BUSINESS: The Ultimate Resource

May 2003 Upgrade #8

MANAGEMENT LIBRARY
The Goal By Eliyahu Goldratt and Jeff Cox
Why Read It?
What goes on in modern manufacturing businesses is highly complex, and often very frustrating. Production problems and job delays are the order of the day, and attempts to improve the situation run up against the existing organizational setup and come to grief. This may sound like the starting point for a textbook on process optimization, but Eliyahu Goldratt, famous for his use of the fictional format, takes an inefficient factory threatened with closure and makes it the setting for a novel as fast-paced and gripping as the average thriller. Many books are said to be entertaining as well as instructive, but Goldratt, here writing with Jeff Cox, does more than most to optimize the entertainment process.

Getting Started
Plant manager Alex Rogo is handed an ultimatum by his bosses: either he makes a clear improvement in the profitability of his factory within three months, or the factory closes. For Rogo, its then a race against time. In order not to fail, he has to change his ideas radically. He meets Jonah, the authors spokesman in the novel, who helps him to break free of traditional ways of thinking and recognize what needs to be done. Jonah knows the solution to the factorys problems and enables Alex to discover it for himself by providing him with questions instead of guidelines. In this way the authors show that management can only learn by deductive insight.

Contribution
Goldratt and Cox set out an important principle of product organization in their novel. The story deals with people who want to understand how business processes function. Because they think about their problems logically, they manage to establish cause-andeffect relations between their actions and the changes that result from them. From these they gradually derive the underlying principles that enable them to turn their factory around and finally achieve success. Alex Rogo is the novels narrator, the I of the story. It begins on the day when Bill Peach, the division vice president, walks into his factory and demands to be shown the status of Customer Order Number 41427. It turns out that nobody knows anything about this order, which happens to be a fairly big one, and also a late one. Rogo sums up the situation in the factory like this: Everything in this plant is late. Based on observation,

Bloomsbury Publishing Plc 2003

BUSINESS: The Ultimate Resource

May 2003 Upgrade #8

Id say this plant has four ranks of priority for orders: HotVery HotRed Hotand Do It NOW. We just cant keep ahead of anything. Rogo meets Jonah, his former math teacher who is now a specialist in production organization. When Jonah asks him whether productivity has risen in the plant since industrial robots were put in, he says that it hasby 36%. In response to further questions, however, Rogo reveals that the 36% increase applies only to one section. Jonah than tells him that if he hasnt slimmed down his inventory and reduced his wage costs, and if the plant is not selling more product than before, the robots cannot have increased its productivity. Rogo speaks to Lou, the plant controller. Together they establish benchmark figures for turning the business around. These should be, they decide, the net profit, the return on investment, and cash flow, because negative cash flow would kill off the business. But these figures are not enough in themselves. They are the ones that the people in division management use to measure progress. At the level of the individual factory, these figures do not make much sense. Jonah prompts Rogo to look at three more figures: throughput, inventory, and operating costs. Goldratt, speaking through Jonah, defines throughput as the amount of money per time unit that the system earns by sales, stressing the fact that sales are what counts, not production. Inventory, he says, is all the money that is invested in the system for the purchase of things that are intended for sale. And operating costs are all the money that the system spends to turn inventory into throughput. Rogo starts thinking about what goes on in his factory in these terms. He then moves on to what is very much home territory for Goldratt, the exponent of the Theory of Constraints. He decides that he has to find the bottlenecks, a bottleneck being any production unit whose capacity is equal to or less than the market requirement allotted to it, and says he would like to organize everything so that the production unit with the smallest capacity has the top place in any work plans. Eventually, Rogo gets to the point where he can go to the managing director with a fivestep program to save the plant: 1. 2. 3. 4. 5. Identify the regulating factor in the system. Decide how the bottlenecks in the system can be used. Make everything else subordinate to the above decision. Free up the bottlenecks in the system. Set the changed procedures in motion.

Context
The Goal is an economics textbook on the natural laws of business life in the form of a novel. It has attained cult status. One the two authors, Eliyahu Goldratt, has been reckoned an industrial guru and cultural revolutionary. He is an expert on production management. He created the mathematical and philosophical bases on which the OPT

Bloomsbury Publishing Plc 2003

BUSINESS: The Ultimate Resource

May 2003 Upgrade #8

(Optimized Production Technology) system of planning and organizing production processes is built and leads a management organization, OPT Management Systems. Goldratts appearances as a speaker are feared by many in business, because he tends to pillory firms and their practices in public.

For More Information

Goldratt, Eliyahu, and Jeff Cox. The Goal: A Process of Ongoing Improvement. 2nd ed. Great Barrington, MA: North River Press, 1994.

Bloomsbury Publishing Plc 2003