Summary
The revised and third edition of the book, “The Goal” only proves its relevance in terms of the current principles in management, specifically in manufacturing. The scientific process shown by this book is that the authors are able to logically and consistently think about their problems and identify the "cause and effect" relationships between actions and the outcomes. In the process, these authors, Goldratt and Cox, have deciphered some organic principles which they used to make their manufacturing plant work.
The recurrent theme in the book is the understanding of the whys of things and how to achieve the ultimate objectives in our personal and professional lives. The gist of the story is about the problem of the Plant Manager of Uniware, Alex. He needed to turn around his manufacturing plant in three months. He took guidance from his colleague Jonah, a physicist. Jonah enabled Alex to simplify his problem by analyzing the situation of Uniware. This finally led to the ultimate question of the company’s goal. Alex internalized it to be that of making profits. Hence, he was able to simplify that any actions which would increase the company’s income would mean the solution and the realization of the company’s goal. On the other hand, he considered any action which does not produce this expected outcome as counter productive.
Through the narrative, the authors were able to simply explain the principles behind managing a manufacturing plant. They made generalizations about how a plant works, which elements make it works (i.e. inventory, operational expenses, sales, etc.), how a balance in production process can be achieved, where the bottle necks come from, and how personal lives can affect the management of a manufacturing plant.
Criticisms
I believe that this oversimplificatin of things is applicable to the manufacturing plant and this is what makes the book very convenient and relevant for its millions of readers. Manufacturing is very scientific and the production line is a simple process once it is best studied and understood, in terms of how it works and produces the intended results or products. While this is a very staright forward problem solving process, it seems too simplified for the challenges in business services, education and good governance of today’s organizations.
The validity of this exercise is not totally applicable in the above-mentioned fields. For instance, in other management problems and challenges, the simplified process of knowing the goal of the company (i.e. to make profit) is not sufficient to determine the solutions to its problems. There are various principles at present which need to be considered aside from the traditional goal of business organization to make profits.
The company I will discuss is Apple, Inc. One special situation which the lessons of “The Goal” can be applied to dramatically enhance its performance is in its subcontracting to OEMs. Apparently, the 100% dependence of Apple to its OEMs and overseas factories (which produce and assemble its products) is sometimes problematic. (Thompson, Strickland & Gamble, 2010) Apple is not fully in control of the procurement even if it implements a complete and rigid sourcing policies and rules.
Supplementary to this problem is that these OEMs, which earmark its profits by producing more with less operational costs, will constantly reduce Apple’s input costs to increase its margins. Another consideration is that any incident in its OEM production and quality will greatly affect its brand and sales performance. Apple customers might not buy the Apple products when they see the glitches in its features or overall quality. The premium prices of the Apple products will then be reduced.
Apple can make use of the book’s Theory of Constraints (TOC) to address these two major problems. While this theory was originally a manufacturing method, it can apply to product and operations management. Apple can use it to powerfully systematize the problem and develop solutions using logic and analysis.
Initially, the various measures to analyze cause and effect in its OEM dependence can be applied. These include lead-time, cycle time and due date performance. In analyzing each and every factor, various standards for OEMs can be concluded. (Atwater & Chakravorty, 1995) Apple, Inc. can adopt TOC with special focus on these three factors. This, in turn, will reduce problems with OEMs and promote the smooth flow of production even if it is outsourced.
The theory’s distribution solution can be effectively used to address a weak link in the outsourcing supply chain and generally over the entire production system, even if this system is made up of various OEMs supplying Apple of different smart phone and tablet product components. The goal of this distribution solution is to create a strong competitive edge which rests on the unique availability. This is made possible by the dramatic reduction of substandard and damaged products when the production system is interrupted by surpluses and/or shortages. (Steyn, 2000)
This approach applies various new rules to protect availability with reduced inventory than is traditionally required. Hence, Apple, Inc. Shuld redefine its production schedules and replenishment time. (2000, p. 365) Replenishment Time (RT) is the totality of the delay. It is measured after the initial consumption after a product delivery and before an order is made in addition to the delay after the order is placed until the ordered goods arrive at the location of orders.
With the Theory of Constraints, the folowing processes will be implemented:
1. Inventory is conducted at an aggregation centers nearest to the headquarters of the surce, as much as possible. This approach allows the smooth operations at the aggregation centers. This also requires lesser inventory. The distribution centers which now carry the aggregate stocks ship goods downline to the next link in the supply chain in a faster way than the make-to-order manufacturing. By following this rule, instead of applying a make-to-order manufacturing, Apple, Inc. will apply the make-to-stock manufacturing. The incremental inventory at the aggregation centers are greatly reduced than the downline inventory.
In all of the locations of the stocks, initial inventory allowances are set. This effectively allows an upper limit of the stock inventory at that point. The size of this allowance is equal to the optimum expected consumption within the regular RT. There are also additional stock to serve as extra buffers, in cases when there is a late delivery. In sum, there is zero advantage in maintaining more inventory in a stock location compared to the actual amount that may be consumed before more could be ordered and delivered. Often, the sum of the actual value of such alowances is between 25 to 75 percent less than the current and average inventory levels.
2. After the allowances have been reset, Apple cannot place any replenishment orders so long as the already ordered but not yet received stocks or “quantity inbound” in addition to the actual quantity at hand are equal to or greater than the allowance size. By implementing this rule, Apple, Inc. will not have any inventory surplus to be consumed.
