Okay! You asked for it!! ~ So here is some information on the Pareto Principle, or what is more commonly known as the 80/20 Rule.
In the 1880’s, when Pareto was researching and analysing wealth distribution in England, he noticed that just 20% of the people owned 80% of the wealth. He then tested this principle in other European countries, and he was able to confirm that the 80:20 ratio could be a reliable indicator to predict and manage all sorts of seemingly unrelated effects and situations.
This principle is extremely helpful in bringing clarity to what appears to be complex situations and problems. It can help when deciding where to expend effort and resources in solving problems. It is commonly used in many aspects of business management.
So in business situation, the Pareto Principle can suggest, where there is cause and effect such as effort and productivity, that 80% of productivity is produced by 20% of effort. Another, which is relevant to problem solving and decision making, is that 80% of outcomes are produced by 20% of causes.
Now the Pareto Principle does not state that the 80:20 ratio will apply to all situations, nor is it the only acceptable ratio. Sometimes the other correlations that Pareto discovered may be more applicable. By extrapolated his original research he also found that if 80:20 worked, so did 65:10 and 50:5. But usually the 80:20 principle is used because it remains the most commonly occurring ratio.
So how can we use this Pareto Principle to aid in decision making and problem solving? Consider an organisation that ignores the fact that 85% of its earnings derive from just 15% of its products, and spreads its resources and efforts across the entire product range. Consider the amount of time and effort wasted, when a quick check by the managers, using the Pareto Principle, could see at a glance where their efforts and resources would be more profitably expended. It could also highlight the fact that many products in the range were not performing and should be discontinued.
The Pareto Principle can also be useful in any situation where a cause:effect relationship exists. The 80:20 Rule means that in anything a few (20 percent) are vital and many (80 percent) are trivial. In Pareto’s case it meant 20 percent of the people owned 80 percent of the wealth. But it equally could be 20 percent of the defects causing 80 percent of the problems. Project Managers know that 20 percent of the work (the first 10 percent and the last 10 percent) consume 80 percent of your time and resources.
And how about 80% of your warehouse space will be occupied by 20% of your stock. And that of that stock 80% will have come from 20% of your suppliers. And of course 20% of your sales staff will produce 80% of your sales. But 80% of staff problems will be cause by only 20% of your staff; however 20% of your staff will provide 80% of your production. Cause and effect ~ it works both ways.
The 80:20 principle is a useful tool in analysing situations, especially when overall judgments have to be made and especially when suggested options are being considered. What is the measurable input versus the expected outcome?
Many a business disaster could have been averted if the planners had thought to apply the Pareto Principle before instigating change. It is a tremendously powerful model, all the more effective because it’s so simple and easy to use.
Michele @ Trischel