Brevity | Goal -1 | EM Goldratt Rate *****
What a darling book for management freaks . No dithering to give 5/5 to this bestseller book .
This story is about Alex and his fellows managers at UniCO. Bearington.
Bill Peach ,once a good friend of his , threatened him that he was going to close the plant if he is not able to turn around the plant's performance and drowning shipment. Alex was newly joined. The responsible in the Plant were Bob (production manager since 9 yrs), Stacey (inventory Control manger), Smyth Hilton(division productivity manger)
Like everyone in plant, Alex unleashed his pride for the experienced robots resulted productivity of the plant and they could lay off people , when once he happened to meet to his Alma-mater project guide, Jonah - a scientist, working on management science in particular.
Jonah, in-arguably concluded that if inventories hadn't down, employee expense was not reduced, company was not selling more product(no increase in shipping), noway plant robots increased his plant's productivity.
With a blame to accept so many things without question like others do and not thinking at all to astonished Alex, he asked the goal of his company. He bereaved saying that productivity was to accomplish something in terms of goals and " Every action that brings a company closer to its goal is productive"
Alex discussed a lot with many in the plant and found that supplying jobs, cost-effective purchasing, manufacture quality product , Technology, having big share of market to unload inventories (even at loss) - these all were reasons for plant existence and NOT the goals. Keeping employee busy when no work , was not going to make any money.
He concluded the goals as - Net Profit, ROI and Cash Flow. Jonah coined the terms as -Throughput, Inventory and Operational Cost.
"Throughput," he said, " the rate at which the system generates money through sales."
Bill Peach ,once a good friend of his , threatened him that he was going to close the plant if he is not able to turn around the plant's performance and drowning shipment. Alex was newly joined. The responsible in the Plant were Bob (production manager since 9 yrs), Stacey (inventory Control manger), Smyth Hilton(division productivity manger)
Like everyone in plant, Alex unleashed his pride for the experienced robots resulted productivity of the plant and they could lay off people , when once he happened to meet to his Alma-mater project guide, Jonah - a scientist, working on management science in particular.
Jonah, in-arguably concluded that if inventories hadn't down, employee expense was not reduced, company was not selling more product(no increase in shipping), noway plant robots increased his plant's productivity.
With a blame to accept so many things without question like others do and not thinking at all to astonished Alex, he asked the goal of his company. He bereaved saying that productivity was to accomplish something in terms of goals and " Every action that brings a company closer to its goal is productive"
Alex discussed a lot with many in the plant and found that supplying jobs, cost-effective purchasing, manufacture quality product , Technology, having big share of market to unload inventories (even at loss) - these all were reasons for plant existence and NOT the goals. Keeping employee busy when no work , was not going to make any money.
He concluded the goals as - Net Profit, ROI and Cash Flow. Jonah coined the terms as -Throughput, Inventory and Operational Cost.
"Throughput," he said, " the rate at which the system generates money through sales."
"Inventory is all the money that the system has invested in purchasing things which it intends to sell."
"Operational expense is all the money the system spends in order to turn inventory into throughput."
So, the goal of company was - Increase throughput while simultaneously reducing both inventory and operating expense.
Inspite of new robots, shipment and sales were not increased , rather inventories went up. Why?
They kept on releasing more materials to the floor to feed robots (just as Peach wanted higher efficiency), letting them to produce at their efficiency, and hence they kept on producing parts that were not required in surplus, while lacked certain parts to assemble - this mounted the inventory. In first glance, it appeared that cost of production being in bulk when down, but perhaps they forgotten the added carrying cost in inventory (an OC).
Jonah explained- As we ' buy' time from employee,and don't sell time to customer (except services)- we should not include direct labor in inventory but in OC. The price we charge should be greater than (combination of inventory + operational expense per unit) in comparison to the value market determines.
Money lost is OC. Any investment that is being sold is inventory.
Knowledge for new manufacturing Process -> OC
Knowledge for sale, under patent or pertaining to a product in the firm (which depreciates) -> Inventory.
Jonah concluded that struggle for higher efficiencies took them in opposite direction and "A plant in which everyone is working all the time is very inefficient."
Excess manpower, excess capacity -raising inventory -increasing OC. He pointed that there is a large market demand for what we produce and we have large capacity as well, only some thought is missing.
"The tendency for most managers is to trim capacity wherever they can, so no resource is idle, and everybody has something to work on." Trimming capacity by laying off - neither increases sales, nor reduces
inventory and improves only one measurement OC. But factually, against the assumptions-throughput goes down, inventory goes up and so is OC.
