The Pareto Principle is a tried and tested management technique that aids you in decision making by using the 80/20 principle. What’s the 80/20 principle? It is an idea that a limited number of activities/causes can generate 80% of the value/issues
Some examples –
- 20% of your customers generate 80% of the revenue
- 20% of your products cause 80% of the customer complaints
- 20% of your sales force generate 80% of the sales
- 20% of a bill of materials will account for 80% of the total part cost
Used correctly this technique helps you focus – with laser like precision on the facts that matter – Pareto can be used almost everywhere and anywhere and Supply Chain professionals can really benefit from its application.
The principle behind how you use Pareto is fairly simple – in our example we’re investigating late deliveries by our suppliers – we have 600 suppliers and we have their annual deliveries, their late deliveries and we’ve calculated a percentage late figure – we’ve created a table of the results formatted as below .
|Supplier Name||Total Deliveries||Late Deliveries||% late||Cumulative % late|
Carrying out Pareto Analysis
First gather you data and summarise (as in the above example)
- Sort your table in descending order of the issue your investigating (in our example by number of Late Deliveries)
- Add a Cumulative % column for your issue
- On your table/list draw a line at 80%
- The Items in your list which add up to the 80% are typically the primary causes the ones between the 80-100% are the less important causes.
3 Key uses of Pareto Principle in Supply Chain
Here’s our three top three tips where to use Pareto
1/ Improving your supplier delivery schedule adherence
As in our example above – Pareto is an excellent tool when analysing supplier performance and deciding on your management strategy – which suppliers to focus on and what route causes to eradicate.
2/ Applying appropriate inventory management controls through ABC Analysis
Applying Pareto principles and methods to your parts when conducting ABC analysis. All parts are not equal – you don’t manage 5 cent screws the same way as a $50,000 part different ordering and inventory management techniques. ABC is used as a method to segment your parts/inventory allowing you to manage each appropriately. Click here for more on ABC analysis
3/ Cost Savings initiatives
Using Pareto techniques to analyse cost drivers within your organization can help you focus on the key contributory factors such as Suppliers, Parts or Bill of material elements allowing you to focus your improvement activities on the parts that matter.
These are just 3 examples of how you can use Pareto in the supply chain – if you have your own thoughts please contribute in the comments section below.