Pareto's Law

I cannot imagine a planner who manages tangible inventory who does not invoke Pareto's Law as a central tool in his or her analysis. Sadly, I know it happens.

Most will be familiar with Pareto's Law, which has also been known as the 80/20 Rule. It involves ranking the items within a product portfolio based on sales, value, or dollar value of usage. It is also used frequently in Quality Control to determine those issues that are most problematic. Once the ranking has been completed, a percent contribution is computed for each sku within the portfolio. Then, a "contribution code" such as A,B,C is assigned to each item. A items are those roughly 20% of items that contribute roughly 80% to overall sales, while B items are those 30% of items that contribute 15% to sales, then C items are, as Dr. Juran would say, "the trivial many"...50% of the items that contribute only 5% to sales.

The objective is to manage the A items with much more care and attention than the C items. In many cases, the inventory status of A items are reviewed daily or at a minimum weekly. Service level targets for A items are set much higher than C items. A items are cycle-counted in the warehouse more frequently than C items, to attain a very high level of inventory record accuracy. A items turn faster than C items. Expediting A items tends to be worth the effort.

I have worked for firms that insist on treating all items in a large product portfolio with equal reverance. The result was that, given limited time and resource, attention to the A items, the most important items, became diluted, and the lowly C  item that contributes 0.1% to annual sales got far more attention than it deserved.

So, let's incorporate Pareto's Law into every planner's tool kit. Use it, and work it.

(A little trivia....Vilfredo Pareto (1848-1923) actually received more credit than he deserved for Pareto's Law. It was really quality pioneer Dr. Joseph M. Juran who coined the term "Pareto's Principle", probably because it sounded better than "Juran's Principle"! While Paerto planted the seed, Juran popularized the notion!) 

Cheers!