Operations Notes – Principles of The Goal


Principles of the book, The Goal by Eliyahu M. Goldratt and Jeff Cox, a required reading in my MBA core operations class.
Subject: Operations
Source: The Goal by Eliyahu M. Goldratt and Jeff Cox

Maximize throughput while simultaneously reducing inventory and operating expenses.

Throughput (the amount you sell)
Inventory (the amount you invested in the system to achieve throughput)
Operating Expenses (all costs incurred to turn inventory into throughput)

When volume of time at bottlenecks isn’t considered, choices that maximize gross margins or commissions do NOT maximize gross/net profit.

Issues with Cost Accounting:
Cost accounting doesn’t tie operating and relevant expenses to sales. In cost accounting:

  • Inventory is viewed as an asset
  • Individual station efficiencies are emphasized to detriment of throughput (activation vs. utilization)

Key lesson: More setup time on non-bottlenecks is acceptable because idle time is available.

Bottleneck (BN) = lowest capacity given demand placed on it

The Goal points out that managers over-estimate the setup on non-bottlenecks, thus the EOQ is not correct (i.e. EOQ isn’t the problem, the way it’s calculated is)

Marginal value of a non-bottleneck is zero (depending on cycle time and overall system capacity)
Marginal value of a bottleneck = (amount you produce) * (gross margin)
{corollary: non-bottlenecks after bottlenecks are more valuable than those before}

Detecting a bottleneck:

  • Use a heuristic – (1) look where inventory is waiting (this won’t always work if storage is geographically dispersed); (2) look for most capacity constrained machine
  • Must look at real demand

Methods of dealing with bottlenecks effectively

  • Make sure BN has materials at all times
  • Add BN capacity (more machines, outsourcing, etc.)
  • Give BN parts higher priority
  • Put QC before BN

Statistical fluctuations mean that a balanced plant is meaningless
Bottlenecks move around in balanced plants
Due to dependent events, fluctuations accumulate rather than average out

Balancing capacity with demand is not very useful when you have variability. Instead, balance flow through the bottleneck with demand.

Principles from The Goal are most appropriate for Job Shops and less so for assembly lines and continuous flow processes.

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