Alex’s journey as a manufacturing plant manager forces him to set aside his traditional ideas about how businesses operate and consider new approaches. This is particularly true in how he and his management staff use metrics (systems of measurement) to determine their effectiveness as a business and make decisions about how to improve their operations. Through Alex’s business advisor, Jonah (who represents author Eliyahu Goldratt himself), Goldratt proposes that businesses need to move beyond their traditional metrics, which are over-complicated and do not directly help businesses increase their profits. As such, Jonah teaches Alex that the traditional corporate metrics are often flawed and can be replaced by three simpler, more effective metrics that directly relate to a company’s primary goal.
Alex’s plant, and many of the plants in his division, appear to be doing well by traditional metrics, yet they fail to turn a profit or meet their own deadlines. This suggests that traditional metrics do not give an actual representation of a business’s effectiveness. In the beginning of the novel, Alex and his management staff calculate the plant’s effectiveness using traditional metrics. They focus on specifics like the relative efficiency of each individual machine (how much time it spends operating versus idle), number of products produced per man-hour, and the amount of money their raw material purchasers are able to save by buying discounted material. Alex and his staff place great emphasis on achieving good traditional metrics, since they must report these to their corporate managers and keep them satisfied, suggesting that traditional metrics are maintained and enforced by upper management in many companies. However, despite maintaining good traditional metrics, Alex’s manufacturing plant is clearly failing. Although the plant appears efficient on paper—at least in its individual parts—it consistently loses money, misses deadlines, and struggles to produce quality products at a reasonable speed. The disconnect between the plant’s metric success and its financial failure implies that traditional corporate metrics do not give an accurate picture of a business’s success.
After Alex sees that the traditional corporate metrics are failing to help him manage his plant, Jonah (and thus Goldratt) posits that nearly all of those metrics can be absorbed by three simple measures which directly describe a company’s ability to make money: throughput, inventory, and operating expense. “Throughput” describes the money that a business generates through sales. Although Alex wants to focus on the volume of products that his plant produces, Jonah insists that the only output that matters is the amount of money made from sales. Simply making products without selling them wastes money and thus detracts from their primary goal. Jonah advises that a business should keep its throughput as high as possible. “Inventory” describes all of the invested money (assets) that exists within the plant, such as raw materials, manufacturing equipment, and unsold finished goods. Everything that counts as inventory could potentially be sold for cash, if need be. However, as long as something exists as inventory, it represents a financial burden since it exists as material goods instead of cash, which detracts from the goal of making money—even though inventory like manufacturing equipment is essential. According to Jonah, a business should keep inventory as low as possible without decreasing its throughput. “Operating expense” describes the cost of turning inventory, like raw materials, into throughput, as sales. Operating expense mainly describes things like employee labor (which cannot be sold off as an asset), energy bills, or the lost value of manufacturing machines as they wear out over time. Like inventory, Jonah states that a business should keep its operating expenses as low as possible while still maintaining its throughput. Although Alex is initially skeptical of such simple categories, Jonah argues that a company only needs to focus on these three major metrics to understand whether it is actually making money and thus achieving its goal. After following Jonah’s advice, Alex realizes that using these three categories simplifies his understanding of how the manufacturing plant is running and how it is losing money by holding far too much inventory, even though the plant appears efficient on paper. Goldratt thus argues that these simpler, more holistic metrics of income and expenses give managers a better understanding of the health of their business than traditional corporate metrics do.
Despite Jonah’s proposed new metrics of throughput, inventory, and operating expense, Goldratt suggests that the search for more effective business metrics will always be ongoing. At the end of the story, in spite of adhering to Jonah’s new metrics and turning the manufacturing plant profitable again, Alex’s chief accountant, Lou, states that rather than retire, he wants to keep working for Alex and develop new metrics to replace their old “erroneous” methods of accounting. Even with Jonah’s guiding metrics, Lou’s determination to find new and better ways to measure business costs implies that new thinkers and leaders must always build and improve upon old methods—no system is perfect. Goldratt confirms this in his introduction to the novel. He describes his approach to business systems as “scientific,” but he reminds the reader that even scientific laws like the Law of Conservation of Energy are constantly reconsidered and improved upon. Goldratt states, “no exceptional brain power is needed to construct a new science or expand on an existing one […] just the courage to face inconsistencies and to avoid running away from them just because ‘that’s the way it’s always been done.’” That is, even his own proposed metrics must be challenged and eventually discarded for better ones.
Ineffective vs. Effective Business Metrics ThemeTracker
Ineffective vs. Effective Business Metrics Quotes in The Goal: A Process of Ongoing Improvement
“…consistent parameters…essential to gain…matrix of advantage…extensive pre-profit recovery…operational indices…provide tangential proof…”
I have no idea what’s going on. Their words sound like a different language to me—not a foreign language, exactly, but a language I once knew and only vaguely now recall. The terms seem familiar to me, but now I’m not sure what they really mean. They’re just words.
You’re just playing a lot of games with numbers and words.
“This much is clear to me. We have to change the way we think about production capacity. We cannot measure the capacity of a resource in isolation. Its true productive capacity depends upon where it is in the plant. And trying to level capacity with demand to minimize expenses has really screwed us up. We shouldn’t be trying to do that at all.”
“Look, I’m convinced you did the right thing back there. Aren’t you?”
“Maybe I did the right thing,” [Bob] says, “but I had to break all the rules to do it.”
“But what are we supposed to do?” asks Bob. “If we don’t keep our people working, we’ll have idle time, and idle time will lower our efficiencies.”
“So what?” asks Jonah. […] “Take a look at the monster you’ve made. It did not create itself. You have created this mountain of inventory with your own decisions. And why? Because of the wrong assumption that you must make the workers produce 100 percent of the time, or else get rid of them to ‘save’ money.”
“If we don’t go ahead with a system to withhold inventory and release it according to the bottlenecks, we’ll be missing a major opportunity to improve performance and save the plant. And I’m not about to stand by and let that happen just to maintain a standard that obviously has more impact on middle management politics than it does on the bottom line. I say we go ahead with this. And if efficiencies drop, let them.”
I start to speak, but Hilton Smyth raises his voice and talks over me.
“The fact of the matter is that your cost-of-products measurements increased,” says Hilton. “And when costs go up, profits have to go down. It’s that simple. And that’s the basis of what I’ll be putting into my report to Bill Peach.”
“Hilton, this morning I asked you to sit in for me because we were meeting with Granby. Two months from now the three of us are moving up the ladder, to head the group. Granby left it to us to decide who will be the next manager of the division. I think that the three of us have decided. Congratulations Alex; you will be the one to replace me.”
“Everywhere, improvement was interpreted as almost synonymous to cost savings. People are concentrating on reducing operating expenses as if it’s the most important measurement.”
“Not even that,” Bob interrupts. “We were busy reducing costs that didn’t have any impact on reducing operating expenses.”
“Correct,” Lou continues. “But the important thing is that we, in our plant, have switched to regard throughput as the most important measurement. Improvement for us is not so much to reduce costs but to increase throughput.”