The 80/20 Strategic Tool
Chip Evans, Ph.D.
Nancy Thorn
Malcolm McAlpine
Brian Wax
Amongamyriadoftheoriesandmanagementpracticesusedinbusinesstoday,the80/20Rule
continuestostandoutasoneofthesimplestandmoste...
Often criticized for being after-the-fact or not relevant for today’s fast-changing
business environment, the 80/20 tool i...
Simple, Powerful Tool
Effective analytical theory for business
management
Uncovers impact drivers of the business (the
dev...
History of the Principle
In 1906, Italian economist Vilfredo Pareto created a
mathematical formula to describe the unequal...
Brief Description of The Rule
What it is
Cause and effect theory
Identifies issues and opportunities
Can be a “search flar...
Classic Representation
0%
25%
50%
75%
100%
0
20
40
60
80
100
shrink porosity weld LOF shell inclusion hard alpha
inclusion...
Application of Pareto Principle
Identify a problem/quality issue
Identify data, create testable case with metrics,
intervi...
Some Likely Scenarios
80% of revenue derived from 20% of customers
20% of products generate 80% of profit
20% of sales for...
How does 80/20 work
Identifies what makes impact or yields positive results
Helps business build on what’s working and imp...
Common Objections
Controversies
Not relevant for today
Always in the past, hindsight
Business moving too fast today to be ...
Expected Results
While implementing an 80/20 program is not a panacea
for all the problems at a company, it can help solve...
Example: Implementation and Results
LargeDairyCompany
Study in mid-2010 showed that out of 700 direct buying customers,
10...
Example: Implementation and Results
LargeConsumerGoodsCompanyOperatingintheFoodandBeverageChannel
Away From Home business ...
Industrial Application
Materials management
Fault detection (field or MFG)
Revenue verses effort
Focus on resource managem...
Quality Measure or Strategy
It is post-facto current state
Provides light and focus on problem against past
performance
It...
Define, Measure, Analyze,
Improve, Control
In process and post facto metrics
Define in process metrics (SPC)
Measure both ...
Addressing the “other parts”
With greater visibility of lesser performing areas, there
are opportunities to develop potent...
Making the 80/20 Rule Effective
80/20 is counterintuitive
Recognizes all causes do not have the same significance, all
cus...
Formoreinfocontact: www.theevansgroupllc.com
www.theevansgroupllc.com 20
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The 80/20 strategic tool

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The 80/20 strategic tool

  1. 1. The 80/20 Strategic Tool Chip Evans, Ph.D. Nancy Thorn Malcolm McAlpine Brian Wax
  2. 2. Amongamyriadoftheoriesandmanagementpracticesusedinbusinesstoday,the80/20Rule continuestostandoutasoneofthesimplestandmosteffectivetoolstounderstandtheunderlying dynamicsofabusiness. OftencalledPareto’sPrinciple,orLawofTheVitalFew,thissimpleexercise canhelpuncoverkeyareasofabusinessthatdriveperformanceobjectives,whileatthesametime revealingareasthatmaybeunder-performingornotsignificantlycontributingtotheoverallsuccess metricsorKPI’s. Thepremisebehindthe80/20toolisderivedfromcauseandeffecttheory,orsimply,whatand wherearetheareasofthebusinessthatarecreatingthemostpositiveornegativeimpact. Asthis processofidentificationofimpactevolves,bothareasofthebusinessthathavemoreorless significantimpactbegintobecomeveryevident. Utilizingthe80/20methodoftenrevealsaminority ofcomponents(products,programs,customers,processes,etc.)thatareyieldingthemajorityof impact(marketshare,profitability,revenue,etc.) Forexample,20%ofanorganization’sproducts maydeliverover80%oftherevenue,or80%ofincomeisderivedfrom20%ofthecompany’s servicesorcustomerbase. Inrealworldapplication,thetheoryrarelyresultsinadditivemath-for example,10%ofthebugsinasoftwareprogrammaybethecausebehind50%ofcustomer complaints-yettheprinciplestillappliesforuncoveringdriversofperformanceandareasofthe businessthatareunderperforming. Abusinesscanhave100%shareinaverysmallmarket,but delivermoretothebottomlinewitha20%shareinalargermarket.The80/20toolcanuncoverand provideinsightsintoirregularitiessuchasthis. www.theevansgroupllc.com 2 Introduction
