The Goal The Goal by Eliyahu M. Goldratt and Jeff Cox, North River Press, Inc., Second Revised Edition (1992). 8/27/04 Paul A. Jensen Operations Research.
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1 The GoalThe Goal by Eliyahu M. Goldratt and Jeff Cox, North River Press, Inc., Second Revised Edition (1992).8/27/04Paul A. JensenOperations Research Models and MethodsCopyright All rights reserved
2 Set the Stage Alex Rogo, plant manager of the Bearington plant Bearington plant, part of the UniWare Division, part of the conglomerate UniCoAlex meets Jonah, his college physics professor, at the airport
5 Alex and Jonah: a conflict Alex: I am running an efficient plant.Jonah: You are running an inefficient plant.DataMachines run 90% of the time.Unit costs are low.More products are not shipped.No one is fired.Inventory is not decreased.Inventories are high.Can't ship on time.
6 What is the source of the conflict? Productivity: Anything that moves toward the goal is productive. Anything that moves away from the goal is not productive.Alex and Jonah have different definitions of the goal.What is the goal?
7 Question left by Jonah: What is the Goal? Make productIncrease market shareProduce quality productsProduce efficientlyHire workersSupport the city, state and national economyIncrease stockholder value
8 Why is a goal important? Directs decisions Allows Measurement of accomplishmentWithout goals we are moved by the current requirements to the exclusion of concerns for the future.What would Deming say is the Goal?Point 1: Constancy of Purpose for the Improvement of Product and Service.We need one goal not many
9 What is the goal of a public company? Make money now and in the future
11 Financial MeasuresWhat Financial Measures Describe the Goal of Making Money?Net Profit (NP)Return on Investment (ROI)Cash Flow (CF)Are these sufficient for making decisions?
12 Can NP, ROI and CF be used to make decisions? Engineering Economics says “yes”Accept the project if the IRR of the cash flow is greater than the MARR.Goldratt would say “no”It is difficult to see how the global measures are affected by individual design and operating decisions.
13 What Operational Measures Describe the Goal? Throughput (TP)Rate at which system generates money through sales. Sales Revenue - Raw material ExpenseInventory (I)All the money that the system has invested in purchasing things which it intends to sellOperational Expense (OE)All the money that the system spends in order to turn inventory into throughput
14 How do these measures relate financial measures? NP = TP - OEROI = NP/ICash flow is OK ifcumulative income + initial cash > cumulative costs.
15 How do the measures relate to decisions? OperationalFinancialTPNPROICFINPROICFOENPROICFAn effective decision simultaneously increases TP, decreases I, and decreases OE.