The first point of common sense it comes to is the goal of any business. In its simplest form, the goal of every business should be to make money. This gets elaborated on more in the statement: The goal is to make money by increasing net profit while simultaneously increasing ROI and simultaneously increasing cash flow. This is done through these areas:
- Throughput: the rate a system generates money through sales. This is your money coming into the system.
- Inventory: all the money that the system has invested in purchasing things which it intends to sell. This is money stuck in the system.
- Operational Expense: All the money the system spends in order to turn inventory into throughput. This is the money going out of the system.
While all of this will likely make sense to anyone in business, the even more valuable lesson learned within the book is the importance of measuring these three areas and NOT worrying so much about irrelevant measurements, which is pretty much every other measurement we seem to use. Examples of what not to measure in manufacturing seemed to focus around efficiencies and keeping people busy while in software, it would be common measurements such as lines of code written per hour or a daily defect fix rate. While I have no doubt people will quickly disagree with this concept, the genius of the book is showing just how important these measurements are.
Once Alex and his team come to understand this, they then delve into managing by the theory of constraints which, after realizing the above, focuses on
- What to change.
- What it has to change to and
- How to change it.
The book is very effective due to its readability and common sense approach and definitely worth a read.
Written by Eliyahu M. Goldratt and Jeff Cox
Goldratt`s site, while advertising his consulting and services also has a number of good free resources on the theory of constraints and more.
