Pareto principle and application of the Pareto principle in logistics

In logistics management and operation, the application of the Pareto principle is no longer a new concept in the world. However, in Vietnam, most Vietnamese businesses are not interested and applied much. In this article, let's LEC Group experts to better understand the Pareto principle and its application in logistics!

What is the Pareto principle?

The Pareto principle (also known as the 80/20 principle) states that in many events, about 80% of the results are due to 20% of the causes. This rule was proposed by corporate governance thinker Joseph M. Juran and was named after the Italian economist Vilfredo. It is observed that 80% of the land in Italy is owned by 20% of the population.

Ứng dụng của nguyên lý pareton trong logistics

Typically, the Pareto principle would indicate that a small part of the population would possess most of the world's wealth. However, this principle is also stated in other forms:

20% of the inputs produce 80% of the results.
20% of employees produce 80% of the product.
20% of customers contribute 80% of the revenue.
20% cause 80% of accidents.
20% of goods creates 80% of the inventories.
...

So:

In the case that 20% of workers produce 80% of the product: focus on encouraging those employees.
20% of the causes of 80% of accidents: focus on solving these causes first.
20% of customers contribute to 80% of sales: focus on caring for and serving those customers.
….

The key to this is that you should always focus on solving only 20% of the work. But it brings a different effect, instead of wasting time and effort handling 80% of other jobs. Thus, it can be concluded that if applying the Pareto principle, it will contribute to increased work performance significantly.

Application of the Pareto principle in logistics

1. Importance of customers

If at present, your company has about 20% or less of the number of customers that bring in big revenue. This number is based on reliability, loyalty, the number of goods, ... You can completely rely on that to adjust marketing, sale and logistics models. In addition, you can apply the Pareto principle to enhance the level of service to customers. It can be used as a tool to determine where your business must focus on areas that both maintain goals and cut costs.

2. Priority in business

After clearly identifying the potential customers and priorities of the company. You will have the opportunity to improve the overall performance of the company by changing its operational goals, based on key KPI parameters and decisions such as:

Delivery on time.
Fulfill orders accurately.
Frequency of returning customers.

3. Shipping, distribution or warehouse costs

The Pareto principle suggests that 80% of logistics costs come from 20% of customers. The reason may vary from case to case. It could be due to the location, traffic flow or loading and unloading process at the destination. It is these facts that show that every method of cost-cutting on this route must be considered.

Ứng dụng của nguyên lý pareton trong logistics

In addition, when applying the Pareto principle, there will be 20% of inventory causing 80% of operating costs. That means you have to contact customers in that 20% group, both positive and negative. The purpose of this work is to understand their unique needs. Since then, the plans have lower costs but still retain the level of service to customers.

Above is all the sharing of LEC Group experts on the Pareto principle and application of the Pareto principle in logistics. If you are looking for a professional logistics service provider. Please contact us from today to receive the best support!

LEC GROUP

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