Goldratt, E. M. and 1. Cox. 1986.

1he Coal: A Process of

Ongoing Improvement. New York: North River Press.

Summary by Chris Hourigan
University oI South Florida, Spring 2001
The Goal is a very compelling novel. Novel, HUH!! Who ever heard oI a novel
about a production plant? Well, Eli has made the production managers have quite
an epiphany. In one book he might have changed the whole world oI cost
accounting. Eli approached the production world with a common sense view.
Using just one goal, making money, he reIerenced every activity to it. Eli said, "I
view science as nothing more than an understanding oI the way the world is and
why it is that way." You see, Eli is a physicist, and in being one, has to understand
why things work the way they do. His common sense approach is illustrated
beautiIully in this novel. He has looked at cost accounting Irom the outside and has
developed a whole new system because oI it.
Everyone Irom accountants to production managers to CEO`s should read this
book. Because oI its Iundamentals, it should be part oI the curriculum oI every
accounting program. This novel has and continues to help the industry to make
strides toward continuous improvement.
Chapter One
The Iirst chapter gets the reader acquainted with Mr. Alex Rogo and his apparent
problems with his production plant. This is shown through a conIrontation between
Mr. Rogo and his boss Mr. Peach, the Division Vice President. The dispute is over
an overdue order #41427. Through their conversation it`s learned that Mr. Peach
will not settle Ior anything less than the order being shipped today, and since the
plant is neither productive nor proIitable, Alex has three months to show an
improvement or the plant will be shut down!
Chapter Two
This chapter gives insight to Alex`s home liIe. Since moving back to his hometown
six months ago, it seems adjustment isn`t going well Ior his Iamily. It`s great Ior
Alex, but it`s a big change Irom the city liIe that his wiIe is used to. You also
experience Mr. Rogo`s background through his reIlections back on his travels to
eventually Iind himselI back where he started. "He`s now 38 years old and a
crummy plant manager". By the way, the order #41427 does get shipped, but not
very eIIiciently. All hands in the plant are working on one order with Iorbidden
overtime to boot.
Chapter Three
Mr. Peach calls a meeting at headquarters Ior all plant managers and his staII. At
the meeting everybody Iinds out how bad things are and are given goals to achieve
Ior the next quarter. Through the grapevine Mr. Rogo Iinds out perhaps why Mr.
Peach has been acting so erratic lately, the Division has one year to improve or it`s
going to be sold, along with Mr. Peach.
Chapter Four
While at this meeting, Alex thinks back on a recent business trip where he ran into
an old physics proIessor, Jonah, at the airport. Jonah puzzles Alex with how well
he knows how Alex`s plant is doing. Jonah has no knowledge oI where Alex is
employed. Johan predicts the problems oI high inventories and not meeting
shipping dates. He also states that there is only one goal Ior all companies, and
anything that brings you closer to achieving it is productive and all other things are
not productive. (See What is this thing called Theory oI ConstraintsIor more on
Alex's encounter with Jonah.)
Chapter Five
Alex decides to leave the meeting at the break. He has no particular place he would
like to go; he just knows this meeting isn`t Ior him, not today. He needs to
understand what the "goal" is. AIter a pizza and a six pack oI beer it hits him,
money. The "goal" is to make money and anything that brings us closer to it is
productive and anything that doesn`t isn`t.
Chapter Six
Mr. Rogo sits down with one oI his accountants and together they deIine what is
needed in terms oI achieving the goal. Net proIit needs to increase along with
simultaneously increasing return on investment and cash Ilow. Now all that is
needed is to put his speciIic operations in those terms.
Chapter Seven
Alex makes the decision to stay with the company Ior the last three months and try
to make a change. Then he decides he needs to Iind Jonah.
Chapter Eight
Alex Iinally speaks to Jonah. He is given three terms that will help him run his
plant, throughput, inventory, and operational expense. Jonah states that everything
in the plant can be classiIied under these three terms. "Throughput is the rate at
which the system generates money through sales." "Inventory is all the money that
the system has invested in purchasing things which it intends to sell." "Operational
expense is all the money the system spends in order to turn inventory into
throughput." Alex needs more explanation.
Chapter Nine
Alex Iresh oII his talk with Jonah gets word that the head oI the company wants to
come down Ior a photo opportunity with one oI Alex`s robots. This gets Alex
thinking oI the eIIiciency oI these robots. With the help oI the accountant,
inventory control woman, and the production manager, Alex discovers the robots
increased costs, operational expenses, and thereIore were less productive.
