Excerpted from Goldratt, Eliyahu M. and Cox, Jeff, 1951, "The Goal", Gower Publishing Co. Ltd., England, pp59-60.
"What kind of measurements are those?" I ask.
"They're measurements which express the goal of making money perfectly well, but which also permit you to develop operational rules for running your plant," he says. "There are three of them. Their names are throughput, inventory and operational expense."
"Those all sound familiar," I say.
Yes, but their definitions are not," says Jonah. "In fact, you will probably want to write them down."
Pen in hand, I flip ahead to a clean sheet of paper on my table and tell him to go ahead.
"Throughput," he says, is the rate at which the system generates money through sales."
I write it down word for word.
Then I ask,"But what about production? Wouldn't it be more correct to say--"
"No," he says. "Through sales - not through production. If you produce something, but don't sell it, it's not throughput. Got it?"
"Right. I thought maybe because I'm a plant manager I could substitute--"
Jonah cuts me off.
"Alex, let me tell you something," he says. "These definitions, even though they may sound simple, are worded very precisely. And they should be; a measurement not clearly defined is worse than useless. So I suggest you consider them carefully as a group. And remember that if you want to change one of them, you will have to change at least one of the others as well."
"Okay," I say warily.
"The next measurement is inventory," he says. "Inventory is all the money that the system has invested in purchasing things which it intends to sell."
I write it down, but I'm wondering about it, because it's very different from the traditional definition of inventory.
"And the last measurement?" I ask.
"Operational expense," he says. "Operational expense is all the money the system spends in order to turn inventory into throughput."
"Okay," I say as I write. "But what about the labor invested in inventory? You make it sound as though labor is operational expense."
"Judge it according to the definitions," he says.
"But the value added to the product by direct labor has to be a part of inventory, doesn't it?"
"It might be, but it doesn't have to be," he says.
"Why do you say that?"
"Very simply, I decided to define it this way because I believe it's better not to take the value added into account," he says. "It eliminates the confusion over whether a dollar spent is an investment or an expense. That's why I defined inventory and operational expense the way I just gave you."
"Oh," I say. "Okay. But how do I relate these measurements to my plant?"
"Everything you manage in your plant is covered by those measurements," he says.