3. In some cases, when the actual and the inbound inventory is less than the allowance stocks, orders are instantly placed to increase inbound inventory in such a way that the buffer is maintained in the relationship equated as: On Hand + Inbound = Buffer.
4. To maintain the size of the stock allowance appropriately even when there are changes inthe rate of demand and replenishment, a simple recursive algorithm referred to as “Buffer Management” is applied. When the actual inventory level on hand is in the upper third of the buffer for a complete RT, the alowance is reduced by a third. This is a very important rule. On the other hand, when the actual inventory at hand is in the bottom one-third of the allowance for quite some time, the stock allowance is increased also by a third. This is also an important rule. The definition of “too long” may be altered based on the needed levels of service. However, as a general rule of thumb, 20% of the RT is usually applied. Changing stock allowances up more instanty than down is supported by the often greater damage caused by stock shortages than the damages caused by inventory surpluses.
Once Apple, Inc. is able to manage its OEM parts as detailed above, sustainable efforts must be undertaken to lessen RT, delayed deliveries, supplier minimum order quantities, and customer batch orders. Any developments in these aspects will automatically enhance both the availability and inventory turns due to the adaptive nature of managing stock allowances.
A stock center which maintains inventory according to the Theory of Constraints TOC) must help a non-Theory of Constraints client (downline link in the supply chain, both internal or external) manage their inventory based on the process of the Theory of Constraint. This type of support can be in the form of a vendor managed inventory (VMI). The TOC distribution outlet basically extends its allowance size and management techniques according to its clients’ inventories. By applying this, the demand from the clients are smoothen. It also reduces the order size per SKU.
The outcomes of VMI are improved availability and inventory turns for the suppliers (OEMs) and the clients. Aside from this, there are advantages accrued to the non-TOC clients which are enough to meet the goal of capitalizing on the decisive competitive advantage by providing the client a powerful reason to remain loyal and give more business to the upline channel. This supply chain is advantageous since the final consumers buy more as the overall supply chain sells more.
There is also a downside to this process. Sometimes, the supply chain or any of its specific link may have reduced sales. However, this may be a temporary situation. The instant sales improvement due to enhanced availability of supply is a countervailing element. The immediate levels of shortages and surpluses fill up each other.
Another problem is Apple’s alledged less serious attention in replacing its energy utilization with the use of alternative energy sources to support its data centers. (Garside, 2012) The Greenpeace Report reported Apple’s major sourcing of its electricity needs from coal. It was alleged that the company’s major data center situated in Maiden, North Carolina gets most of its power from a coal plant called Duke Energy. This plant has also reported that it sources most of its energy from cleaner nuclear energy. (2012, p. 1)
This was a highly negative publicity for Apple especially in the very competitive industry such as the smartphone and tablet industry. Public image is a very critical element for technological companies. For being an industry leader, image is very, crucial to Apple and this socially relevant environmental issue must be resolved as soon as possible. Apple, for sure, intends to show itself as a very ethical and socially responsible organization in all its business terms.
Apple can adddress this using the concept used in bottle necks. This energy constraints in its manufacturing process and how its impact can be reduced yields to the book’s useful tool for measuring and controlling the system of production. Apple, Inc. must be able to identify the bottlenecks in energy replacement process and instantly start to implement changes to help quickly change it to a more sustainable one.
This problem can also be addressed using the Evaporating Cloud thinking process, one of the six thinking process in the Theory of Constraints. The cloud gives a means by which both sides of the conflict will be able to do something that has not been done before. When both parties are ready, able and committed to look at the conflict in both ways, a resolution is often found.
Through the Evaporating Cloud, Apple can find a solution to conflicting views about their use of alternative energy. The method needs its managers to find a “win-win” solutions to this ecological problem while targeting their original goal/s. (Goldratt & Cox, 2004)
Apple executives can explore both sides of the conflict. They can do situation evaluation, description of the present reality in terms f energy use, and identify the core problem or conflict and assumptions that sustain it. After this, a clear diagnosis can be deduced.
After diagnsis, the changes which need to be done become evident. This is because there was a verbalization of vision/solution and discussion of the strategy to go to the desired state. The process applie here is prescription, decision making and development of a solution. Evaporating Cloud serves to determine an out-of-the-box initialization point.
References:
Atwater, J.B. & S. Chakravorty. (1995). Using the Theory of Constraints to guide implementation of quality Improvement Projects in Manufacturing Operations. International Journal of Production Research, 33 (6). p. 1761 – 1784.
Garside, Juliette. (March 30, 2012). Apple's factories in China are breaking employment laws, audit finds. The Guardian Website. Retrieved on August 25, 2012 from, http://www.guardian.co.uk/technology/2012/mar/30/apple-factories-china-foxconn-audit.
Goldratt, Eliyahu M. & Jeff Cox. (2004). The Goal: A Process of Ongoing Improvement. Great Barrington, MA.: North River Press.
Steyn, Herman (2000). "An Investigation Into the Fundamentals of Critical Chain Project Scheduling.". International Journal of Project Management (19): 363–369.
Thompson, A., Strickland, A., & Gamble, J. (2008). Crafting and Executing Strategy: The Quest for Competitive Advantage. 17th ed. New York: Mc Graw Hill.
