The Goal: A Process of Ongoing Improvement

By Eliyahu Goldratt

Location: 55

Jonah, in spite of his knowledge of the solutions, provoked Alex to derive them by supplying the question marks instead of the exclamation marks. I believe that because of this method, you the reader will deduce the answers well before Alex Rogo succeeds in doing so.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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productivity is the act of bringing a company closer to its goal. Every action that brings a company closer to its goal is productive. Every action that does not bring a company closer to its goal is not productive.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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If the goal is to make money, then (putting it in terms Jonah might have used), an action that moves us toward making money is productive.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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And an action that takes away from making money is non-productive.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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is possible for a company to show net profit and a good ROI and still go bankrupt.’’ "You mean if it runs out of cash,’’ I say.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"So you have to count cash flow as a third measurement?’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"If you’ve got enough of it, then cash flow doesn’t matter.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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don’t, nothing else matters,’’ says Lou. "It’s a measure of survival: stay above the line and you’re okay; go below and you’re dead.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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net profit, ROI and cash flow.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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make money by increasing net profit, while simultaneously increasing return on investment, and simultaneously increasing cash flow.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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Their names are throughput, inventory and operational expense.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"Throughput,’’ he says, "is the rate at which the system generates money through sales.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"Inventory is all the money that the system has invested in purchasing things which it intends to sell.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"Operational expense is all the money the system spends in order to turn inventory into throughput.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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did we sell any more products (i.e., did our throughput go up?); did we lay off anybody (did our operational expense go down?); and the last, exactly what he said: did our inventories go down?

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"Throughput is the money coming in. Inventory is the money currently inside the system. And operational expense is the money we have to pay out to make throughput happen.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"Okay, then it’s the same as a machine,’’ says Lou. "Any money we’ve lost is operational expense; any investment that we can sell is inventory.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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If it’s knowledge, say, which gives us a new manufacturing process, something that helps turn inventory into throughput, then the knowledge is operational expense. If we intend to sell the knowledge, as in the case of a patent or a technology license, then it’s inventory.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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And, again, the investment that can be sold is inventory; the depreciation is operational expense.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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assumed that if you trim capacity to balance with market demand you won’t affect throughput or inventory,’’ he says. "But, in fact, that assumption—which is practically universal in the western business world—is totally wrong.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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when capacity is trimmed exactly to marketing demands, no more and no less, throughput goes down, while inventory goes through the roof,’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"One phenomenon is called ‘dependent events.’ Do you know what I mean by that term? I mean that an event, or a series of events, must take place before another can begin... the subsequent event depends upon the ones prior to it. You follow?’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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These types of information vary from one instance to the next. They are subject to statistical fluctuations.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"dependent events’’ ... "statistical fluctuations’’—so what? They’re both quite

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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If we’re all walking at about the same pace, why is the distance between Ron, at the front of the line, and me, at the end of the line, increasing?

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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it’s an accumulation of slowness—because dependency limits the opportunities for higher fluctuations.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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how much distance each of us has to make up tends to be a matter of where we are in the line. Davey only has to make up for his own slower than average fluctuations relative to Ron—that twenty feet or so which is the gap in front of him. But for Herbie to keep the length of the line from growing, he would have to make up for his own fluctuations plus those of all the kids in front of

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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record the amount that each of them deviates from the average.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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At the end of two rounds, this is what the chart looks like. We keep going. The die

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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It was a balanced system. And yet throughput went down. Inventory went up. And operational expense? If there had been carrying costs on the matches, operational expense would have gone up

