From the treasure chest of the 80/20 Experts - Submitted by Peter Philippi of Strategex
You’ve heard of 80/20, right? Do you believe the principle? Do you know the problems it reveals? Do you have an understanding of the opportunities it creates?
First, the principle: 20% of the input generates 80% of the output; 20% of activity generates 80% of the results; typically 20% of customers generate 80% of the revenues; 20% of your products generate 80% of the revenues; 20% of your employees create 80% of your HR problems…and on and on it goes.
Still not convinced? Take a look at your closet, 20% of what’s in there you wear 80% of the time! It’s the principle that the Italian economist Vilfredo Pareto discovered in the early 1900’s, the Principle of Imbalance.
Your first assignment: get your data and see if 20% of your customers generate 80% of your revenues, and then do the same with your products. You may actually be shocked to find out that it may be less than 20% of your customers and products that generate 80% of the revenues!
Your second assignment: split your customer and product data into four Quartiles and see what revenues your top 25% of customers and top 25% of products generate, then take your next 25% and so on. Here’s what you’ll find directionally: 89% of revenues come from the top 25%, 7% from the next 25%, 3% from the third 25% and finally 1% from your bottom 25% of customers and products.
So what do you think, is there a problem? No doubt! But by no means do anything about it…yet. Don’t start getting rid of products or customers, that’s NOT the solution. Without the right approach to customers and products you will undoubtedly hurt your business, so resist the urge!!!
Peter H. Philippi is the founder and CEO of Strategex Inc, the Chicago based firm that specializes in profit optimization through business simplification and profitable growth in manufacturing businesses. You can reach Peter at pphilippi@strategex.com.
If you're looking for more information on the 80/20 principles or how IMEC's manufacturing and business improvement specialists can help identify a strategic path to growth, contact Cary Moreth at cmoreth@imec.org.
LEARN MORE! For a sneak peak at the 80/20 principles, join us for a Breakfast Seminar hosted by IMEC, Strategex, and Fusion OEM on December 10th in Burr Ridge! Learn more online.
