The Goal The Goal by Eliyahu M. Goldratt and Jeff Cox, North River Press, Inc., Second Revised Edition (1992). Paul A. Jensen Operations Research Models and Methods Copyright 2004 - All rights reserved
Set the Stage • Alex Rogo, plant manager of the Bearington plant • Bearington plant, part of the UniWare Division, part of the conglomerate UniCo • Alex meets Jonah, his college physics professor, at the airport
Alex and Jonah: a conflict • Alex: I am running an efficient plant. • Jonah: You are running an inefficient plant. • Data • Machines run 90% of the time. • Unit costs are low. • More products are not shipped. • No one is fired. • Inventory is not decreased. • Inventories are high. • Can't ship on time.
What is the source of the conflict? • Productivity: Anything that moves toward the goal is productive. Anything that moves away from the goal is not productive. • Alex and Jonah have different definitions of the goal. • What is the goal?
Question left by Jonah: What is the Goal? • Make product • Increase market share • Produce quality products • Produce efficiently • Hire workers • Support the city, state and national economy • Increase stockholder value
Why is a goal important? • Directs decisions • Allows Measurement of accomplishment • Without goals we are moved by the current requirements to the exclusion of concerns for the future. • What would Deming say is the Goal? • Point 1: Constancy of Purpose for the Improvement of Product and Service. • We need one goal not many
What is the goal of a public company? Make money now and in the future
Financial Measures • What Financial Measures Describe the Goal of Making Money? • Net Profit (NP) • Return on Investment (ROI) • Cash Flow (CF) • Are these sufficient for making decisions?
Can NP, ROI and CF be used to make decisions? • Engineering Economics says “yes” • Accept the project if the IRR of the cash flow is greater than the MARR. • Goldratt would say “no” • It is difficult to see how the global measures are affected by individual design and operating decisions.
What Operational Measures Describe the Goal? • Throughput (TP) • Rate at which system generates money through sales. Sales Revenue - Raw material Expense • Inventory (I) • All the money that the system has invested in purchasing things which it intends to sell • Operational Expense (OE) • All the money that the system spends in order to turn inventory into throughput
How do these measures relate financial measures? • NP = TP - OE • ROI = NP/I • Cash flow is OK if • cumulative income + initial cash > cumulative costs.
An effective decision simultaneously increases TP, decreases I, and decreases OE. OE NP NP NP TP ROI ROI ROI I CF CF CF How do the measures relate to decisions? Operational Financial
The Goal The goal is to reduce operating expense, reduce inventory while simultaneously increasing throughput. The most powerful effect is to increase throughput.