Pareto Principle (80/20) And Application In Logistics

Logistics and Supply Chain are industries that operate continuously with very high intensity. And there are a lot of factors to consider in order for the whole system to run smoothly and efficiently. We can use KPIs to control the quality of each stage, but can we control all the stages, which may be related to each other, including the distribution of financial and information, and reverse logistics flow? The answer is yes, just follow the steps below:

First, you must understand the Pareto principle (The 80/20 Principle) Concept:

The Pareto Principle states that in many events, about 80% of the results are caused by 20% of the causes. The corporate governance thinker Joseph M. Juran proposed this rule and named it after the Italian economist Vilffredo Pareto, who observed that 80% of the land in Italy is owned by 20% of the population.

Normally, the Pareto rule would indicate that a small portion of the population will hold the majority of the world's wealth. However, this principle is also stated in other forms:

The 20% input produces 80% of the results

20% of employees produce 80% of the products

20% of customers contribute 80% of sales

20% of the causes cause 80% of the accidents

20% of stock makes 80% of inventory

...

Therefore:

20% of employees make 80% of the product: Focus on motivating those people.

20% of causes 80% of accidents: Focus on solving these causes first.

20% of customers contribute 80% of revenue: Focusing on serving those customers.

Et cetera. The bottom line here is, you will focus on solving only 20% of the work but making the difference, instead of spending resources handling 80% of the other tasks. In economic terms, we have the law of diminishing marginal utility. In general, it will contribute to a significant "efficiency" increase.

Note:

- 20% of customers can contribute 10% of sales. Or 50%. or 80%. or 99%, or even 100%. Remember, the 80/20 rule is a number that represents a typical distribution.

At the same time, it is not necessary to always be true 20% and 80%. The bottom line is that most things are not distributed fairly - some things will produce more results.

Pareto Principle (80/20) and Application in Logistics

Then just apply this principle to Logistics

1. The importance of the customer.

If there are 20% or less of the customers bring big revenue for your company. This number can be based on reliability, loyalty level, quantity of goods…. Can you adjust your marketing, sales and logistics models based on those numbers? Or use the Pareto principle to improve service levels to customers? Of course, you can use Pareto as a tool to find out where your business has to focus on areas that both maintain its goals and cut costs.

2. Priority in business.

After identifying the company's target customers and priorities, we have the opportunity to improve the overall performance of the company through changing operational goals, based on key KPIs and decisions. , as:

- Delivery on time

- Execute menu execution, or

- Customer return frequency.

3. Transportation, distribution or warehouse costs

The Pareto Principle suggests that 80% of logistics costs come from 20% of customers. The reasons may vary from case to case. This could be due to location, traffic flow, or unloading at the destination. This shows that every cost-cutting method on this route must be considered.

Along with the above suggestion, there will be 20% of the inventory causing 80% of the operating costs. In general, we must contact the customers in that group of 20%, both positive and negative, to find out their unique needs, and to come up with options that cost less but keep the same. service level with customers.