This happens based on dependent events together with 'statistical fluctuations''. Let us understand this based on a row of boys walking :
Hilton, in his new role, where mangers reported him -emphasized on cost reduction.
"Operational expense is all the money the system spends in order to turn inventory into throughput."
So, the goal of company was - Increase throughput while simultaneously reducing both inventory and operating expense.
Inspite of new robots, shipment and sales were not increased , rather inventories went up. Why?
They kept on releasing more materials to the floor to feed robots (just as Peach wanted higher efficiency), letting them to produce at their efficiency, and hence they kept on producing parts that were not required in surplus, while lacked certain parts to assemble - this mounted the inventory. In first glance, it appeared that cost of production being in bulk when down, but perhaps they forgotten the added carrying cost in inventory (an OC).
Jonah explained- As we ' buy' time from employee,and don't sell time to customer (except services)- we should not include direct labor in inventory but in OC. The price we charge should be greater than (combination of inventory + operational expense per unit) in comparison to the value market determines.
Money lost is OC. Any investment that is being sold is inventory.
Knowledge for new manufacturing Process -> OC
Knowledge for sale, under patent or pertaining to a product in the firm (which depreciates) -> Inventory.
Jonah concluded that struggle for higher efficiencies took them in opposite direction and "A plant in which everyone is working all the time is very inefficient."
Excess manpower, excess capacity -raising inventory -increasing OC. He pointed that there is a large market demand for what we produce and we have large capacity as well, only some thought is missing.
"The tendency for most managers is to trim capacity wherever they can, so no resource is idle, and everybody has something to work on." Trimming capacity by laying off - neither increases sales, nor reduces
inventory and improves only one measurement OC. But factually, against the assumptions-throughput goes down, inventory goes up and so is OC.
This happens based on dependent events together with 'statistical fluctuations''. Let us understand this based on a row of boys walking :
Hilton, in his new role, where mangers reported him -emphasized on cost reduction.
" In case of linear dependency, the fluctuations of the variables down the line will fluctuate around the maximum deviation established by any preceding variables."
The proof is Pete's company (link)
A bottleneck, is any resource whose capacity is equal to or less than the demand placed upon it , else it is non-bottleneck.And, one need not to balance demand with capacity but with flow of product. So, bottlenecks can be used to control the flow through a system.
How to find Bottleneck? First estimate the market average demand (in terms of hours ) .If number of available hours per resource (excluding breaks) is less than demand hours- that is bottleneck.
Symptoms : The parts (inventory) lacking in supply will be accumulated in front of bottleneck. In a company, Sequence of operation cannot be change (unlike a queue).
Alex and his people found that surprisingly their most advanced robot was a bottleneck. It had low set up time and low per unit cost, but on removing old machines - increased production of unwanted parts and lingered desired once. This reduced assembly and shipping.
So, Some percent of non-bottleneck should be idle, but for bottle neck it should NOT. Idle bottleneck means lesser throughput of the organization. Means loss in bottleneck processing is not only the loss at that point but many a times more in the throughput - due to inability to assemble the product. Simultaneous hazard happens when bottleneck's time is wasted on unwanted work or future work - cash flow remains not sustained.
What to do ? Enhance bottleneck productivity with siblings (irrespective of cost rise) and wise opt in its feed.
Alex team tagged the parts which were reaching to bottleneck - red and green . Red, lack of which, the assembling was delayed, were prioritized to reach to bottleneck. Also , they put Quality Control in front of (usually they had it after) bottleneck, so that inferior qualities shouldn't reach to bottleneck, causing wastage of its time, ensured availability of trained operators all the time, activating the three machines to supplement the bottleneck; increased the batch size.
Throughput increased initially , but soon inventories heaped at the end, both in form of excess finished good , and with work-in-progress those of green tagged. Why? See .
What to do ? Team Alex decided to have a three-day stock of work-in-process in front of each bottleneck, so that non-bottlenecks are not clogged too.
In order to increase more sale, Alex took shipping orders ahead of schedule. He studied various times of operation :
The proof is Pete's company (link)
A bottleneck, is any resource whose capacity is equal to or less than the demand placed upon it , else it is non-bottleneck.And, one need not to balance demand with capacity but with flow of product. So, bottlenecks can be used to control the flow through a system.
How to find Bottleneck? First estimate the market average demand (in terms of hours ) .If number of available hours per resource (excluding breaks) is less than demand hours- that is bottleneck.
Symptoms : The parts (inventory) lacking in supply will be accumulated in front of bottleneck. In a company, Sequence of operation cannot be change (unlike a queue).
