Many people in business are familiar with the Pareto 80/20 Rule, particularly the idea that 80% of their business comes from just 20% of customers or clients, or that 80% of their profits comes from 20% of orders, or that 80% of their profits come from 20% of products, or even that 80% of their sales are generated by 20% of their sales staff.
Understanding this can influence behaviour such as protecting the 20% that contribute the most or looking at how to improve the lower performing 80%.
Essentially the Pareto 80/20 Rule is simply a way of demonstrating that most things in life are not distributed evenly.
This can apply to everything but focuses on considering productivity as an output of time spent or as a return on investment. It looks at resources, in terms of people, time and cost with a view to optimising the output. Analysis of turnover and profits by customer, market segment and products to produce a pie chart is likely to highlight aspects of the Rule.
The 80/20 Rule is a guide that can be misused, While 20% workers may be measured as doing 80% of the work this rarely means that the work of remaining 80% is irrelevant. Indeed, it may be that 20% contribute to profitable work while 80% are necessary for the 20% to be productive. It does however show where to focus on improvements.
So how can businesses use the Pareto 80/20 Rule to improve their businesses?
To a large extent this is about identifying the processes, systems or activities on which to focus because they have the best potential for a return on the effort.
You might focus attention on customers perhaps with view to selling more to your best customers or to improving sales to the 80% with view to generating the same level of return as the 20%. This might be putting prices up or selling different products or even turning away unprofitable business or customers who are hard work.
You might focus on staff perhaps with a view to measuring and improving their working practices that in turn improve productivity. Can one person be trained to do several jobs? Or should teams be reorganised or shift patterns altered? Sales and delivery may benefit from reorganising those geographical or market segments for which they are responsible.
You might focus on your products and production. Do you reduce the number of suppliers or the stock held or number of products sold. Can one product replace several existing products? Should you outsource the manufacture of components?
The Pareto 80/20 Rule is, in short, a handy guide to where you might focus your attention for improvement, it should not be regarded as a fixed and immutable rule.
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