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The Goal

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  1. 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

  2. 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

  3. Interchange between Alex and Jonah at Airport

  4. Airport conversation continues

  5. 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.

  6. 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?

  7. 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

  8. 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

  9. What is the goal of a public company? Make money now and in the future

  10. How do we measure progress toward the goal?

  11. 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?

  12. 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.

  13. 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

  14. How do these measures relate financial measures? • NP = TP - OE • ROI = NP/I • Cash flow is OK if • cumulative income + initial cash > cumulative costs.

  15. 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

  16. Was the decision to add robots a good idea?

  17. The Goal The goal is to reduce operating expense, reduce inventory while simultaneously increasing throughput. The most powerful effect is to increase throughput.