  3. 3. Often criticized for being after-the-fact or not relevant for today’s fast-changing business environment, the 80/20 tool is still one of the most effective methods to understand what is happening within a business that creates either a positive or negative impact. Certainly not intended as a universal panacea to solve day-to-day problems, the practice on an ongoing basis, can serve to strengthen and support an organization’s ability to compete more effectively. Not only identifying key drivers of the business, but uncovering areas of lesser impact that have potential to deliver more, is the key benefit of using the 80/20 tool. Whether it’s a sales team that needs additional training, a process that can be refined to be more efficient, a service where costs can be reduced, or a product that can be reformulated to deliver more features to the customer and margin to the business, the 80/20 process aids in identifying areas that have untapped potential. On the other hand, the exercise can also reveal those segments of the business that need to be cut, sold, or otherwise disposed of, and that, by doing so, stops the drag on the other, impact-producing areas. Making the 80/20 tool a best practice can aid businesses of any size to identify key factors to build on, develop, or reduce. This will result in more efficiency, more margin, more satisfied customers and more sustainability to survive in today’s digital and global business world, where companies are faced with constantly adapting to emerging forces and competitive threats. www.theevansgroupllc.com 3
  4. 4. Simple, Powerful Tool Effective analytical theory for business management Uncovers impact drivers of the business (the devil is in the detail) Supports understanding and improving Aids in strategic development Still relevant and widely used Can align with today’s more modern data mining, analytical programs, dashboards, etc. www.theevansgroupllc.com 4
  5. 5. History of the Principle In 1906, Italian economist Vilfredo Pareto created a mathematical formula to describe the unequal distribution of wealth in his country, observing that twenty percent of the people owned eighty percent of the wealth. In the late 1940s, Dr. Joseph M. Juran inaccurately attributed the 80/20 Rule to Pareto, calling it Pareto's Principle. While it may be misnamed, Pareto's Principle or Pareto's Law as it is sometimes called, can be a very effective tool to help you manage effectively www.theevansgroupllc.com 5
  6. 6. Brief Description of The Rule What it is Cause and effect theory Identifies issues and opportunities Can be a “search flare” Creates focus on impact areas What it is not May be 30/70, 40/60, not additive math, imbalanced distribution Not intended to solve all day-to-day problems Will not act as universal panacea for all business ills www.theevansgroupllc.com 6
  7. 7. Classic Representation 0% 25% 50% 75% 100% 0 20 40 60 80 100 shrink porosity weld LOF shell inclusion hard alpha inclusion tungsten inclusion Pareto Chart of Titanium Investment Casting Defects DefectFrequency CumulativePercentage . . . . . www.theevansgroupllc.com 7
  8. 8. Application of Pareto Principle Identify a problem/quality issue Identify data, create testable case with metrics, interviews and analysis (testing for assumptions) Examine results in contrast to perceived evidence Use Pareto or other method www.theevansgroupllc.com 8
  9. 9. Some Likely Scenarios 80% of revenue derived from 20% of customers 20% of products generate 80% of profit 20% of sales force produces 80% of sales 80% of complaints come from 20% of products 20% of bugs in a system produce 80% of the problems 80% of the output gets done by 20% of the workers 20% of the effort produces 80% of the results 80% of supplies come from 20% of supplier base www.theevansgroupllc.com 9
  10. 10. How does 80/20 work Identifies what makes impact or yields positive results Helps business build on what’s working and improve on what’s not Can help streamline processes, product lines, systems, to yield improvement, growth, margin Allows fact based decision making to eliminate waste and refine the business Puts focus on efforts and activities that produce best outcomes Keys in on what is of value www.theevansgroupllc.com 10
  11. 11. Common Objections Controversies Not relevant for today Always in the past, hindsight Business moving too fast today to be useful Limited due to evolving circumstances Our digital world changing 80/20 to 90/10, etc. Focus on 20% may not give proper attention to the rest Does not promote development of the non-focus parts Misses future forces impacting the business www.theevansgroupllc.com 11
