A review as well as analysis of highly acclaimed book by Eliyahu M. Goldratt. The review consists of a Management Control System perspective.

1. A BOOK REVIEW

2. INDEX CONTENT
1
BRIEF INTRODUCTION
5
MANAGEMENT AUDIT
2
KEY CONCEPTS
6
THE TRANSFORMATION
3
PROBLEM AREAS
7
THE IMPLEMENTATION
4
CONTROL SYSTEMS
8
KEY LEARNINGS

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Brief Introduction

4. BRIEF INTRODUCTION
Alex Rogo
(Plant
Manager)
Stacey
Bill Peach
(Division
Head)
Julie Rogo
(Alex’s wife)
Ralph
Nakamura
(Head
Inventory
Control)
Bob
Donovan
(Production
Manager)
(Planning)
Jonah
Lou
(Physicist /
Consultant)
(Accountant)

5. BRIEF INTRODUCTION
Alex’s Bearington plant is losing money.
He is given 3 months ultimatum to either make plant make money or plant will be closed.
He implements a few concepts suggested by Jonah.
He, with his team consisting of Stacey, Lou, Bob and Ralph improve the processes and
culture at the plant.
As a result, Alex gets promoted as Divisional Manager.

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Key Concepts

7. KEY CONCEPTS
Rate at which system
generates money
through sales
All the money system has
invested in purchasing
things it intends to sell
THROUGHPUT
OPERATIONAL
EXPENSES
All the money system
spends to convert
inventory to throughput
INVENTORY
BOTTLENECK
Any resource whose
capacity is equal to or
less than the demand
placed upon it

8. TOC CONCEPT
Identify the
Constraint
Repeat the process
Elevate performance
of the Constraint
Exploit the Constraint
Subordinate and
Synchronize to the
Constraint
The throughput of
any system is
determined by the
Bottleneck
Constraint.
Hence to increase
the throughput one
must focus on
identifying and
improving this
constraint.

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Problem Areas

10. PROBLEM AREAS
THE INVENTORY
the
problem
areas
BOTTLENECK’S CAPACITY
ROBOTS
ORDERS

11. THE INVENTORY
Every machine was used with 100% capacity which in turn increased
Inventories due to capacity mismatch between adjacent machines/resources
Inventory was high.
Inventory turnover period increase.
Cash conversion cycle increase.
Low Cash Inflow.

12. BOTTLENECK’S CAPACITY
Capacity is less than or equal to the demand.
Bottlenecks decided throughput of the system as a whole.
Bottleneck capacity could not be increased due to Capital Expenditure
Constraint.

13. THE ROBOTS
Robots were used, but production didn’t increase.
Labour wasn’t laid off.
Cost of materials didn’t go down.
So, there was no tangible effect of using Robots.

14. THE ORDERS
Most of the orders were getting late.
Expediting was a norm in the plants.

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Control Systems

16. BASIC MODELS OF MANUFACTURING
The four basic models of manufacturing, shown as follows:
Where X represents a Bottleneck and Y represents a Non-Bottleneck
Y
X
X
Y
Y
ASSEMBLY
&
Y
PART-A
X
but
X
ASSEMBLY
PART-B

17. CONTROL SYSTEMS
SET GOALS
MEASURE
ACHIEVEMENT
CALCULATE VARIANCE
REPORT VARIANCE
DERIVE CAUSE OF THE
VARIANCE
• To make money by increasing net profit, while
simultaneously increasing ROI and Cash Flow.
• Plant was making losses (Bill Peach’s revelation)
• Division was also making losses.
• Losses were not quantified though
• Less throughput due to bottleneck constraints

