource means using it in a way that moves the system toward its goal. Utilizing a resource is a productive action.

Activating resources means using them, whether or not there is a benefit from the work they’re doing. This explains why activating a non-bottleneck resource is often inefficient—it does not move the system closer to its goal.

For that reason, it is important to notice the difference between data and information. Information answers a question. Data may or may not answer a question.

The role of a manager is also part of the discussion. Through the story, Goldratt leads to the idea that a manager can answer three questions: What needs to be changed? What does it need to be changed to? How do you cause the change?

 And in summary 5 Steps for Improving a System

• Identify the system’s constraint.
• Decide how to exploit the system’s constraint.
• Subordinate everything else to these decisions.
• Elevate the system’s constraint.
• If a constraint has been broken, go back to step 1 without allowing inertia to cause a new constraint.

This is a fun book for those in supply chain or process improvement. As you follow Alex Rogo’s journey to save his factory and marriage, you see how these concepts apply to all areas of business and life.