The Goal

1. The Goal A Process of Ongoing Improvement Eliyahu M. Goldratt and Jeff Cox

2. The Goal Characters: Alex Rogo – Plant Manager Jonah – Physicist/Production Consultant Bill Peach – Division VP of Manufacturing Bob Donovan – Plant Production Manager Lou ____ - Plant Controller Stacey Potazenik – Production Control Manager Ralph Nakamura – data processing manager

3. The Goal Setting: City of Bearington – location? Pennsylvania, Ohio, Indiana manufacturing town UniCo Corporation Manufacturing Plant – • probably 15 years old • other impressions?

4. The Goal Introduction: What’s your first impression of the manufacturing plant? • Plant out of control • VP of manufacturing expediting an order • New robots • Controlled chaos • Good at “fighting fires” • Excellent at getting order filled when pressed • Lots of inventory

5. The Goal Alex travels to corporate meeting with a bunch of “corporate speak”. Alex begins daydreaming.

6. The Goal Alex/Jonah Chance Meeting in Airport Alex – “Robots increased productivity by 36% in one department” Jonah – “Are plant inventories down?” : No “Is employee expense less?” : No “Shipping more product?”: No Alex – “Must keep robots running to maintain efficiencies”. Jonah – Then “Inventories must be sky high and orders must be late.”

7. The Goal Alex/Jonah Chance Meeting in Airport – cont. Jonah – “In your own words, what is productivity.” Alex – “ Accomplishing your goals”. Jonah – “Correct, then what is the goal of your company?” Alex – “To be more productive?” : No “To produce products?” : No “To increase market share?”: No Jonah – “How can you be productive? You don’t know the goal.”

8. The Goal What does Alex determine “The Goal” is? To make money!! How do you know you are making money (Alex and Lou)? • Net profit (Income-Expenses) • Return on Investment • Cash Flow Why are each of these important?

9. The Goal How do the “making money” measures translate to the production environment? (Jonah’s translation) • Throughput – Is the rate at which the system generates money through “Sales” • Inventory – all the money that the system has invested in purchasing things which it intends to sell. • Operational Expenses – all the money the system spends in order to turn inventory into throughput.

10. The Goal What was the common word in all three measurement definitions? • Money going into the system • Money stuck inside the system • Money flowing out of the system

11. The Goal • Throughput – Is the rate at which the system generates money through “Sales” • Inventory – all the money that the system has invested in purchasing things which it intends to sell. • Operational Expenses – all the money the system spends in order to turn inventory into throughput. Where do the following fit? • Raw materials • Direct labor • Indirect labor • Tooling, machines, building • Knowledge gained by employees

12. The Goal Alex meets Jonah in New York seeking help to determine steps to take in achieving the goal: Jonah – “Do you run a balanced plant? Do you have any idle workers and is it good or not?” Alex – “We try to keep all our employees productive”

13. The Goal Jonah – “Impossible to perfectly balance capacity to demand, there even exists a mathematical proof showing if you did, inventories go through the roof?” Alex – “How’s this possible” Jonah – “Due to two phenomenon: • Dependent events – a series of events must take place before another begins. • Statistical Fluctuations – the length of events and outcomes are not completely deterministic. The combination of these phenomenon are the issue.”

14. The Goal Dependent events – Statistical Fluctuations Q. - Where does Alex first come to grips with this (i.e. sees this first hand)? A. – During the boy scout hike.

15. The Goal Analyzing the boy scout hike Observations: • the walking speed of individuals fluctuate • All may have the same average walking speed, but gaps continue to lengthen, why? • There is no limit to how much an individual can slow down, but your top speed is dependent on the person in front. • Fluctuations are accumulating over time, and the slow fluctuations tend to accumulate faster because they are not limited like the fast ones.

16. The Goal Boy scout hike –> Manufacturing Plant Observations: • Each boy is an operation • The product is “walk the trail” • Each boy/operation is dependent on the one in front. • A “sale” is when the last operation/boy walks the trail. • Throughput is the rate at which the last person walks the trail. • Operating expense is the energy output of each boy. • Inventory (material inside the plant) is the distance between the first and last boy. • Fluctuations in operating speed is causing inventory to increase and causing throughput to decrease. Attempting to reduce gaps is increasing operating expense.

17. The Goal Play the matches game? • Setup: 5 players, 5 bowls, matches, 1 die • Dump all matches in bowl #1 • Roll one die (starting with player #1) and pass that many matches from your bowl to the next person down the line • Pass die to next player who rolls die and moves that number of matches from their bowl to next player, cannot pass more matches than what is in your bowl. • Continue for each player, with last player handing die back to player #1. • What is the average number rolled on a die? • After 20 rounds, how many matches should the last player “produce”?

18. The Goal Back to the Boy scout hike After lunch the boy scouts “self-arrange” so that the fastest is up front and so on until Herbie is at the rear. Q. What was the result? A. Line got even longer. Q. Did throughput improve (completing more miles)? A. No, completed miles still dependent on last scout walking the trail, plus “inventory” has increased. Observation: however, everyone is always walking (no one is idle). But goal is not being achieved.

