Notes on "The Goal" by Goldratt

38

alex goes to headquarters with lou and ralph to ask johnny jons for more orders.

they’d need over $10 million in additional sales to fill up all their capacity. alex thinks jons can’t have that much business in reserve and they’ll need to come up with new ideas about how to get sales.

jons meets them with dick pashky. jons sez he can’t get them $10 million in new business.

alex sez they can deliver anything in two weeks and their quality is the best in the market.

jons sez sales take time. he has to build up credibility with potential clients.

alex sez he has 20% spare capacity so he needs 20% more sales. he asks jons to consider orders he’d usually decline cuz the quality requirements are too high or the delivery time is too short.

jons sez he accepts any order, but the pressure is too high. lou sez that must mean clients want lower prices.

jons sez he is asked to provide stuff with no marin or below cost.

alex sez he’ll accept orders at 10% below cost. jons sez that makes no sense since they’ll make no money and other clients will start to demand the same prices.

dick sez djangler isn’t connected to their regular customers and they can claim they gave him a volume discount. jons sez djangler wants the $992 model 12 for $701.

alex asks about the materials cost for the model 12 and lou sez it’s $344.07. alex sez he’ll accept the order cuz they’ll get $701 and only pay $344.07 and air freight is less than $30 and he asks to see the details of the deal.

alex points out that cameras from japan are cheaper in new york, but the japanese wouldn’t do a deal where they lose money.

they start working on the deal. alex sez he wants to get into europe so he wants to lock in djangler for one year.

alex some way to compete with european companies other than price. he asks what the shipment time is in europe and jons sez it’s 8-12 weeks. alex sez he’ll deliver any reasonable quantity in three weeks since he already has it in stock.

alex, lou and ralph are happy about the deal, but they think johnny is too attached to cost accounting since he was going to throw away a profitable deal. and division will be even worse, so alex needs to figure out what management techniques to master.

alex thinks that jonah is a physicist and somehow figured out business stuff, so maybe he should read a popular science book.

jons gets the deal and wants to know if he can offer the same 3 week delivery to domestic customers. alex agrees, but he wants to ensure he won’t have to go back to firefighting, so he goes to the library to read science books.

alex reads for some time then asks julie to join him for tea and asks her about why she likes greek philosophy. she sez it’s hard to explain why it’s good and he should read it.

she asks him about science books. he sez physicists don’t start by collecting data. they start with some phenomenon and guess about its cause, then they work out other consequences of that cause and try to verify them and these verifications make it more obvious that the guess about the cause is correct. and they find out that lots of apparently different things have the same underlying cause.

julie sez the socratic dialogues work the same way but they’re about human behaviour.

alex sez business is about materials and human behaviour. so jonah must use these techniques.

julie sez that jonah’s ideas must be about thinking methods not just techniques.

alex sez jonah asked him to figure out what techniques he should learn not how to do them so he’s skipping a step: he should figure out how he operates and how he should operate.

39

alex receives a call from bill peach to congratulate him on his profits. hilton smyth’s indicators are doing well but his plant is losing money.

bill peach sez ethan frost has tried to explain why the indicators don’t produce good results but he doesn’t understand and wants alex to explain it to him at headquarters, and he should come out to find out more about his new job.

stacey sez she needs a meeting because she and bob have been playing expeditors and despite overtime orders will be late.

alex asks if the bottlenecks are overloaded and ralph sez no. stacey points out that the bottlenecks are spending some time idle and then getting overloaded by a wave of work.

they’re doing lots of overtime, but that risks making the plant chaotic and delaying more orders.

ralph sez they should examine a bottleneck but bob thinks they have many travelling bottlenecks. alex sez they should go ahead anyway.

ralph asks what happens if they have a problem at a bottleneck. throughput is lost.

if they have a problem before a bottleneck, then the stream of tasks to the bottleneck is interrupted.

bob sez they always make sure the bottleneck has some inventory.

ralph asks how they know how much inventory they should have in front of a bottleneck.

ralph sez they previously cut the amount and bab suggests increasing it again.

ralph continues to say that if they have enough inventory in front of the bottleneck to last the time required to fix problems earlier, then the bottleneck will keep working.

stacey sez that can’t be true cuz the problems haven’t changed but the bottlenecks are running dry. so they have wandering bottlenecks.

alex sez they should continue to pursue ralph’s line of thought. once the problem is corrected they have to build up stocks in front of the bottleneck again in addition to providing the bottleneck’s standard consumption.

bob sez the fact that they have bottlenecks is necessary cuz if upstream resources don’t have spare capacity they won’t be able to use the bottlenecks to capacity.

ralph asks how much spare capacity they need and stacey sez it’s a tradeoff.

bob sez new orders didn’t create new bottlenecks but did reduce the spare capacity at non-bottlenecks so they need more inventory in front of the bottlenecks.

bob asks ralph to identify the orders that are on short delivery and for them release material one week in advance, for others release it two weeks in advance.

bob asks stacey to get the non-bottlenecks to work through the weekend and not to promise less than four weeks for new orders.

alex is unhappy about what bob had to do. sales will drop their campaign to promise delivery in two weeks, so future throughput will be down.

lou points out that they’ve consumed their whole overtime budget for the quarter.

alex points out that means operating expense is up, throughput is down and inventory is up so everything is going in the wrong direction. they’re also reacting to events instead of planning. alex thinks he must have made a mistake.

