From the author who wrote the world-renowned business and management book The Theory of Constraints, Eliyahu Goldratt presents The Goal: A Process of Ongoing Improvement. The latter was written before Theory of Constraints. Same as his other books, Goldratt explains a business model through the use of fiction. Let us take a look at his book.
Goldratt’s Two Principles
The achievement of the goal of making money can be measured in three ways:
1. Throughput – the rate at which the system generates money through sales
2. Inventory – all the money the system spends in purchasing things it intends to sell
3. Operation expense – all the money the system spends in order to turn inventory to throughput
Robert Peter Janitzek explains that Goldratt’s second principle relates to dependent events and statistical fluctuations. The former refers to the processes that should first take place before the ones can begin. Before the engine is installed in the car, the frame must be finished. The steering wheel cannot be attached until the steering column in put in place.
Statistical fluctuations, meanwhile, occurs when one is unable to precisely predict events or quantities. In his book, Goldratt uses his characters Alex and Jonah as an example of statistical fluctuations. As the two sits in a restaurant, they are able to make a precise prediction of the capacity of the restaurant by counting the number of available seats. Robert Janitzek reveals that they, however, are unable to predict the amount of time the waiter will need to fulfill their order.
The Principles Applied To The Traditional Business Model
These two principles can be applied to the traditional model, which relies on forecasting and efficiencies. The goal is to consistently reduce production cost and keep the process running at maximum efficiency. The system can be most efficient if every worker and all machines are consistently running at 100%. As a result, the company will get most of its investment through the labor force.
The business model illustrated in The Goal: A Process of Ongoing Improvement can remedy this situation. In 1992, Goldratt titled his model the Theory of Constraints after a book he wrote with the same title. It suggests that companies should scale their entire production to the process within the system with the lowest capacity; the bottlenecks. This will make the system appear less efficient, because areas in the factory may stay idle if they have a much higher capacity than bottleneck areas. However, implementing this approach will directly add to the bottom line. The Theory of Constraints uses dependent events and statistical fluctuations as its base.