19. The Goal Continuing with the Boy scout hike Q. How does Alex fix the boy scout hike? A. Puts kids in order from slowest first to fastest last. The line then stays compressed (i.e. inventory has gone down and progress has improved because Herbie is setting the pace and doesn’t have to exert energy to catch up). Q. How do they further improve throughput? A. Off-loaded Herbie’s backpack. In oherwords, they improved Herbie’s throughput so the entire boy troop’s throughput improved.

20. The Goal Alex’s First Chance to Test the Boy Scout Theory Hilton Smyth’s order • needs 100 parts by end of day • Parts require 2 operations, fabrication then weld by robot • Each department averages 25 units per hour, with robot working at almost exactly 25 unit pace. • Start fabrication at noon, transferring parts on the hour, every hour. Fabrication (25/hour) Weld (25/hour) Transfer (once/hour)

21. The Goal Alex’s First Chance to Test the Boy Scout Theory Expectation: Hourly Part Count Fabrication (25/hour) Weld (25/hour) Transfer (once/hour)

22. The Goal Alex’s First Chance to Test the Boy Scout Theory Realization: 100 90 Hourly Part Count Fabrication (25/hour) Weld (25/hour) Transfer (once/hour)

23. The Goal Q. So what have they learned to this point? A. Have more capacity at downstream operations.

24. The Goal Q. What does Jonah suggest they do next? A. Distinguish between bottleneck and non-bottleneck resources. Definition: Bottleneck – any resource whose capacity is equal to or less than the demand placed upon it. Non-bottleneck – any resource whose capacity is greater than the demand placed upon it.

25. The Goal Jonah then suggests balancing the flow of product through the plant with demand from the market. Not to balance the capacities of operations with demand. Q. What determines the flow of product through the plant. • The bottleneck resources.

26. The Goal The next step for Alex and company is to identify the bottlenecks (i.e. find Herbie). Q. So how do you find a bottleneck in a manufacturing plant? A. Go out on the floor and find the operation with the most inventory sitting in front of it. Q. Is having a bottleneck a bad thing? A. Not necessarily, all plants have to have a bottleneck.

27. The Goal The next step for Alex and company is to identify the bottlenecks (i.e. find Herbie). Q. Once the bottleneck is identified, can you simply move the machines/operations around like Herbie was moved to the front of the line? A. No, production steps often cannot be reorganized. Q. So how do you solve the problem of “moving Herbie to the front”? A. Find more capacity for the bottleneck, don’t try to move them. Have enough capacity to meet demand.

28. The Goal The next step for Alex and company is to identify the bottlenecks (i.e. find Herbie). Q. How do you find more capacity? • Make sure it is never idle (focus your attention on it). • Increase cycle time on the machine • Add another duplicate machine • Outsource to another vendor • Reduce the demand (process change) • Inspect part quality before bottleneck (make sure bottleneck only works on good parts) • Ensure process controls on bottleneck are good so bad parts aren’t produced • Don’t let it work on parts that aren’t needed.

29. The Goal Back to the story: Q. Where does Alex and company find the bottleneck? • They find two bottlenecks, NCX-10 and Heat Treat Q. What is their first approach to improving the flow through the bottlenecks and ultimately improving productivity. 1. Move QC in front of bottlenecks. 2. Make a list of all late jobs and what components from those jobs flow through the bottleneck machines. They then create a schedule/list in due date order and instruct the bottleneck operators to only work on those jobs in that order.

30. The Goal Back to the story: Q. Does this scheduling system work (e.g. get late jobs completed while always keeping bottleneck running)? A. No, because the late job components are not always waiting in front of the bottleneck machines. Q. What do they do to rectify this? A. Create a red tag (parts that travel through the bottleneck) / green tag system for all jobs throughout the plant such that any job with a red tag which arrives at a machine is given priority. If they are in the middle of a run, then if the run takes longer than 30 minutes to complete, stop that job and start the red tag job. If no red tags, then ok to process green tag jobs. If more than one red (or green tag), then process job with lower number on tag.

31. The Goal Back to the story: Q. What do they do next to further off-load the Herbies / bust the bottleneck? • Gold tags placed on parts that have traveled through the bottleneck everyone extra careful not to damage. • Dedicate personnel at NCX-10 and Heat Treat even though they are idle much of the time, just don’t let machine idle. • Send out some portion of heat treat parts to vendor in town. • Found old equipment (that is less efficient) to run in parallel to NCX-10. • Fully load furnace when possible (e.g. mix batches). • Reduce setup time with new fixtures. • Were able to process some parts differently so heat treat wasn’t required.

32. The Goal Back to the story: Q. What were the results of these bottleneck busting tactics? • New monthly shipping record from old record of 2 million to new record of 3 million. • 57 customer orders shipped versus old record of 31. • WIP Inventories reduced 12%.

