How's my Luck now?

Reflections, views and descriptions during my stay at IIM Lucknow from July 2004 to March 2006

Location: India

Thursday, January 13, 2005

'The Goal'

This is the name of the classic book that I read a few days ago. It is written by Eliyahu Goldratt and Jeff Cox (Gower, 1983). It is a terrific book on Operations (specifically, manufacturing) Management. But it is not just another management book. It introduced the world to the Theory of Constraints (developed by Goldratt), a way (perhaps, the way) to manage production in a plant according to the constraints of the plant.

Unlike other management books, this is a novel, which through the course of its story, shows the application of techniques of ToC. There are no formalisms in the book, only illustrations of the techniques. Basically, the theory behind the techniques must be that of Operations Research (specifically, linear programming, integer programming, etc.)

The protagonist of the story is Alex Rogo, a plant manager at the Bearington, USA, plant of a company called UniCo. His plant is down in the dumps, with a large pile of late orders and pressure increasing all the time. To add to his trouble, his long hours at the plant make his domestic life stormy.
Rogo accidentally meets Jonah, his physics teacher in school, now living in Israel. Jonah has transformed himself from a physicist to an expert consultant on problems with manufacturing plants. Jonah, by adopting the 'Socratic method' of asking pointed questions and leaving it to Rogo to find the answers, shows him the way out.

When Rogo first complains of 'productivity problems' at his plant, Jonah begins by asking what the goal of a manufacturing plant was. Rogo thinks about it for several days, before concluding that it must be 'making money'. Now, all indicators of a plant must be defined in terms of this goal, and this goal only.
Jonah tells him about three performance parameters of any plant, which he defines differently from their usual meaning:

1. Throughput - the rate at which the plant produces goods for sale
2. Inventory - anything in the plant which will be converted to throughput
3. Operating Expense - any expense which is used in converting inventory to throughput

Throughput must be attacked first and sought to be maximized. For this purpose, the plant's bottleneck(s) must be identified, and the entire plant centred around these resources (they may be machines or labour). Next, inventory must be minimized as far as possible since it represented a lot of tied-up funds. Finally, operating expense should be minimized keeping optimum levels of throughput and inventory. Rogo and his team falter around but ultimately achieve a turnaround using the suggested techniques. In fact, so good does the plant become, that Rogo becomes a hero in his company and ultimately is promoted to the position of divisional head. And after a lot of problems, his domestic life also falls into place and everything is well again.

A general 5-step process has been given in the book to achieve the above-mentioned goals:
1. Identify the system's constraints.
2. Decide how to manage and exploit these constraints.
3. Subordinate everything else to the decision in step 2.
4. Elevate the system's constraints (by adding additional resources at the bottleneck, for example).
5. If any of the constraints is broken by the above steps, return to step 1.

The book has a wonderful flow which makes the novel gripping. The language is conversational and easy to understand. Traditional methods of manufacturing performance management and cost accounting have been shown to be inadequate, and in fact, detracting from the goal of making money. All in all, a wonderful and must-read book.
Another thing. Throughout, the techniques described made me think this was the theoretical background to the Japanese Just-in-Time (JIT) techniques and perhaps, Activity-based Costing (ABC). I was wrong on both counts. JIT is considered to be incomplete by ToC experts and ABC is, in fact, considered fundamentally flawed. I will be reading up more on the Net to see why this is so.


Blogger Darth Midnightmare said...

Hmmm....nice, informational post....which section are u in? Someone also recommended that I should read this book. Never got down to, perhaps I will....or at least I can globe about it ;-). Are u the quizzer?

8:01 AM  
Blogger Tadatmya Vaishnav said...

I am in section-D. 'The Goal' is definitely a must-read. One of the few books with concrete lessons rather than just globe.
And let's just say that I'm 'a' quizzer, not 'the' quizzer :)

12:28 AM  
Blogger Darth Midnightmare said...

OK. It's quite amazing in our batch how we don't even know or recognise so many people who are in other sections even though we have heard of them, unless those people are from our hostel itself...... :D

1:49 AM  

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