Discrete event simulation

Introduction

A few years ago Eliyahu Goldratt visited Alcatel Bell Telephone Manufacturing in Antwerp. Nowadays the company is part of Alcatel-Lucent Bell The purpose of the visit was to discuss the company’s profitability issues. In a meeting with the management of the company his first question was: “What is the goal of your manufacturing organization?” Several ideas and opinions were brought up by the members of the management. The only answer that everybody agreed upon was: “The goal of a firm is to make money and be profitable”. Without that goal a company’s existence is in danger. There are several financial tools for the Chief Financial Officer to measure this goal. The most important are net profit, return on investment and cash flow. But how can a Chief Operation Officer decide and act in order to improve these financial goals? Goldratt answers this question with his Theory of Constraints.

He defines a series of operational measures:

1. Throughput: Throughput is the rate at which a system generates money through sales or any other type of selling activities.
2. Inventory: Inventory is the monetary value of the goods that are still in the system and which a company intends to use in its processes in order to sell their products.
3. Operational Expense: Operational expense is the monetary value of the expenses of the system in order to turn inventory into throughput.

Goldratt explains to the management that they should use these measures to reach the Goal as follows: “Increase throughput while simultaneously reducing inventory and reducing operating expenses”