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
8/27/04 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

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Interchange between Alex and
Jonah at Airport
Alex Jonah
I'm going to speak at a Robots So your plant uses robots
for Productivity Conference
Yes Have they increased productivity?
Sure - 36% in one area 36% more money?

You didn't increase productivity

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 Airport conversation continues
Jonah Alex
Did you ship one more product? Not sure.
Did you fire anybody? Probably not
Did your inventories go down? No
Then you didn't increase productivity.

Alex But we run at 90% efficiency with a low cost per part.

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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.
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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?

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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

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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

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What is the goal of a public
company?

Make money now and in the future

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How do we measure progress
toward the goal?

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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?

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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.

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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

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

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 How do the measures relate
to decisions?
Operational Financial
NP ROI CF

TP NP ROI CF
I NP ROI CF
TP I OE OE NP ROI CF
 An effective decision simultaneously
increases TP, decreases I, and
decreases OE.
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 Was the decision to add
robots a good idea?
Jonah Alex
Did you ship one more product? Not sure
(did you increase throughput?)
Did you fire anybody? Probably not
(did you decrease cost?)
Did your inventories go down? No
Did the robots increase productivity?

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The Goal

The goal is to reduce operating

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