The Manager's Toolkit - Part 2: Looking after your vitals

Pareto Charts

In the second of this series of articles exploring the new thinking methods and techniques, or tools of the manager's trade, we examine how to make the best use of the Pareto principle; sometimes known as the 80:20 rule and often generalised as 'the vital few and the trivial many'.

In any business it is essential to separate the 'vital few' from the 'trivial many' and Pareto provides us with a way to find and identify those 'vital few' that can really make the difference to the business. It really is looking after your vitals.

The Pareto principle is named after the Italian economist Vilfredo Pareto (1848-1923) who studied the distribution of wealth. He found that wealth was not evenly distributed and that a few people controlled most of the wealth. Things have not changed a lot since then and his findings apply just as much to Britain today as they did to Italy in the 19th century.

The rule was generalised by Juran (the quality guru) who also coined the phrase 'the vital few and the trivial many' to describe the Pareto principle. The Pareto Principle or 80:20 rule can be applied to all areas of business and is used to focus on the real problems or issues. In essence the Pareto principle is a means of separating the vital few from the trivial many. To give some examples:

• 80% of your sales volume will come from 20% of your customers.
• 80% of your call-backs or remedial work will come from 20% of your installation teams.
• 80% of your profit will come from 20% of your customers.
• 80% of the defects will be in 20% of jobs done.
• 80% per cent of the time taken off for sickness will come from 20% of your personnel.

Or even a few wilder ones:

• 20% of the people will commit 80% of the crimes - maybe that is not so wild!
• 20% of the planets have 80% of the mass in the solar system.
• 20% of the biological species account for 80% of the animal mass on the earth.

Instinctive rule

In many ways the application of the 80:20 rule is instinctive and we know that it is right when it feels right. The important point is that when you can separate the vital few from the trivial many then you can begin to concentrate your efforts where the rewards are greatest. You can be more effective in your work when you concentrate on the vital few. It is logical that if you are going to attempt to improve something then you should start with the biggest contributors.

Take, for example, stocks in your warehouse. If you have £800 worth of stock of item A and £200 worth of stock of item B and you need to reduce inventory by 20%, i.e. £200, then where do you start? The obvious answer is that it is easier and quicker to reduce the stock value of A by £200 than to reduce the stock value of B by £200. Pareto is all about finding the 'vital few' and concentrating on these to get the best results.

The idea of having a 'key account manager' to be personally responsible for your top accounts is a reflection of Pareto, only 20% of your customers probably represent 80% of your turnover/profit/complaints and it pays to look after them and to make them feel special.

Logical groupings

The first step in using Pareto is to gather information on call-backs, sickness, profit per customer or whatever it is you wish to improve. The information is then grouped into logical categories. For call-back analysis the obvious initial grouping would be by installation team and for customer analysis the initial grouping would be by customer. Try to get the information into as few categories as possible (about six is best) and if you have small numbers, i.e. lots of once off customers, then you can use a special category called 'other' for the trivial many.

This information is then plotted as a bar chart by category (see Examples), starting with the highest and going to the lowest. If you have used a category for 'other' then this should be plotted last. The charts are then used to decide where you should take action and will also give information as to the action required.

Examples

Example 1: Call Backs per Installation Team
This example shows the use of the 80:20 method for dealing with call-backs and installation teams. The information was gathered over a 12-month period for the six teams and plotted to show the number of call-backs per installation team.
Team A B C D  E  F  Total	Call-backs 25  36  75 98  15  20  269	% 9 13 28 36 6 7 100
Responses: Teams C and D may need training, better supervision or perhaps even more radical responses. What areas are Teams C and D making mistakes in? Another chart on the reason for the callbacks may give more detailed information for training purposes. It may be that Teams C and D are fitting more of a 'problem product' that needs more care or training.

Example 2: Customer Sales Analysis
This example shows the use of the 80:20 method for dealing with customer analysis for sales.
Customer  Adams Baker Cold Down Eric Fame Other  Total	Sales 15,000 5,000 80,000 25,000 8,000 16,000 15,000 164,000	% 9 3 49 15 5 10 9 100
Responses: Spend more time with Cold. They are 50% of your turnover but do you give them 50% of your time? Ensure good service, quick response to Cold. Try plotting profit per customer, the margins on Cold's work may be so small that the actual profit on Down's work may be greater. This may be an incentive to try to get more work from Down. At nearly 50% the volume of work from Cold is a large percentage of your turnover, you may need to consider trying to reduce your dependence on this business.

You can use further charts to zero in on the areas for improvement but remember to always go for the big ones first. They're generally the easiest to improve and you can look very good very easily.

Pareto analysis is useful for taking a 'snapshot' of the information and targeting areas for improvement or concentration.

NOTE: Pareto analysis does not stop you making instant improvements. If one of the 'trivial many' causes is easily fixed now then it should be done now. You should never use Pareto as an excuse for not doing something. It is also important that you think about the information that you are gathering. Make sure that you have all the information before making your decision. Try not to get all your exercise by jumping to conclusions!

"The Manager's Toolkit" Series.

"The Manager' Toolkit" series is designed to give Managers and other staff an insight into the use and application of a new set of thinking tools. The series is:

Part 1: Introduction
Part 2: The Pareto Principle (This Section)
Part 3: Cause and Effect Charts
Part 4: Scatter Charts
Part 5: Flow Charts
Part 6: Histograms
Part 7: Capability Studies
Part 8: Mind Mapping

Last edited: 24/03/04

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