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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We expected to ship thirty-five. But what was our actual throughput? It was only twenty.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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Herbie really is determining the maximum throughput.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"The maximum deviation of a preceding operation will become the starting point of a subsequent operation.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"Don’t forget we only had two operations here. You can imagine what happens when we’ve got dependency running through ten or fifteen operations, each with its own set of fluctuations, just to make one part. And some of our products involve hundreds of parts.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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One type is what I call a bottleneck resource. The other is, very simply, a non-bottleneck resource.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"A bottleneck,’’ Jonah continues, "is any resource whose capacity is equal to or less than the demand placed upon it. And a non-bottleneck is any resource whose capacity is greater than the demand placed on it. Got that?’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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Balance flow, not capacity.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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bottlenecks are not necessarily bad—or good,’’ says Jonah, "they are simply a reality. What I am suggesting is that where they exist, you must then use them to control the flow through the system and into the market.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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Stacey says, "I can go dig up the records if you like, but the cost won’t be much more than what Lou said. At the most, I’d guess we’ve got about twenty thousands dollars in material—’’ "No, no,’’ says Jonah. "I’m not just talking about the cost of materials. How many products are you going to sell to customers as soon as you can process this entire pile?’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"You mean we should put Q.C. in front of the bottlenecks?’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"The numbers are wrong, not because you have made a calculating error, but because the costs were determined as if these work centers existed in isolation,’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"The actual cost of a bottleneck is the total expense of the system divided by the number of hours the bottleneck produces,’’ says Jonah. "What does this make it?’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"How is the time of a bottleneck wasted? One way is for it to be sitting idle during a lunch break. Another is for it to be processing parts which are already defective—or which will become defective through a careless worker or poor process control. A third way to waste a bottleneck’s time is to make it work on parts you don’t need.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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He leaves shortly with my blessing to implement the change as soon as possible. I sit there marveling that we’re going to reduce the efficiency of some operations and make the entire plant more productive. They’d never believe it on the fifteenth floor.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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the definition of a non-bottleneck, we know that Y has extra capacity. Because of its extra capacity, we also know that Y will be faster in filling the demand than X,’’ says Jonah. "Let’s say both X and Y have 600 hours a month available for production. Because it is a bottleneck, you will need all 600 hours of the X machine to meet demand. But let’s say you need only 450 hours a month, or 75 percent, of Y to keep the flow equal to demand. What happens when Y has worked its 450 hours? Do you let it sit idle?’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

feedback loop

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"So if you work Y to the maximum, you once again get excess inventory. And this time you end up, not with excess work-inprocess, but with excess finished goods. The constraint here is not in production. The constraint is marketing’s ability to sell.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

boulot inutilr

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Stacey points out immediately that in no case does Y ever determine throughput for the system. Whenever it’s possible to activate Y above the level of X, doing so results only in excess inventory, not in greater throughput.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"Yes, and that’s a very close approximation of the second rule we can logically derive from the four combinations of X and Y we talked about,’’ says Jonah. "Putting it precisely, activating a resource and utilizing a resource are not synonymous.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"See, to keep the line from spreading, it actually wouldn’t be necessary to keep everyone marching to exactly the same step or to keep everyone tied to the rope,’’ I tell them. "What we really have to do is just keep the kid at the front of the line from walking faster than Herbie. If we can do that, then everybody will stay together.’’ "So we just tie the

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"I’d say we’d be accurate to within plus or minus a day,’’ he said. "So if we keep, say, a three-day stock of work-in-process in front of each bottleneck, we should be safe.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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Once he knows when the bottleneck parts will reach final assembly, he can calculate backwards and determine the release of the non-bottleneck materials along each of their routes. In this way, the bottlenecks will be determining the release of all the materials in the plant.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"Cut our batch sizes in half on non-bottlenecks,’’ I say.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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phone had to do with the time a piece of material spends inside a plant. If you consider the total time from the moment the material comes into the plant to the minute it goes out the door as part of a finished product, you can divide that time into four elements. One of them is setup, the time the part spends waiting for a resource, while the resource is preparing itself to work on the part. Another is process time, which is the amount of time the part spends being modified into a new, more valuable form. A third element is queue time, which is the time the part spends in line for a resource while the resource is busy working on something else ahead of it. The fourth element is wait time, which is the time the part waits, not for a resource, but for another part so they can be assembled together.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"The rule he gave me last night is that an hour saved at a non-bottleneck is a mirage.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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That’s because a really terrific thing has happened. Before we reduced batch sizes, it wasn’t uncommon for a work center to be forced idle because it didn’t have anything to process—even though we were wading through excess inventory. It was usually because the idle work center had to wait for the one preceding it to finish a large batch of some item. Unless told otherwise by an expeditor, the materials handlers would wait until an entire batch was completed before moving it. In fact, that’s still the case. But now that the batches are smaller, the parts are ready to be moved to the next work station sooner than they were before.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"We’ve assumed that utilization and activation are the same. Activating a resource and utilizing a resource are not synonymous.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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Would we have had the courage to try to implement them if it weren’t for the fact that we’d had to sweat to construct them? Most probably not.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"It looks like one should think twice before charging the tall windmills of common practice.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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We need financial measurements for sure—but we don’t need them for their own sake. We need them for two different reasons. One is control; knowing to what extent a company is achieving its goal of making money. The other reason is probably even more important; measurements should induce the parts to do what’s good for the organization as a whole.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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were visiting the same six or seven work centers every time. They’re not bottlenecks, but the sequence in which they perform their jobs became very important. We call them ‘capacity constraint resources,’ CCR for short.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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I want to make sure that the material manager’s job will continue to be boring. I want to demonstrate how local improvements should be managed. And I want to show all of you how much more throughput we can squeeze from the same resources.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"What’s my wish, you ask? I want to develop a system that’ll help in what Bob wants to do, that will help to shrink drastically the time and effort needed to engineer a sale, as he calls it. I want to develop a system to help Stacey manage the buffers, and even to help in managing the local improvements. I want to develop a system to help Lou measure, in a much more beneficial way, the local performance. You see, like everyone else, I have my dreams.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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We check, and yes, he’s right. Here there is one and here and here and here. We’re making progress, the picture starts to unfold.’’ What they actually see is how the white board is getting the measles. It looks like one of the drawings my kids used to bring home from kindergarten.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"They would probably start in the same way—fact finding. And as you so vividly demonstrated, they would end up in the same colorful ditch. But Alex, is there any other way to start? How can you do anything sensible without knowing what’s going on, without having the data?’’ Ralph is true to his profession; for him, knowing what’s going on is equivalent to having the data neatly stored in his computer files.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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This overconcern about the ‘proper way to arrange things’ manifests itself in other harmful ways.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"As a president of a company, when you don’t know what to do, when things are not going well, you can always shuffle the cards—reorganize.’’ Mockingly he continues, "That will do it! This reorganization will solve all our problems!’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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Maybe we can proceed from there in a different way than writing reports or rearranging the company, but the first step definitely must be to put some order into the mess.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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This avenue of first collecting data, getting familiar with the facts, seems to lead us nowhere. It’s nothing more than an exercise in futility. Come on, we need another way to attack the issue. Any suggestions?’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"We probably have to look for a more numerical measure. This way we’ll be able to arrange the elements without being criticized for subjective preferences.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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right,’’ Ralph is getting excited, "Mendeleev definitely revealed an intrinsic order. He didn’t reveal the reason for that

