Top Ten Business Uses of the 80/20 Principle
By: Hubert Crowell
The 80/20 Principle can be used in almost any area of function to direct strategic and financial improvement. However, Richard Koch in his book. The 80/20 Principle, list ten top business uses that he believes has the most potential for improvement.
Using the 80/20 profit analysis, determine a segment strategy by dividing your business up into as many categories as are relevant to your business. Compare the profit and loss of each segment to find the 20 percent that are accounting for 80 percent of the profits and the 20 percent that are accounting for 80 percent of the losses.
Redirect your efforts to the areas where you can gain the most benefit. Reduce your efforts in the areas where you are having the most losses.
Using the 80/20 principle to focus your efforts on the least 20 percent causing most of the problems, instead of trying to tackle all the problems at once. As the least 20 percent that are causing the most problems become resolved, reevaluate your list again and start over.
Cost reduction and service improvement
Simple is cheaper and better, make the simplest 20 percent of your products as high quality and consistent as possible. If something is complex, simplify it or eliminate it.
Identify your core 20 percent of your best customers and do everything possible to keep them. Provide exceptional and outrageous service to them even if it has a short-term cost, the payback later will be worth it.
Have all of sales focus on the core 20 percent of customers in their business line. Resort to less expensive phone or mail support for the remaining 80 percent. The core 20 percent are the customers that are providing you with 80 percent of your business profits. Reward you best sales people and hire more with the same personality and attitude.
Computer programs become more efficient when 80 percent of the processing time is used on 20 percent of the need. This results in functions that are used the most often, being faster and easer to use. Most advances in the last 50 years have been due to the 80/20 principle being applied to technology. There is no end to the refining processes that use of the 80/20 principle will bring to businesses relating to information technology.
Decision making and analysis
Since 1950, business has increasingly been blessed, or if you prefer plagued, by management, scientists, and analytical managers. Analysis has probably been the greatest U.S. growth industry in the past half-century, and instrumental in some of the greatest U.S. triumphs.
But analysis has had its darker side: the escalation of corporate staffs that are only now being properly dismantled. The 80/20 Principle is analytical but puts analysis in its place.
Five rules for decision making:v
Rule one. Not many decisions are very important. Only one in twenty will be important.
Rule two. The most important decisions are often those made only by default.
Rule three. Gather 80 percent of the data and perform 80 percent of the relevant analyzes in the first 20 percent of the time available. Then make a decision 100 percent of the time and act decisively as if you were 100 percent confident that the decision is right.
Rule four. If what you have decided isn't working, change your mind early rather than late.
Rule five. When something is working well, double and redouble your bets.
Stock almost invariably follows some sort of 80/20 distribution, around 80 percent of stock only accounts for 20 percent of volume or revenues.
Point one. Cut down radically on your unprofitable product.
Point two. Try to export the problem and cost of inventory management to other parts of the value-added chain, to your suppliers or to your customers. The ideal solution is for your stock never to come near your facilities.
Point three. If you must hold a certain amount of stock, there are many tactical ways to use the 80/20 Principle to cut costs and speed up picking and packing.
A word of caution, in repair related business, make sure that you are not hurting your business by cutting your part's department of parts needed for repairs. Use the 80/20 Principles to better manage these stocks. Stock higher assembles in place of hundreds of smaller parts.
Management structures are being exposed as inadequate and worse. Many of the most energetic people in business, from chief executives down, do not really have a job. Rather, they pursue a number of projects.
Project management is an odd task. On the on hand, a project involves a team. It is a cooperative and not a hierarchical arrangement. But on the other hand, the team members usually do not know fully what to do, because the project requires innovation. The art of the project manager is to focus all team members on the few things that really matter.
Simplify the objective, 80 percent of the value of any project will come from 20 percent of its activities, the other 80 percent of the activities will arise because of needless complexity.
Impose an impossible time scale, this will ensure that the project team does only the really high-value task, the 20 percent that will deliver 80 percent of the benefit.
Plan before you act, write down all the critical issues that you are trying to resolve. Decide who is to do what and when. Re-plan after short intervals.
The 80/20 Principle adds just two points to the study subject of negotiation.
20 percent or fewer of the points at issue will comprise over 80 percent of the value of the disputed territory. Build up a long list of spurious concerns and requirements early in a negotiation, making them seem as important to you as possible. These points must, however, e inherently unreasonable, or at least incapable of concession by the other party without real hurt (otherwise they will gain credit for being flexible and conceding the points). Then in the closing stages of the negotiation, you can concede the points that are unimportant to you in exchange for more than a fair share of the really important points.
Second, don't peak too early, wait until the deadline looms. 80 percent of the concessions will occur in the last 20 percent of the time available.
Impatient people don't make good negotiators.
Assignment: Read Chapter 7 of The 80/20 Principle, by Richard Koch, ISBN 0-385-49174-3
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Optional Exam: Describe another business example where the 80/20 Principle would work and how.
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