18. CONTROL SYSTEMS
Prioritized material coming to bottlenecks over other material.
TAKE
NECESSARY
ACTIONS TO
MINIMIZE
THE
VARIANCES
Bottlenecks utilized to 100 % of time
Quality Check shifted before the bottleneck to let bottleneck process
non-defective WIP
Consume the inventory to decrease levels of inventory and free money
locked up in inventory
Production Planning and Material Sourcing Planning to avoid Interactive
Bottleneck Situation.
Use of alternate resources to increase capacity of Bottleneck
Process Re-engineering
REPEAT THE STEPS UNTIL GOALS ARE MET

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Management Audit

20. APPRAISAL OF CONTROL
Process re-engineering
APPRAISAL
OF
CONTROL
Information gathered from shop floor and list of backlog
orders
Ralph created system to efficiently predict time to engineer a
sale.
Materials were sourced as per the demand and capacity
constraint Resources to efficiently use bottlenecks

21. APPRAISAL OF ORGANIZATION STRUCTURE
Production Planning and Control
Inventory Planning
PRODUCTION
Capacity Utilization of Bottlenecks
Production Inspection (QC moved to
before bottleneck)

22. APPRAISAL OF ORGANIZATION STRUCTURE
Differentiation Strategy
New Marketing Campaign for 4 week delivery
MARKETING
Heightened brand image
Long term / Yearly contracts with French
Customer.

23. BALANCED SCORECARD
FINANCIAL PERSPECTIVE
CUSTOMER PERSPECTIVE
Increase in Orders:
• New customer Burnside
• Contract made with
French customer for 1
year
•
•
•
•
Cash Flow
Net Profit
ROI Increase
Sales backlog
INNOVATION &
LEARNING PERSPECTIVE
• Revenue per employee
• Culture change from cost
world to throughput
world
INTERNAL BUSINESS
PERSPECTIVE
• Production planning
control
• Material sourcing
• 4 week delivery

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The Transformation

25. THE TRANSFORMATION
PREDICTIVE
PROACTIVE
REACTIVE

26. THE TRANSFORMATION
REACTIVE
• In Bearington plant, expediting was a norm.
• Efficiency of the plant was down.
• Plant was making losses.
PROACTIVE
• Alex and team identified system constraints i.e. the bottlenecks.
• Gave high priority to parts that were to be fed to Bottlenecks over parts that were not going to be processed
by bottlenecks.
• Bottlenecks time was not lost and it increased throughput.
PREDICTIVE
• Red tag and green tag priority system caused starvation of resources for green tagged parts.
• Increased QUEUE TIME for green tagged parts & increased WAIT TIME for Red Tagged parts.
• By analyzing the capacity of bottlenecks, the amount of production of green tagged parts could be
calculated.
• This helped in material sourcing planning and predicting the Out Time of the order.

27. HOW DO THE MEASURES RELATE TO DECISIONS?
NP
ROI
CF
OPERATIONAL
FINANCIAL
THROUGHPUT (TP)
I
OE
ROI
CF
INVENTORY (I)
TP
NP
NP
ROI
CF
OPERATIONAL
EXPENSE (OE)
NP
ROI
CF
An effective decision simultaneously increases TP, decreases I, and decreases OE.

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The Implementations

29. THE IMPLEMENTATIONS
WHAT TO IMPLEMENT?
Efficiently use
the
bottleneck
capacity
Increase in
bottleneck
capacity
What?

30. THE IMPLEMENTATIONS
HOW TO IMPLEMENT?
Realigning
Quality
Control
Prioritization
(Tagging)
Recall some
of the Old
Machines
Dedicated
Personnel
Material
Release
System
Reduce the
Batch Size

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Key Learnings

32. KEY LEARNINGS
Balance the flow with demand, not capacity.
The level of activity of the system is determined by constraints in
the system.
Activating a resource and utilizing it are not the same.
An hour lost at a bottleneck is an hour lost by the entire system.
An hour saved at a non-bottleneck is worthless.
Performance of an operation should be evaluated by its bottom
line.

33. KEY LEARNINGS
Alex and Lou identify three fundamental decision issues as
critical to the success of any manager
Knowing
what to
change
What to
change to
How to
cause the
change

34. THANK YOU