The Goal: A Process of Ongoing Improvement by Eliyahu Goldratt
Through an engaging fictional story about a manager who has 90 days to turnaround his plant, author Eliyahu Goldratt teaches you the first principles of operating and improving a system. Reading this book will show you how to implement an effective and efficient process of ongoing improvement. His system is applicable to life and business.
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“…productivity is the act of bringing a company closer to its goal. Every action that brings a company closer to its goal is productive. Every action that does not bring a company closer to its goal is not productive.”
Productivity is not about getting more done in less time. It’s about getting the right things done. The right things are those actions that move you or your company closer to the goal.
The goal of a business
“To make money by increasing net profit, while simultaneously increasing return on investment, and simultaneously increasing cash flow.”
In business, you have three primary levers – net profit, return on investment, and cash flow. You want all three levers to move in the right direction. A common mistake is optimizing for one of these metrics, which may inadvertently make one or both of the other metrics go in the wrong direction.
It’s important to view your business as a system, and the system improves when you move the three metrics the right way.
Throughput, inventory, and operating expense
In a warehouse setting, throughput, inventory, and operating expenses are proxy metrics that represent net profit, return on investment, and cash flow, the three levers of a business. They are the way in which you translate abstract financial terms into action parts of the system you’re working to improve.
Throughput: the rate at which the system generates money through sales.
Inventory: Inventory is all the money that the system has invested in purchasing things which it intends to sell.
Operating expense: Operational expense is all the money the system spends in order to turn inventory into throughput.
“Throughput is the money coming in. Inventory is the money currently inside the system. And operational expense is the money we have to pay out to make throughput happen. One measurement for the incoming money, one for the money still stuck inside, and one for the money going out.”
The goal is thus to increase throughput while simultaneously reducing both inventory and operating expense. If you do this, you will increase net profit, while simultaneously increasing cash flow and return on investment.
A plan is a system of dependent events
“Obviously we have dependent events in manufacturing. All it means is that one operation has to be done before a second operation can be performed. Parts are made in a sequence of steps. Machine A has to finish Step One before Worker B can proceed with Step Two. All the parts have to be finished before we can assemble the product. The product has to be assembled before we can ship it. And so on.”
At its core, manufacturing is a series of dependent events. Ensuring the right interaction between these dependent events is essential for the success of the manufacturing business.
To improve in manufacturing, you must optimize for the entire system, not just a local area. The reality is that some resources have more capacity than others, and this needs to be considered when creating efficiencies in the system.
Bottlenecks and non-bottlenecks
Bottleneck: a resource whose capacity is equal to or less than the demand placed upon it.
Non-bottleneck: a resource whose capacity is greater than the demand placed on it.
Because bottlenecks are the constraint in the system, if you waste any time on a bottleneck resource, your entire system loses time. The capacity of the plant is equal to the capacity of the bottleneck. If you lose an hour on a bottleneck, you lose an hour in the entire plant.
Three ways a bottleneck’s time can be wasted
- If it’s sitting idle during a lunch break
- If it’s processing defective parts, or parts which will become defective through careless workers or poor process controls
- If it works on parts you don’t need
An important note on non-bottlenecks – Its level of utilization is determined by a constraint in the system, not by its own potential.
Activating vs. utilizing a resource
Utilizing a resource means using a resource in a way that moves the system toward its goal. Utilizing a resource is a productive action.
Activating resources means using a resource, whether or not there is benefit from the work its doing. This explains why activating a non-bottleneck resource is often inefficient – it does not move the system closer toward its goal.
The difference between data and information
Information is the answer to the question asked. Data is information that may or may not answer the question being asked.
The role of a manager
A manager has the ability to answer three simple questions:
- What needs to be changed?
- What does it need to be changed to?
- How do you cause the change?
5 steps for improving a system
- Identify the system’s constraint.
- Decide how to exploit the system’s constraint.
- Subordinate everything else to the above decisions.
- Elevate the system’s constraint.
- If in the previous steps a constraint has been broken, go back to step 1, but do not allow inertia to cause a system constraint.
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