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40

alex has been talking to lou about what’s going on in the division.

bob’s plant has saved the division, it’s the only bright spot. they didn’t realise that until they separated the results for that plant from those from the rest of the division.

alex thinks they made a mistake by just gathering lots of data about the division.

lou sez the information misses lots of details. they don’t have a late receivables report, the information for it is scatted around reports.

lou thinks reducing open receivables by 4 days will help.

alex asks how doing that would improve throughput, inventory and operating expense.

lou sez they’ll be slightly improved and it will give them 4 days of cash. alex doesn’t think this will help.

alex asks how long it will take lou to change the way they evaluate inventory.

lou thinks getting the information will take a few days. explaining it and getting managers to act on it will take weeks.

alex asks how the current evaluation of inventory impacts the finished stocks held by the division.

lou sez sales are down and pressure to show profits is up, so they have built up 70 days of finished products to generate fictitious profits.

alex asks how it changes throughput. lou sez he doesn’t know.

alex asks what reason plants gave for not introducing new models. lou sez they don’t want to obsolete their current inventory cuz it would reduce their bottom line.

alex sez this reduces their market share, and so reduces throughput.

lou thinks they can reduce inventory and improve receivables.

alex asks about plant indicators, judging sales opportunities according to product cost, margins, and anything they can sell above variable cost. and transfer prices between divisions are also a problem. each of these are more than 4 days of receivables.

the next day alex and lou are going through the five steps.

lou asks if they accept the first step is identifying the system constraints.

alex wants to reconsider this idea from first principles.

one principle is that an organisation exists for a reason, another is that it consists of more than one person.

so the organisation requires synchronised efforts of more than one person. so the operation of the organisation depends on chains of links between people, or a grid of chains.

alex sez that the more complex the organisation the more interdepencies there are between different chains and so the fewer independent chains there are.

lou asks what they should do about measurements and sez they are the biggest constraint.

alex disagrees. bigger problems: outdated products, the idea that engineering projects never finish on time, marketing plans that can’t solve the problem, and the idea of blaming other people for problems.

alex thinks all this is a result of some core problem and it must be possible to work out what the problem is.

lou sez that at the divisional level these problems are a result of policies, measurements and procedures, not a bottleneck. alex disagrees: they dealt with bottlenecks in the plant by changing policies, measurements and procedures.

lou asks if there’s no difference why don’t they know what the divisional constraint is.

alex sez the division has excess capacities they’re wasting, not physical constraints and there are markets they could sell to.

alex decides they need a technique to identify constraints, or the core problem. lou sez finding the core problem won’t be enough.

step 2 is exploit the system’s constraint. step 3 is subordinating everything to step 2 but there isn’t a physical constraint so this is unnecessary.

step 4 elevate the constraint involves changing the policy.

alex and lou realise that they need a way to come up with better policies and to test them for whether they solve the problem without causing others.

they need such ideas if they’re going to plan instead of react.

lou and alex realise they need a third kind of idea: how to cause a change of policy.

alex understands now why jonah refused to help him. he has to learn the thinking processes required for solving his own problems.

It would have been good to mention that 40 is the last chapter. Got any concluding thoughts or next steps?

There’s also a long interview with Goldratt at the end of the book, at least in some editions.

I think I understand TOC better now and see more of its relevance to CF. I might do a post on that topic next.

If you decided not to, would you say why?

I haven’t decided not to write the post. I have been busy for the past few weeks. I’ve made some notes today and I’m planning to write the post tomorrow.

Can you see how your reply relates to Curiosity – Question-Ignoring Discussion Pattern ?

Your question is about whether I would say why I decided not discuss TOC and CF to if I decided not to. The question I answered was whether I had decided not to, not whether I would tell you if I decided not to. My response conforms to the pattern:

Me: What do you think about X?

Them: [silence]

Me: Why didn’t you discuss X?

Them: [Starts saying their opinion about X.]

That’s not what I meant. What I meant is that your reply about proceeding with the post is one level of abstraction below what I was talking about.

I was trying to talk at the level of what’s going on. Proceeding with the project (at this specific timing, which seems probably not coincidental but you left that ambiguous) seems possibly designed to avoid that discussion.

So did you want to discuss why I hadn’t written the post and I wrote the post instead of discussing that issue?

I was arranging to move and then actually moving for about the past month. I replied to a few other posts because I could do it easily and quickly. To write TOC and CF relevance material I wanted to reread my notes and work out what to say and I didn’t do that cuz I was busy arranging the move.

You sound maybe defensive. I wasn’t trying to request you do the post now/soon or to make you defensive. Your response seemed like you may have treated my question as a request or reminder to post Goldratt related stuff. I replied to it because it had ambiguity from my pov.