Implementing the robots increased costs by not reducing others, like direct labor.
The labor was shiIted to other parts oI the plant.
Chapter Ten
AIter explaining everything, Alex and his staII (Bob Irom production, Lou Irom
accounting and Stacey Irom inventory control) hammered out the meaning oI
throughput, inventory and operational expense until satisIied. Lou, states the
relationships as Iollows. "Throughput is money coming in. Inventory is the money
currently inside the system. And operational expense is the money we have to pay
out to make throughput happen." Bob is skeptical that everything can be accounted
Ior with three measurements. Lou explains that tooling, machines, the building, the
whole plant are all inventory. The whole plant is an investment that can be sold.
Stacey says, "So investment is the same thing as inventory."
Then they decide that something drastic is needed to be done with the machines.
But how can they do that without lowering eIIiciencies? Another call to Jonah is
placed and Alex is oII to New York that night.
Chapter Eleven
The meeting with Jonah is brieI. Alex tells Jonah oI the problems at the plant and
the three months in which to Iix them. Jonah says they can be Iixed in that time
and then they go over the problems the plant has. First, Jonah tells Alex to Iorget
about the robots. He also tells Alex that "A plant in which everyone is working all
the time is very ineIIicient." Jonah suggest that Alex question how he is managing
the capacity in the plant and consider the concept oI a balanced plant. According to
Jonah, this "is a plant where the capacity oI each and every resource is balanced
exactly with demand Irom the market." Alex thinks a balanced plant is a good idea.
Jonah says no, "the closer you come to a balanced plant, the closer you are to
bankruptcy." Then Jonah leaves Alex with another riddle, what does the
combination oI "dependent events" and "statistical Iluctuations" have to do with
your plant? Both oI those seem harmless and should work themselves out down the
production line.
Chapter Twelve
This short chapter tries to capture the essence oI the problems the job is causing at
home with the extra workload. The marriage is very strained because oI the
devotion Alex needs to give to the plant.
Chapter Thirteen
Stuck Ior the weekend as troop master, Alex discovers the importance oI
"dependent events" in relation to "statistical Iluctuations". Through the analogy
between a single Iile hike through the wilderness and a manuIacturing plant, Alex
sees that there are normally limits to making up the downside oI the Iluctuations
with the Iollowing "dependent events". Even iI there were no limits, the last event
must make up Ior all the others Ior all oI them to average out.
Chapter Fourteen
Finally, through the dice game or match bowl experiment, it becomes clear that
with a balanced plant and because oI "statistical Iluctuations" and "dependent
events" throughput goes down and inventory along with operating expenses goes
up. A balanced plant is not the answer. (See the Dice Game or Match Bowl
experiment note).
Chapter FiIteen
Fully understanding the "dependent events", Alex puts the slowest kid in the Iront
oI the hike and he relieves him oI extra weight he has been carrying in his
backpack. This balances the Iluctuations and increases the kid`s productivity,
which increased the throughput oI the team.
Chapter Sixteen
Well, aIter the camping trip the boys arrive home to Iind the mother has
disappeared. All the stress oI his job was too much Ior her so she leIt. Now the kids
and the job are all Alex`s responsibility. This was supposed to be a weekend Ior
Alex and his wiIe, but when the hike came up it seemed to be the last straw Ior her.
Chapter Seventeen
Alex tries to portray his new revelation to his team at the plant. Nobody seems
interested. But the walk in the woods becomes apparent when it is put to the test
Ior an overdue order in the plant. Now even the production supervisor agrees. Now
what?
Chapter Eighteen
In this chapter Jonah introduces Alex to the concept oI bottlenecks and non-
bottlenecks. Jonah deIines these terms as Iollows. "A bottleneck is any resource
whose capacity is equal to or less than the demand placed upon it. "A non-
bottleneck is any resource whose capacity is greater than the demand placed on it."
Jonah explains that Alex should not try to balance capacity with demand, but
instead balance the Ilow oI product through the plant.
Later, Alex and his team recognize the bottlenecks, the areas where capacity
doesn`t equal demand, like the slow kid Herbie on the hike. With this discovery
goes the ideas related to reorganizing the plant like Alex did with the hike.
Production is a process and it cannot be moved around so easily. Many processes
rely on the previous one to be able to complete the next. Alex would need more
machines, which takes more capital, and division is not going to go Ior that.
