The Goal and the Theory of Constraints
I was recently having a conversation about metrics and KPIs in a company, with the aim of finding out the things important to the company and ultimately designing an objective function for the business. This objective function is then used to determine which factors are important for the success of the business and therefore can result in the design of a closed-loop control system that can serve as a way to run and optimize the business. In the course of this conversation, the other person asked me if I had read The Goal, and I replied that I had not. They recommended it because it covers topics like the purpose of a business, how to find things to optimize, and what kind of process can be used for such optimization.
Given my interest in such topics, I went directly to Amazon and ordered a copy of The Goal and the related book titled *What Is This Thing Called Theory of Constraints. When reading a book like The Goal it is important to keep the book in context. After all, it was released 30 years ago and times have changed since then. For its time though, I’m sure it was disruptive to standard management thinking.
Wikipedia describes the book as a management-oriented novel with a focus on describing the Theory of Constraints, bottlenecks, and how to alleviate them. There is also a thread running through the book emphasizing the importance of the Socratic method in problem solving and discussion, a method which I have also found to be useful throughout my career. Most business-focused books I read tend to take far too long to emphasize the point, which is why I typically find a summary to be more useful than reading the whole book. While there are a few exceptions to this, The Goal at nearly 400 pages is not one of them. The process outlined in the book is relatively straightforward.
Identify the most problematic constraint(s)
Make decisions and take actions that allow the constraint(s) operate more effectively
Keep those decisions top priority
Find further ways to increase throughput at the constraint(s)
When the biggest constraint has been eliminated, start the process over again with the new highest priority constraint. Also, don’t let historical process or procedure become a blocker as constraints are removed.
Depending on your background, this overall approach may be nothing new at all. For people coming from a distributed systems background or stream processing background, this is almost exactly the process used to optimize the throughput of a stream-based data processing system. The system will only be able to process data as quickly as the slowest component, so constantly profiling to find the slowest component and then focusing effort on improving that is standard procedure. After all, the system is only as fast as the slowest component, so focusing effort anywhere else simply does not make sense unless you’re in the mode of completely changing the system architecture.
The Theory of Constraints could simply be described as the process of repeatedly identify the thing that’s slowing you down, and making it faster. While this is a sound approach to optimizing business, data processing pipelines, and other things, I don’t think it requires 400 pages to adequately explain.
At the time The Goal was released, and certainly in the time since then, there were and are many other methods for production management and process optimization. In addition to intuitive approaches that had been developed over longer timescales, there were also the more rigorous approaches of statistical process control which had been around since the 1950s. The fact that plenty of other systems exist, some of which with more rigorous evidence of success, isn’t discussed in The Goal but does receive some focus in the book What Is This Thing Called Theory Of Constraints. This book provides a much more compact introduction to the Theory of Constraints than The Goal, but sadly is largely padded with some articles from the now-defunct Journal of Theory of Constraints. It also seems to be selling sessions and seminars offered by the author’s company.
One thing that is noted repeatedly in The Goal but doesn’t receive enough attention is the problem of what is being measured and why. Specifically, the problem of performance being measured against metrics that are not relevant to the business. In the book, this takes the shape of people being measured against efficiency metrics for particular components instead of overall revenue metrics for the business, and therefore possibly being penalized for what appears on paper to be a decrease in efficiency but regardless results in an increase in sales. This kind of dissonance is something I have personally encountered many times in my career, usually in the context of a supervisory board or board of directors that enforces goals or metrics for executives which are totally detached from the success of the business.
A recent article in Harvard Business Review entitled Where Boards Fall Short specifically addresses the topic of board members not understanding the business and therefore giving direction and applying pressure to executives to achieve short-term financial goals instead of long-term business success.
A mere 34% of the 772 directors surveyed by McKinsey in 2013 agreed that the boards on which they served fully comprehended their companies’ strategies. Only 22% said their boards were completely aware of how their firms created value, and just 16% claimed that their boards had a strong understanding of the dynamics of their firms’ industries.
It’s bad enough of course if your board doesn’t understand how the company’s industry works, but it’s worse when that lack of understanding is translated into an emphasis on simple short-term financial metrics.
More recently, in March 2014, McKinsey and the Canada Pension Plan Investment Board (CPPIB) asked 604 C-suite executives and directors around the world which source of pressure was most responsible for their organizations’ overemphasis on short-term financial results and underemphasis on long-term value creation. The most frequent response, cited by 47% of those surveyed, was the company’s board.
As a data professional, a big part of the job is helping companies and boards to understand business dynamics, how to collect data on those dynamics, and what kinds of incentives make sense in order to encourage the kind of growth the company needs. If senior executives or boards are focused on irrelevant metrics, or do not have an understanding of the business and therefore focus on only financial metrics, then everything else is put to the side to the detriment of long-term business success. Measurement and how people are incentivized is a topic for another post, and definitely could have received more emphasis in The Goal. After all, it doesn’t matter if you improve the right things only for management to fire you because they don’t understand the business anyway.
The Goal is a good book to read, provided you do not have a background in other management or process approaches, or any background in queueing theory or designing high-performance data pipelines. If you already have experience in those areas, the ideas in The Goal may seem quaint and dry to you, and the book will seem too long, involved, and slow in explaining things with which you are already familiar. The process overall is a sensible one, and should be studied in the context of other methods like JIT, TPS, Kanban, and so on.
The overall lessons in the book are good ones, though it should be noted that the topic of properly defining and analyzing metrics for the business gets a lighter treatment than it should. For that reason, I would also recommend reading something like Lean Analytics by Croll and Yoskovitz to get a feel for how analytics inside a company can look. The approaches there can help guide the implementation of effective analytics and measurement programs inside companies, and hopefully can also provide ideas for helping management understand how to measure the things that matter. In a world where most boards do not understand how the business works or what kind dynamics indicate business growth, no good deed goes unpunished.