The Goal Discussion Questions & Answers Chapters 1-25

1.  According to the authors of The Goal what is the primary purpose of a firm and how is this primary goal related to other organizational goals? Please identify the other important goals identified in the book.  

According to Goldratt and Cox, the primary purpose of a firm is to maximize throughput while minimizing inventory and operating expense.  He cautions practitioners about becoming complacent. TOC is an on-going process, and the inertia that can build up after a change occurs can actually serve to prevent continuous improvement.  Goldratt also provides a foundation for achieving change through TOC by defining a set of three essential measurements that drive the change process. He correctly realized that conventional accounting systems do not support TOC, or lean-based efforts. Goldratt proposes replacing all traditional measures derived from the "product cost" accounting paradigm. The following measures are the only way to increase profit through TOC:

• Throughput - the rate at which the entire organization generates money through sales for a product or service. Throughput represents all the money coming into an organization.
• Inventory - all the money the organization invests in things it intends to sell. Inventory represents all the money tied-up inside an organization. Goldratt’s definition includes facilities, equipment, obsolete items, as well as raw material, work in process, and finished goods.
• Operating Expense - all the money an organization spends turning Inventory into Throughput. It represents the money going-out of the organization. Examples include direct labor, utilities, consumable supplies, and depreciation of assets.

These measures are the key to relating local decisions to the performance of the entire system. Goldratt advocates that all improvement opportunities should be prioritized by their effect on the three measures, especially throughput, for which the only limit on how high it can be increased is market size.

1.  The Division Vice President, Bill Peach, was upset that a major order (Order # 41427) was not ready for shipment as promised.  Explain the pros and cons of the manner in which the company was finally able to ship the order out.  

To finally ship the order, all resources from the plant had to be diverted to the production of the parts for order #41427, they worked overtime (which was against company policy), lost a good machinist and production hours from the machine that broke down.  Using the production line solely to complete one job and the loss in production hours would result in other jobs completing later which could mean additional unhappy customers.  The loss of the machinist will have an impact moving forward and may require additional overtime.  One upside might be that they determine that this approach is better than breaking the machines down in the middle of a job and could lead to a more productive assembly.

1. What are some of the relevant measures of performance identified by Lou, and how are they related to firm performance?  

Lou identified net profit, ROI and cash flow as relevant measures needed in terms of achieving the goal. Net profit needs to increase along with simultaneously increasing return on investment and cash flow. This is related to a firm’s profitability.  Profitability ratios show a company’s overall efficiency and performance.  Ratios that show margins represent the firm’s ability to translate sales dollars into profits at various stages of measurement.  Ratios that show returns represent the firm’s ability to measure the overall efficiency of the firm in generating returns for its shareholders.

1. Jonah advised Alex that “managers should not be concerned with local optima” but rather with organizational performance as a whole (p.61, Third Revised Edition).  Do you agree?  Discuss with the help of examples.  

When Alex finally speaks to Jonah, he is given three terms that will help him run his plant - throughput, inventory, and operational expense.  Jonah states that everything in the plant can be classified under these three terms. "Throughput is 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."

1. Based on your reading of Chapter 9 (Third Revised Edition), discuss how Throughput, Inventory and Operating Expense can be used as indicators of organizational performance.  

As Lou had indicated in earlier Chapters, some indicators of organization performance are net profit and ROI.  Net Profit is determined by subtracting operating expense from throughput.  ROI is determined by dividing Net Profit by inventory.  Two other indicators are productivity and turnover.  Productivity is determined by dividing throughput by operating expense.  Turnover is determined by dividing throughput by inventory.

1. Alex Rogo likens leading Boy Scout troops in a hiking tour with plant operations.  Discuss the similarities of trail coverage by the hiking group with plant operations in regard to rate of output, bottleneck creation, throughput and inventory accumulation (chapters 13-15 of the 3rd edition).

Stuck for the weekend as troop master, Alex discovers the importance of "dependent events" in relation to "statistical fluctuations". Through the analogy between a single file hike through the wilderness and a manufacturing plant, Alex sees that there are normally limits to making up the downside of the fluctuations with the following "dependent events". Even if there were no limits, the last event must make up for all the others for all of them to average out.  Finally, through the dice game or match bowl experiment, it becomes clear that with a balanced plant and because of "statistical fluctuations" and "dependent events" throughput goes down and inventory along with operating expenses goes up. A balanced plant is not the answer. (See the Dice Game or Match Bowl experiment note).  Fully understanding the "dependent events", Alex puts the slowest kid in the front of the hike and he relieves him of extra weight he has been carrying in his backpack. This balances the fluctuations and increases the kid’s productivity, which increased the throughput of the team.