33. The Goal What happens next? The bottlenecks are apparently expanding… material is backing up at the milling machines, and non-bottleneck parts (green tags) are not reaching assembly even though all bottleneck parts (red tags) are available at assembly.

34. The Goal What happens next? Jonah revisits plant and discusses relationship between bottleneck(X) and non-bottleneck(Y) machines. • Y X 3) Y A 4) Y Product A • X Y X S X Product B S E M B L Y

35. The Goal Jonah believes the “new bottlenecks” are not real bottlenecks, but self-created bottlenecks. Why? • Material is being “released” to the plant just to keep the non-bottleneck machines busy. This improves these machines efficiency measures, but does not help the goal. Jonah: “A system of local optimums is not an optimum system at all; it is a very inefficient system”. Lesson: Do not try to make non-bottlenecks work all the time. They should be idle some of the time!

36. The Goal So how do you go about fixing the problem of keeping the non-bottleneck machines working at the same rate as the bottleneck? Recall the boy scout hike: Herbie is in the middle of the line and cannot be moved, so how do you keep the kid in the front walking at the same pace as Herbie? Alex’s kids: use a rope and a drum. Rope: Attach a rope from Herbie (bottleneck machine) to the kid at the front (assembly). The length of rope represents inventory. Drum: Herbie tells the kid at the front to slow down or speed up (beats the drum). Need some kind of signaling or communication between assembly and the bottleneck.

37. The Goal How is the rope and drum concept implemented in the plant? • Identified it takes about 2 weeks from when parts are released to the floor until they get to bottleneck. • Setup system that monitors when inventory is processed at the bottleneck. Material required 2 weeks later is then released to the floor. • Non-bottleneck parts are released according using the same principle but tied to assembly. Communicate release Bottleneck Material Release 2 weeks lead time

38. The Goal What is the result of this new release system? • WIP is down. • Revenues are up. • Efficiencies dropped initially, but have come back up. • The backlog of orders is completely gone (satisfied customers). How does management respond? • Happy • Somewhat skeptical success will last • Wants 15% more revenue next month!!

39. The Goal In order to improve by another 15% what does Jonah suggest as the “next logical step”? • Cut batch sizes for non-bottleneck parts in half. What is the impact of reducing these batch sizes? • WIP for non-bottleneck parts reduced by half. • Significantly reduce time parts spend in plant. Leads to increased responsiveness (from 6-8 weeks to 3-4 weeks). What about the time to handle increased number of setup? Doesn’t matter if occurs on non-bottleneck operations. Process Time Setup Time Queue Time Wait for Assembly Time Time parts spend in the plant

40. The Goal Also to help get the 15%, Alex calls the marketing/sales manager and bets him he can reduce lead time to fill orders. What does Alex expect to gain by reducing lead times to ship from what used to be 4 months to 4 weeks? • Increased sales!! • The bottleneck had moved to customer demand. Quick response on promised due dates should translate to a competitive advantage.

41. The Goal Everything is going good now except it looks like part costs are going up. However, in reality all costs have gone down. How can this be? The accounting rules: • Cost per part = raw material + direct labor + burden cost • Burden cost is all the indirect labor costs. • Burden = direct labor x burden factor Cost per part has risen because more setups are occurring because of smaller batch sizes. However, workers were idle, so the increased number of setups didn’t really increase costs.

42. The Goal What other performance measure made them not look as good as they actually were. Answer: Inventory Inventory is counted as an asset on the balance sheet. When the plant worked hard to reduce inventories to improve their throughput and responsiveness, it looked as if their assets had fallen.

43. The Goal Sacred Cows Slaughtered: • Worker efficiency • Optimal batch size • Releasing work to the floor to keep people busy • Accounting rules

44. The Goal Why Alex’s plant was successful: Change in Focus from the “cost world” to the “throughput world” Throughput Cost Inventory Throughput Cost Inventory

45. The Goal What process did they use to shift their focus to the “throughput world”? The Theory of Constraints Step 1: Identify the system’s constraints (NCX10 and oven) Step 2: Decide how to exploit the system’s constraint (don’t take lunch break on bottleneck machines) Step 3: Subordinate everything else to the above decision (red tags and green tags) Step 4: Elevate the systems constraint (bring back old Zmegma machine, outsource heat treat) Step 5: Warning!! If in a previous step, a bottleneck has been broken, go back to step 1 (material release system, marketing), but do not allow inertia to cause a system’s constraint (red and green tags eventually caused problems).

46. The Goal Final words from Alex on “how to be an effective manager”: Help people to identify: • “what to change?” • “what to change to?” • “how to cause the change?”

47. The Goal Finally some Philosophy: What approach did Jonah use to help Alex and the plant succeed? Find the answers/solutions by asking questions, the Socratic approach. Let others convince themselves of the answers, don’t just give it to them. Also used a “common sense” approach which went against “common practice”. In other words, think!!