A classic book by Israeli business management guru Eliyahu Goldratt, who invented the Optimized Production Technique, the Theory of Constraints, the Thinking Processes and many other productivity methodologies. In The Goal, Elihayu defines productivity as getting closer to the goal – every action that brings you closer to the goal is productive. Every action that does not bring you closer to the goal is not productive (even if it seems do). It may sound trivial – but how often do we not see companies focusing on subgoals – such as production efficiency, team size, money raised etc. These are not productive measurements.
Instead, focus on 3 metrics: Throughput, Inventory and Operational Expense:
- Throughput: the rate at which the system generates money through sales
- Inventory: all the money system has invested in purchasing things it intends to sell
- Operational expense: all the money the system spends to turn inventory into throughput
Ideally – an initiative can improve all 3 at once. This is where many companies fail – they focus primarily on decreasing operating expense. As a result of this change, they may start doing unproductive behaviors that stifle throughput and become less productive overall.
A clear example in the IT industry I believe is outsourcing. Taking all your capital expenses, Hardware, software, staff and instead buying this as a service. Sure – you might be reducing your operational expenses – but are you increasing your throughput? How fast can you deliver a new service when this is handled by a 3rd party? If your 3rd party provider becomes your weakest link in the application delivery lifecycle, and you want to become an innovative company with a short time to market, what do you do? This is where one must seriously consider the “savings” vs throughput. Again, throughput in this case can be seen as the rate (time to deploy a new functionality) at which the system (app) generates money through sales (new customers or up-sell of existing customer base).
Memorable quotes
So this is the goal: To make money by increasing net profit, while simultaneously increasing return on investment, and simultaneously increasing cash flow.
“They’re measurements which express the goal of making money perfectly well, but which also permit you to develop operational rules for running your plant,” he says. “There are three of them. Their names are throughput, inventory and operational expense.”
“The entire bottleneck concept is not geared to decrease operating expense, it’s focused on increasing throughput.”
“I’m talking about a production employee who is idle because there is no product to be worked on.” “Yes, that’s always bad,” I say. “Why?” I chuckle. “Isn’t it obvious? Because it’s a waste of money! What are we supposed to do, pay people to do nothing? We can’t afford to have idle time. Our costs are too high to tolerate it. It’s inefficiency, it’s low productivity—no matter how you measure it.” He leans forward as if he’s going to whisper a big secret to me. “Let me tell you something,” he says. “A plant in which everyone is working all the time is very inefficient.”
“What you have learned is that the capacity of the plant is equal to the capacity of its bottlenecks,” says Jonah.”
“STEP 1. Identify the system’s bottlenecks. (After all it wasn’t too difficult to identify the oven and the NCX10 as the bottlenecks of the plant.)
STEP 2. Decide how to exploit the bottlenecks. (That was fun. Realizing that those machines should not take a lunch break, etc.)
STEP 3. Subordinate everything else to the above decision. (Making sure that everything marches to the tune of the constraints. The red and green tags.)
STEP 4. Elevate the system’s bottlenecks. (Bringing back the old Zmegma, switching back to old, less “effective” routings. . . .)
STEP 5. If, in a previous step, a bottleneck has been broken go back to step 1.”
“I smile and start to count on my fingers: One, people are good. Two, every conflict can be removed. Three, every situation, no matter how complex it initially looks, is exceedingly simple. Four, every situation can be substantially improved; even the sky is not the limit. Five, every person can reach a full life. Six, there is always a win-win solution. Shall I continue to count?”
Deciding that the company is wasting too much money on duplicated efforts and thus moving to a more centralized mode. Ten years later, we want to encourage entrepreneurship and we move back to decentralization. Almost every big company is oscillating, every five to ten years from centralization to decentralization, and then back again.’’
“At the same time,’’ I continue, “can you imagine what the meaning is to being able to hone in on the core problem even in a very complex environment? To be able to construct and check solutions that really solve all negative effects without creating new ones? And above all to cause such a major change smoothly, without creating resistance but the opposite, enthusiasm? Can you imagine having such abilities?’’
“What are we asking for? For the ability to answer three simple questions: ‘what to change?’, ‘what to change to?’, and ‘how to cause the change?’ Basically what we are asking for is the most fundamental abilities one would expect from a manager. Think about it. If a manager doesn’t know how to answer those three questions, is he or she entitled to be called manager?’’
I’m invited to participate in some of the initial meetings with the client, I may approach it differently than some of my colleagues. They’ll come in and say: “We have this line of services, which one do you want?” What I do is ask questions, like Jonah does in the book. That helps me decide if there is a fit for what I do. Basically, I try to help clients understand that if you address the core problems rather than the symptoms so many people focus on, you can almost promise good results.
If I’m invited to participate in some of the initial meetings with the client, I may approach it differently than some of my colleagues. They’ll come in and say: “We have this line of services, which one do you want?” What I do is ask questions, like Jonah does in the book. That helps me decide if there is a fit for what I do. Basically, I try to help clients understand that if you address the core problems rather than the symptoms so many people focus on, you can almost promise good results.