To achieve the mentioned overarching low-resolution goal, an organization has to operationalize this. One of the major tenets of TOC is that this is done through three global performance measures.
In the aftermath of the concretizing of the company’s goal in “The Goal – A process of Ongoing Improvement” (Goldratt, 1984) the main character deduces two sets of global performance measures; one set financial performance measures (FGPM) to tell if the manufacturing company is underpinning the goal seen from the financial perspective and one set with operational global performance measures (OGPM) to tell if the manufacturing company is underpinning the goal seen from the purely operational perspective.
The following subsections will first go through and explain the FGPM, then the same for OGPM and lastly the relation between them will be presented and summarized. The measures
40 will here be presented as in the context that the book presents, i.e. of a traditional pure manufacturing company.
The Financial Global Performance Measures (GPMs)
The GPMs is a first level derivation of the global. The reason for having them is to express the goal in a more concrete manner and tell what to do in order to move towards the agreed upon goal. Following is a list the explanation of the three financial global performance measures cash flow, net profit, and return on investment.
Figure 4.10 – The financial global performance measures (FGPM) cash flow, net profit, and return on investment in combination serve (in sum) as proxies for the goal in the financial roam for the
overarching goal.
Cash Flow (CF) – Is what money is realized through the sales of products, i.e., revenue. It would be the normal condition for a company to generate sufficient cash flow in order to manage the short-term expenses. However, if this is not true, the company can’t make the necessary short-term investment to pay for workers, inventory (i.e., the current expenses). Put another way; this is available capital for the further short-term operation of the factory. Bad CF is what kills most of the companies that go under (Goldratt, 1984). Cash flow is generated by sales of processed raw materials, and it may be decomposed into two subcomponents; selling price and quantity sold.
Net Profit (NP) – From the pre-supposition that the goal is to maximize the profit we can by this logically say that every amount of money in is a contribution towards the goal. To even be on the path of maximizing profit, one also need as a pre-requisite to have a positive net profit.
This means; selling the products made for more than what was paid for making it (NP =
41 Revenue – Expenses alternatively; NP = T – OE). NP serves as an indication of the total revenue is greater than the total expenditures.
Return on Investment (ROI) – To tell how “good” we have accomplished the fundamental measure, net profit, we evaluate it concerning the what invested in the making that profit. This measurement is giving information on “how good” the performance is given what was invested in making it. In other words, how effective is the investment given the operation of the production (ROI = NP / I).
Summary of the FGPM
The FGPM seems quite trivial to figure that is in the best interest of the company. However, what is not so obvious is the fact that these are the only measures a manufacturing company has to know in order to evaluate if the company is moving towards its goal or not. Even if only one of them is improving while the other is ,held fixed, the company is then doing better, according to TOC.
The Operational Performance Measures
Just as the FGPM, the OGPM serves collectively as a proxy for the goal into the roam of operations of the manufacturer.
Figure 4.11 – The operational global performance measures (OGPM); throughput, operational expenses, and inventory in combination, serve as proxies in the operational roam according to the
overarching goal.
Throughput (T) – In the case of a manufacturing business, throughput is the measure of finished products produced that gets sold to a customer. The important word here is “sold”; as long as the product gets produced (or partially produced) but lies around in along the production line
42 or in the storage and do not have an intended paying customer, it is not to be regarded as a step in the positive direction according to the goal. Depending on the situation, it will be counter-productive cf. the goal, as it will cost workmanship to place it into storage. The unsold units will lower all of the GPM’s and hence do the business further away from its goal. Throughput expressed as a rate within a predefined time interval and can be decomposed into the number of units and the sale price (e.g., x-USD a day, month, etc.) and is calculated as sales minus variable cost (OE).
Operating Expense (OE) – Jonah puts this measure concisely in “The Goal” where he explains that OE is all the money that is used to turn the inventory into throughput (Goldratt, 1984).
Inventory (I) – Is “[the cost of] everything that the system has invested in purchasing things which it intends to sell” (Goldratt, 1984), i.e. the cost of the work-in-progress on the assembly-line and whatever work-in-progress that might be kept in the at the assembly assembly-line or ingoing or outgoing stock. This is heavily dependent on how the factory is configured; however, it is in the interest to minimize this to the lowest practical point.
Summary of the Operational Global Performance Measures
These measures explain how the business should go about put in operational terms. The claim is that everything that one can manage in the factory, in relevance to the goal, is covered by these three measures (Goldratt, 1984, p. 67). Throughput is preferred to be raised everything else fixed, inventory is preferred to go down everything else fixed, and operating expenses are preferred to go down everything held equal.
Summary of the FGPM and OGPM
In “The Goal” (Goldratt, 1984), it is claimed each one of the sets (FGPM and OGPM) can function as the governing independently. However, FGPM is explained in terms easier understood by the financial manager, and OGPM is easier understood by the job-shop manager.
Reverting back to the system view (illustrated in two versions SUBCHAPTER 4.1 and 4.2), the following figure illustrates this claimed isomorphic relation:
43 Figure 4.12 – The two sets (FGPM and OGPM) has an isomorphic (i.e., they tells the same only in
two different perspectives) relation of according to the system.