Chapter Nineteen
Well, Jonah makes a visit to the plant. Jonah tells Alex that a plant without
bottlenecks would have enormous excess capacity. Every plant should have
bottlenecks. Alex is conIused. What is needed is to increase the capacity oI the
plant? The answer is more capacity at the bottlenecks. More machines to do the
bottleneck operations might help, but how about making them run more
eIIectively. Jonah tells them that they have hidden capacity because some oI their
thinking is incorrect. Some ways to increase capacity at the bottlenecks are not to
have any down time within the bottlenecks, make sure they are only working on
quality products so not to waste time, and relieve the workload by Iarming some
work out to vendors. Jonah wants to know how much it cost when the bottlenecks
(X and heat treat) machines are down. Lou says $32 per hour Ior the X machine
and $21 per hour Ior heat treat. How much when the whole plant is down? Around
$1.6 million. How many hours are available per month? About 585. AIter a
calculation, Jonah explains that when the bottlenecks are down Ior an hour, the true
cost is around $2,735, the cost oI the entire system. Every minute oI downtime at a
bottleneck translates into thousands oI dollars oI loss throughput, because without
the parts Irom the bottleneck, you can`t sell the product. ThereIore, you cannot
generate throughput.
Chapter Twenty
Alex organizes the bottlenecks to work on only overdue orders Irom the most
overdue to the least. He then Iinds his wiIe. She is at her parent`s house. Through
their conversation it is learned that she still needs to be away Irom everybody, even
the kids.
Chapter Twenty-One
The crew works out some oI the details Ior keeping the bottlenecks constantly
busy. In the process they Iind that they need another system to inIorm the workers
what materials have priority at non-bottlenecks. Red and green tags are the answer.
Red Ior bottleneck parts to be worked on Iirst as to not hold up the bottleneck
machine, and green Ior the non-bottleneck parts. That concludes another week. The
true test will be next week.
Chapter Twenty-Two
Great, twelve orders were shipped. Alex is pleased, but he deIinitely needs more.
He puts his production manager on it. His production manager rounds up some old
machines to complement what one oI the bottlenecks does. Things are looking up.
Chapter Twenty-Three
They are becoming more and more eIIicient, but lag time arouse with the two
bottlenecks because oI workers being loaned out to other areas and not being at the
bottlenecks when needed to process another order. It seems there was nothing to do
while waiting Ior the bottleneck machine to Iinish the batch. ThereIore, in keeping
with the notion that everybody needs to stay busy, workers were at other areas
between batches. Alex decides to dedicate a Ioreman at each location all the time.
Then one oI those dedicated Ioreman, the night Ioreman, discovers a way to
process more parts by mixing and matching orders by priority, increasing
eIIiciency by ten percent. Finally, one process being sent through a bottleneck
could be accomplished through another older way and thereIore Iree up time on the
bottleneck.
Chapter Twenty-Four
Now that the new priority system is in place Ior all parts going through the
bottlenecks, inventory is decreasing. That`s a good thing right? But lower
inventory revealed more bottlenecks. This intrigues Jonah so he`s coming to take a
look.
Chapter Twenty-Five
"There aren`t any new bottlenecks", says Jonah. What actually has happened is a
result oI some old thinking. Working non-bottlenecks to maximum capacity on
bottleneck parts has caused the problem. All parts are stacked up in Iront oI the
bottlenecks and others are awaiting non-bottleneck parts Ior Iinal assembly. There
needs to be balance. The red and green tags need to be modiIied. It seems as iI the
bottlenecks will again control the Ilow, by only sending them exactly what they
need and when they need it.
Chapter Twenty-Six
RalI, the computer wiz, says he can come up with a schedule Ior bottleneck parts
and when they should be released. This will alleviate any excess inventory in Iront
oI the bottlenecks, but what about the non-bottlenecks? Jonah says with the same
data out oI the bottlenecks to Iinal assembly, you should be able to predict non-
bottleneck parts as well. This will make some time, but there are enough parts in
Iront oI the bottlenecks to stay busy Ior a month.
Chapter Twenty-Seven
There is another corporate meeting. Mr. Peach doesn`t praise Alex like Alex thinks
he should. Alex decides to talk with him in private. Mr. Peach agrees to keep the
plant open iI Alex gives him a IiIteen percent improvement next month. That will
be hard because that relies heavily on demand Irom the marketplace.
Chapter Twenty-Eight
FiIteen Percent!! FiIteen Percent!! Just then Jonah called to let Alex know that he
will not be available to speak with in the next Iew weeks. Alex inIorms him oI the
new problem oI more inventories and less throughput. Jonah suggests reducing
batch sizes by halI. OI course, this will take some doing with vendors, but iI it can
be done, nearly all costs are cut in halI. Also, they get quicker response times and
less lead times Ior orders. Sounds good.
