Pareto’s Principle – The Swiss Army Knife of Management

by James P. Tate on December 7, 2012

Everyone has a favorite tool (like a Swiss Army knife) that seems to be the first one we reach for when there is something to be fixed.  It’s the same way in management!  When faced with new challenges and problems, I look for my Pareto Principle to help me decide how to handle the problem.

Simply stated, the Pareto Principle or Law states that 80% of the results are caused by 20% of the actions.  This can be applied in various ways:

  • 80% of your sales revenue comes from 20% of your customers.
  • 80% of the mistakes come from 20% of the machines or workers.
  • 80% of the customers use the same 20% of the product features.
  • 80% of the inventory value comes from 20% of the part numbers.

This handy Rule can be applied to a wide range of situations.

This rule was first formulated in 1904 by Vilfredo Pareto, an Italian economist.  Pareto noted that 80% of the wealth of Italy was held by only 20% of the population.  In the 1940s Dr. Joseph Juran, a pioneer in quality management, referred to the “vital few and the trivial many”.  Because Juran’s writings seemed to apply the economic principle of Pareto to a wider discipline, the 80/20 Rule became known as “Pareto’s Principle” or “Pareto’s Law”.

In statistical terms Pareto observed that most things in life are not evenly distributed.  Some things contribute more than others.  This observation is very important in management. As managers we are all faced with the issues of applying limited time and resources to a broad range of problems.  If you can identify the “vital few”, you can apply your scarce resources to this small group and achieve a greater return on the resource investment.  Looking at the examples above, if 80% of your sales revenue comes from 20% of the customers, you may wish to devote more time and resources to these select customers.

If you can identify the small number of machines that cause most of your failures or quality problems, you can address those machines first and achieve a stronger reduction in the failure rate.

If 80% of your customers are using 20% of the product features, you may want to devote more production resources to manufacturing these features.

In inventory management, you may want to spend more time and effort monitoring the small number of SKUs that are the most costly.   This idea was addressed in the November 2012 e-bulletin.

In every case you will find it more economical in terms of time, money and resources to direct your efforts to the small number of incidents that contribute the vast number of results.

Homework Assignment:  Look at a particular issue or problem that you face in your work.  Break down the results in terms of the causes.  See if the 80/20 rule can be applied (sometimes it is a 70/30 or 90/10 distribution).  Then focus your time and resources on the small number of causes.  You will be pleasantly surprised at the results of this analysis.  If you have questions or problems applying this rule, contact us at jptate@cogentmr.com.

Good Luck!

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