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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Any other classification that just tries to superimpose some order, any order, on the given facts is useful in only one sense—it gives the ability to present the facts in a sequence, tables, or graphs.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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technique to reveal the intrinsic order does exist? Wouldn’t such a technique be a powerful management tool?’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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We all are action-oriented and searching for basic procedures is almost against our nature, no matter how much Bob tells me that he’s been transformed.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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Not only are the plants very different from each other; how can one fight local efficiencies in sales, or cut batches in product design?

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"The entire bottleneck concept is not geared to decrease operating expense, it’s focused on increasing throughput.’’ "What you are telling us,’’ I say slowly, trying to digest it, "is that we have switched the scale of importance.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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Throughput is most important, then inventory—due to its impact on throughput and only then, at the tail, comes operating expenses.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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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.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"And then Jonah came and showed us it wasn’t new bottlenecks, but that the constraint had shifted to being the way we released work to the plant.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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If we eliminate the tags and we instruct the workers to work according to the sequence in which the parts arrive—first come, first done—the parts will be done in the right sequence, fewer holes will be created in the buffers, my people will not have to track where the material is stuck, and...’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"Why shouldn’t we get rid of the finished products as fast as possible?’’ she asks.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"It’s how physicists approach a subject; it’s so vastly different from what we do in business. They don’t start by collecting as much data as possible.

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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The fact that we have bottlenecks and non-bottlenecks is not because we designed the plant very poorly. It’s a must. If the upstream resources don’t have spare capacity, we won’t be able to utilize even one single resource to the maximum; starvation will preclude it.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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We took more orders, which by themselves didn’t turn any resource into a new bottleneck, but they did drastically reduce the amount of spare capacity on the non-bottlenecks, and we didn’t compensate with increased inventory in front of the bottleneck.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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we cannot ignore the fact that organizations are not just a pile of different links, they should be regarded as chains.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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The important thing is you’ve just proven that any organization should be viewed as a chain. I can take it from here. Since the strength of the chain is determined by the weakest link, then the first step to improve an organization must be to identify the weakest link.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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The real constraints, even in our plant, were not the machines, they were the policies.’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"That brings us to the real question, how does one go about identifying the system’s constraint? How can we zoom in on the most devastating erroneous policies. Or, to use your term, how does one go about identifying the core problem, the one that is responsible for the existence of so many undesirable effects?’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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‘what to change?’, ‘what to change to?’, and ‘how to cause the change?’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt

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"We should and can be our own Jonahs,’’

~ The Goal: A Process of Ongoing Improvement, Eliyahu Goldratt