Introduction
The Goal, a 1984 book by Eliyahu M. Goldratt, is, no matter how strange this might sound, a novel on management. Utilizing the form of a literary work, the author exposes some common, but crucial mistakes made by the management of numerous companies of his time, that is, the attempts to increase productivity by maximizing efficiency of production in an incautious and thoughtless way.
In this paper, we will address the notions of productivity and efficiency and explain how they work in the theory offered by Goldratt, exposing the mistake of the classical management that leads to sub-optimization.
The Notion of Productivity
In The Goal, Goldratt exposes, among others, the concept of productivity. Jonah, while talking to Alex, suggests that he defines this notion for himself in order to be able to see how to improve the situation in his factory. Having given this issue some consideration, Alex arrives at the conclusion that productivity of an activity measures whether the goals of the activity were achieved. Therefore, to determine whether an activity is productive, it is necessary to define the goals of this activity.
As Alex thinks about this problem, he realizes that the goal of the UniCo’s plant he works in is not utilizing the newest technologies or capturing the largest share of the market; the ultimate goal is making money. The absence of profit is what is wrong with the factory on the whole1.
While considering this issue further, Alex understands that the amount of money made can be expressed in an explicit form by utilizing three metrics: net profit, return on investment, and cash flow. However, it still remains unclear how to apply even these three notions to measure the productivity of a particular activity that takes place in the factory’s walls. Jonah reveals this secret to Alex during one of their conversations; he explains that the notions to be used for this purpose are throughput, inventory, and operational expenses.
They are defined as “the rate at which the system generates money through sales”, “all the money that the system has invested in purchasing things which it intends to sell”, and “all the money the system spends in order to turn inventory into throughput”, respectively (Goldratt and Cox 66-67). Utilizing these three notions, it is possible to evaluate all the processes which take place in the factory.2
The Notion of Efficiency
In contrast to the concept of productivity, the term “efficiency” is not defined clearly in Goldratt’s book. However, it is frequently used in the text. Thus, it is possible to explain what is meant when the word is used. In our opinion, efficiency could be understood as the extent to which the present resources are utilized in order to produce the product.
Therefore, a common-sense understanding leads us to think that to enhance the efficiency always means to improve the amount of money made, because common sense says that the more you produce, the more money you can make.
Besides, if not all the present resources are employed in order to make the product, the notion of downtime is often used. It carries negative connotations; some resources, it appears, are simply wasted. For instance, a worker who stays idle seems to receive their salary for nothing; therefore, their idle time is a waste of money.
Goldratt, on the contrary, shows us that, although it is true in some cases, in a large number of situations idleness is not an adverse phenomenon.3 According to the traditional business model, it is required to reduce the cost of products by all methods available while keeping the facilities constantly running at maximum efficiency; the conclusion that Goldratt reaches is counter-intuitive from this point of view (Winter par. 20).
The Relationship between Productivity and Efficiency
Why can it not be productive to work at the full efficiency? That is, why employing all the present resources might not result in the maximum financial output? To solve this problem, Goldratt offers a theory, which he later calls the Theory of Constraints; it has achieved very positive reviews and was put to use in multiple areas (Berry and Smith 86-87; Seider 43). It explains this situation via the notion of a constraint, or a bottleneck.
A bottleneck is “any resource whose capacity is equal to or less than the demand placed upon it” (Goldratt and Cox 145); the product of the bottleneck is necessary for the final product’s creation or assembly. If such a unit exists (as it was the case with Alex’s factory), then there is no point in employing departments other than the bottleneck at their full capacity.
In fact, the efficiency of those departments can actually hinder the efficiency of the whole factory, for instance, by producing too many parts that cannot be utilized, but continuously require storage and maintenance costs (inventory). Therefore, it is productive to use the factory’s resources only to the extent at which the bottlenecks can operate, so that the inventory is used and produced in a balanced way; the excess usage will only decrease the productivity.4
An Example
A simple example can help clarify this. A factory produces tables; a table consists of 4 legs and 1 desktop. These parts are produced in different facilities, and for a unit of time it is possible to create 8 legs and only 1 desktop. In this case, the department that produces desktops is a bottleneck.
Therefore, there is no point in running the leg-production facility at the full capacity; slightly more than 50% of its capacity would be optimal, because it would allow all the parts produced to be employed in the assembly of the final product, and allow for some spare parts.
To generalize it all in the terms of the given above concepts for measuring the productivity, for a business to gain money it is necessary to maximize the throughput, at the same time minimizing inventory and operational expenses. At least two of these metrics need to be changed at a time. Changing only one component can lead to an unwanted change in one or both of the others, which will result in a profit loss (Goldratt and Cox 66).
In the given example, producing extra legs means increasing the inventory, and possibly the operational expenses, while the throughput stays the same. On the other hand, instantly laying off ≈50% of the “leg department” workers might decrease motivation and worker loyalty (Hopp and Spearman 188). So, the problem requires a balanced, well-weighted decision that would allow for exploiting the constraint, reducing, and, finally, eliminating it (after which a search for other constraints should be started) (Goldratt 6-7).
Sub-optimization
An important notion in relation to this theory is that of sub-optimization. It is a situation in which a system that is being used produces less than the best possible result due to the absence of proper coordination between the system’s parts.
As we were able to see, this was exactly the case at the UniCo’s plant: the heat treat furnaces were working at very low efficiency due to the poor management and capacity limitations, as well as was the NCX-10 machine (Goldratt and Cox 152-153,158-160).
These constraints, the “bottlenecks”, did not allow for assembly of the complete product. On the contrary, other facilities of the factory were often working at the maximum efficiency, which caused an abundance of inventory that could not be utilized due to the lack of the components produced in the “bottlenecks”.
So, in terms of Goldratt, the notion of sub-optimization indicates the imbalanced regulation of throughput, inventory, and operational expenses.
Conclusion
As we could see, Goldratt exposes the notion of productivity and explains that the maximum productivity (i.e., maximum monetary income) is not guaranteed by all the company’s departments working at their full efficiency. The three important notions that permit us to understand the cause of this are throughput, inventory, and operational expenses; if not properly balanced, changes in these three factors (the situation of sub-optimization) often lead to the loss of profit.
Works Cited
Berry, Rik, and Lola Belle Smith. “Conceptual Foundations for the Theory of Constraints.” Human Systems Management 24 (2005): 83-94.
Goldratt, Eliyahu M., and Jeff Cox. The Goal: A Process of Ongoing Improvement. 3rd ed. Great Barrington, MA: North River Press, 2004. Print.
Goldratt, Eliyahu M. What Is This Thing Called Theory of Constraints and How Should It Be Implemented? n.d. Web.
Hopp, Wallace J., and Mark L. Spearman. Factory Physics. 3rd ed. Long Grove, IL: Waveland Press, 2011. Print.
Seider, Ross. “Optimizing Project Portfolios: Engineering Productivity and Effectiveness Can Be Improved by Applying the Theory of Constraints.” Research Technology Management 49.5 (2006): 43-48. ProQuest.
Winter, Christian. According to the Goal: How Eliyahu Goldratt Helps Organizations Examine Their Processes to Achieve Maximum Results. 2005. Web.