  12. 12. Expected Results While implementing an 80/20 program is not a panacea for all the problems at a company, it can help solve several key business issues and ensure that many of the following benefits are obtained. Improve revenue and margin Reduce costs – manufacturing, operations, sales/marketing, customer service, other areas Reduce complexity in manufacturing, improve economies Improve quality and reduce product write-offs Enhance sales/marketing focus Improve customer service Drive sustainable strategic growth – business planning Improved productivity in all departments – focus on products, process, strategies, customers and other areas that drive growth www.theevansgroupllc.com 12
  13. 13. Example: Implementation and Results LargeDairyCompany Study in mid-2010 showed that out of 700 direct buying customers, 105 accounted for 76% of the revenue and volume. With limited field sales and customer service personnel, this created an issue. The smaller direct buying customers were taking up a disproportionate amount of time and resources. The strategic decision was made to not completely drop the 595 smaller customers as they represented 28% of the margin, but move them to an indirect relationship. Smaller customers were moved to an indirect re-distributor program. Approximately 90% of the customers and the associated volume was retained through the indirect distribution program. With Sales and Marketing focus on the top 105 customers, volume and revenue growth was increased from 2% annually to 7% 1n 2011. The 7% growth number was also achieved in 2012 www.theevansgroupllc.com 13
  14. 14. Example: Implementation and Results LargeConsumerGoodsCompanyOperatingintheFoodandBeverageChannel Away From Home business in 2004 had a total of 420 SKU’s. 200 of the SKU’s delivered 87% of the volume and revenue and 90% of the profit. Product write-offs, mainly due to expired shelf life, were running at 10%, driven almost entirely by the 220 poor-performing SKU’s. Cross functional team formed in late 2004 and project plan with action steps and milestones developed. During 2005 and Q1 2006, 190 of the poor-performing SKU’s were discontinued. 85% of the business and customers were retained by switching to the SKU’s being retained. The 30 remaining poor performing SKU’s were subject to a price increase of between 5 and 12% Product write-offs reduced to 1.5% of revenue Profit increased by 3.3% Manufacturing and Operations costs were reduced by 5.7% www.theevansgroupllc.com 14
  15. 15. Industrial Application Materials management Fault detection (field or MFG) Revenue verses effort Focus on resource management (sales) Cost in contrast to revenue www.theevansgroupllc.com 15
  16. 16. Quality Measure or Strategy It is post-facto current state Provides light and focus on problem against past performance It is not continuous performance measure unless followed as a trend Provides a valid point for analysis (deep dive) Can support or become the basic strategy for operation improvement www.theevansgroupllc.com 16
  17. 17. Define, Measure, Analyze, Improve, Control In process and post facto metrics Define in process metrics (SPC) Measure both in process and result metrics Analyze for changes and incremental improvement Adjust as required Identify feed back loops www.theevansgroupllc.com 17
  18. 18. Addressing the “other parts” With greater visibility of lesser performing areas, there are opportunities to develop potential Seize these opportunities by level of impact Reduce costs Use best sales people on underperforming accounts Fix majority complaints Selective distribution related to customers, products, markets Simplify forecasting and streamline systems Eliminate unprofitable, low impact activities Enhance contribution of underperforming areas www.theevansgroupllc.com 18
  19. 19. Making the 80/20 Rule Effective 80/20 is counterintuitive Recognizes all causes do not have the same significance, all customers are not equal Application can lead to growth, improved profitability, market share Needs to be done ongoing to reflect changes in business Helps identify drivers of the business and negative forces that otherwise might not be so noticeable Use as tool for digging deeper and managing Aids in justifying development of otherwise ignored areas that have potential for further improvement and impact www.theevansgroupllc.com 19
  20. 20. Formoreinfocontact: www.theevansgroupllc.com www.theevansgroupllc.com 20

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