Alex and his people found that surprisingly their most advanced robot was a bottleneck. It had low set up time and low per unit cost, but on removing old machines - increased production of unwanted parts and lingered desired once. This reduced assembly and shipping.
So, Some percent of non-bottleneck should be idle, but for bottle neck it should NOT. Idle bottleneck means lesser throughput of the organization. Means loss in bottleneck processing is not only the loss at that point but many a times more in the throughput - due to inability to assemble the product. Simultaneous hazard happens when bottleneck's time is wasted on unwanted work or future work - cash flow remains not sustained.
What to do ? Enhance bottleneck productivity with siblings (irrespective of cost rise) and wise opt in its feed.
Alex team tagged the parts which were reaching to bottleneck - red and green . Red, lack of which, the assembling was delayed, were prioritized to reach to bottleneck. Also , they put Quality Control in front of (usually they had it after) bottleneck, so that inferior qualities shouldn't reach to bottleneck, causing wastage of its time, ensured availability of trained operators all the time, activating the three machines to supplement the bottleneck; increased the batch size.
Throughput increased initially , but soon inventories heaped at the end, both in form of excess finished good , and with work-in-progress those of green tagged. Why? See .
What to do ? Team Alex decided to have a three-day stock of work-in-process in front of each bottleneck, so that non-bottlenecks are not clogged too.
In order to increase more sale, Alex took shipping orders ahead of schedule. He studied various times of operation :
Set up time - resource is ready to work on the part initially, part waiting its turn.
Process Time - time spent to increase the value of part.
Queue Time - Part in line waiting for resourse, while resource is working on something else .
Wait Time - Part waits not for resource, but another part for assembly.
Process Time - time spent to increase the value of part.
Queue Time - Part in line waiting for resourse, while resource is working on something else .
Wait Time - Part waits not for resource, but another part for assembly.
Alex said to cut the batch size in half - this reduces inventories to half, reduces the cash tied at one time, eases the cash flow pressure. Also, half was the process time so more costumers could be served at a time. Seemingly, Set-up cost increases, but Saving set- ups at a non-bottleneck doesn't make the system one bit more productive as they have high idle time already. This ensured more order, more shipping.
But , now raised Cost measurement issue . Mostly cost is measured on direct labor cost . Let us say, we reduced the batch size from 100 to 50. Actually, set up time remained same (as non-bottlenecks have lot of idle time), but it is spread over 50 parts instead of 100. so per-unit set up time seems double(illusion).
So per unit setup time + Process time = Cost . This high cost appears because of measurement assumption that all of the workers in the plant are always going to be fully occupied, and therefore, in order to do more set-ups, one has to hire more people.
Somehow, Alex managed to keep his point to Granby (CEO) and got appreciations for his bright idea from mangers and customers as well for on time delivery. Hilton still believed that an hour saved at a non-bottleneck was an hour saved at that resource.
Alex got promoted to division manager and Bob to his place of plant manager. With a new responsibility , they concluded new scale -
Throughput is most important, then inventory—due to its impact on throughput and only then, at the tail, comes operating expenses.
But , after some smooth time, there emerged a number of holes in front of assembly than in front of bottle neck. Stacy emphasized to remove tags. Why?
Let us See.
Alex accepted more order for plant for 10% below cost (to increase sale and let not to divest the companies). Note that cost was still determined by labor cost. To rule the market, he nodded for this as there was extra capacity in plants, actually only out of pocket cost was that of raw materials.
Then , there emerged many traveling bottlenecks, difficult to analyze and Control each one. Tasks got stuck. Alex concluded-Let Murphy hits before a bottleneck X. the stream of tasks to the bottleneck is temporarily stopped and the bottleneck is starved, and eats the 3 days stock as well before it goes down.
When the stoppage is overcome , the upstream resources not only have to supply the current consumption of the bottleneck, at the same time they have
to rebuild the inventory. This also happens when bottlenecks have more capacity than upstream non bottlenecks. So, to utilize resources to maximum, the upstream resources must have spare capacity.
Taking more order in such case , turned low capacity non-bottleneck to bottleneck due to reduction of spare capacity of bottleneck.
Alex and his fellows had to care entire division now (not only a plant). Identification of constraints in behavioral (not physical) patterns viz. lack of sensible long-term strategy, the measurement issues, the general attitude of passing the ball was mandatory , seeing no dearth of market.
Required was a thought process for the ability to answer three simple questions: 'what to change?', 'what to change to?', and 'how to cause the change?'
If a manager doesn't know how to answer those three questions, is he or she entitled to be called manager?"
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