Chapter Twenty-Nine
Alex is propositioned with a test. They can greatly increase sales, current and
Iuture, iI they can ship a thousand products in two weeks. Impossible without
committing the plant to nothing but the new order? Wrong! How about smaller
batch sizes. Cut them in halI again. Then promise to ship 250 each week Ior Iour
weeks starting in two weeks. The customer loved it.
Chapter Thirty
Seventeen percent!! That`s great, but it`s not derived Irom the old cost accounting
model. The auditors sent down to the plant Irom Division Iind just 12.8
improvement. Most oI it accounts Irom the new order. Which by the way, the
owner oI the company that placed the order came down personally to shake
everybody`s hand in the plant and to give a contract to them Ior not a thousand
parts but ten thousand. Anyway, tomorrow is the day oI reckoning at division.
Chapter Thirty-One
Well the meeting at Division started out rough. Alex thought he would be meeting
with Mr. Peach and other top executives. Instead, he met with their underlings. He
decides to try and convince them it doesn`t work. Just beIore leaving he decides to
see Mr. Peach. It`s a good thing he did, because he just got promoted to Mr.
Peach`s position. Now Alex has to manage three plants as the whole division. He
calls Jonah desperately and asks Ior help. Jonah declines until he has speciIic
questions.
Chapter Thirty-Two
Alex has a nice dinner with his wiIe. Through the veal parmesan and cheese cake it
is decided that Alex should ask Jonah how he can get other people to understand
these techniques that his team has discovered without being condescending.
Chapter Thirty-Three
Now is the time to assemble Alex`s team Ior Division. Surprisingly the accountant
with two years to retirement is on board, but the production manager isn`t. He
wants to be plant manager to continue their eIIorts. Everything is totally into place
at the plant but more is needed Ior division.
Chapter Thirty-Four
Alex is Iirmly engrossed with the problems oI taking over the division. With
advice Irom his wiIe he decides to enlist the help oI his team at the plant. Every
aIternoon they will meet to solve the problem. AIter the Iirst day it is obvious ,
they will need them all.
Chapter Thirty-Five
The second day they are led in a discussion about the periodic table oI elements,
and how the scientists actually got a table oI any sort. Maybe that is how they will
solve the massive problems oI division, by understanding how the scientists started
with nothing and achieved order. A way to deIine them by their intensive order is
needed.
Chapter Thirty-Six
The team Iinally comes up with the process: Step one identiIy the system`s
bottlenecks; Step two- decide how to exploit those bottlenecks; Step three-
subordinate everything else to step two decisions; Step Iour- evaluate the systems
bottlenecks; Step Iive- iI, in a previous step, a bottleneck has been broken, go to
step one. It seems so simple, just diIIerent.
Chapter Thirty-Seven
The team decides to revise the steps: Step one identiIy the systems constraints;
Step two decide how to exploit the systems constraints; Step three subordinate
everything else to step two decisions; Step Iour evaluate the systems constraints;
Step Iive- warning!!! II in the previous steps a constraint has been broken, go back
to step one, but don`t allow inertia to cause a system constraint.
It also has been discovered that they have been using the bottlenecks to produce
Iictitious orders in an eIIort to keep the bottlenecks busy. That will Iree up twenty
percent capacity, which translates in to market share.
Chapter Thirty-Eight
Talking with the head oI sales. Alex Iinds out that there is a market order to Iill the
capacity. It`s in Europe, so selling Ior less there will not aIIect domestic clients. II
it can be done, will open a whole new market. Then Alex ponders Jonah`s
question, to determine what management techniques should be utilized. Alex
determines how a physicist approaches a problem. Maybe this will lead to an
answer.
Chapter Thirty-Nine
Alex experiences a problem at the plant. It seems all the new orders have created
new bottlenecks. AIter analyzing the problem, they agreed to increase inventory in
Iront oI the bottlenecks an tell sales to not promise new order deliveries Ior Iour
weeks, twice as much as beIore. This will hurt the new relationship between sales
and production, but it is needed. Production is an ongoing process oI improvement,
and when new problems arise they need to be dealt with accordingly.
Chapter Forty
Finally, struggling with the answer to Jonah`s question, Alex comes up with some
questions on his own: What to change? What to change to? How to cause the
change? Answering these questions are the keys to management, and the skills
needed to answer them are the keys to a good manager and ultimately the answer
to Jonah`s question.