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Understanding The Pareto Principle and How to Get Things Done in Business

Logistics and freight management are a fast paced world. There are a lot of factors in your supply chain to consider in order for it to stay optimized and healthy? So how does one keep up with all the tasks so there are tangible returns on investments from the activities around these complex industries? Often, The Pareto Principle is used as a way to get complex projects done. It's often called the "80/20" rule. Here is another great guest blog post from .

Understanding the Pareto Principle (The 80/20 Rule)

Originally, the Pareto Principle referred to the observation that 80% of Italy’s wealth belonged to only 20% of the population.

More generally, the Pareto Principle is the observation (not law) that most things in life are not distributed evenly. It can mean all of the following things:

  • 20% of the input creates 80% of the result
  • 20% of the workers produce 80% of the result
  • 20% of the customers create 80% of the revenue
  • 20% of the bugs cause 80% of the crashes
  • 20% of the features cause 80% of the usage
  • And on and on…

But be careful when using this idea! First, there’s a common misconception that the numbers 20 and 80 must add to 100 — they don’t!

20% of the workers could create 10% of the result. Or 50%. Or 80%. Or 99%, or even 100%. Think about it — in a group of 100 workers, 20 could do all the work while the other 80 goof off. In that case, 20% of the workers did 100% of the work. Remember that the 80/20 rule is a rough guide about typical distributions.

Also recognize that the numbers don’t have to be “20%” and “80%” exactly. The key point is that most things in life (effort, reward, and output) are not distributed evenly – some contribute more than others.

Life Isn't Fair

What does it mean when we say “things aren't distributed evenly”? The key point is that each unit of work (or time) doesn't contribute the same amount.

In a perfect world, every employee would contribute the same amount, every bug would be equally important, every feature would be equally loved by users. Planning would be so easy.

But that isn’t always the case:

 

The 80/20 rule observes that most things have an unequal distribution. Out of 5 things, perhaps 1 will be a good thing. That good thing/idea/person will result in majority of the impact of the group (the green line). We’d like life to be like the red line, where every piece contributes equally, but that doesn’t always happen.

Of course, this ratio can change. It could be 80/20, 90/10, or 90/20 (remember, the numbers don’t have to add to 100!).

The key point is that most things are not 1/1, where each unit of “input” (effort, time, labor) contributes exactly the same amount of output.

So Why Is This Useful?

The Pareto Principle helps you realize that the majority of results come from a minority of inputs. Knowing this, if…

20% of workers contribute 80% of results: Focus on rewarding these employees.
20% of bugs contribute 80% of crashes: Focus on fixing these bugs first.
20% of customers contribute 80% of revenue: Focus on satisfying these customers.

The examples go on. The point is to realize that you can often focus your effort on the 20% that makes a difference, instead of the 80% that doesn’t add much.

In economics terms, there is diminishing marginal benefit. This is related to the law of diminishing returns: each additional hour of effort, each extra worker is adding less “oomph” to the final result. By the end, you are spending lots of time on the minor details.

The point is to put in the amount of effort needed to get the most bang for your buck — it’s usually in the first 20% (or 10%, or 30% — the exact amount can vary). In the planning stage, it may be better to get 5 fast prototypes rather than 1 polished product.

Concluding Thoughts

This may not be the best strategy in every case. The point of the Pareto principle is to recognize that most things in life are not distributed evenly. Make decisions on allocating time, resources and effort based on this:

  • Instead of 1 hour on a rough draft for an article you may write, spend 10 minutes on 6 outlines for a paper / blog article and pick the best topic.
  • Instead of investing 3 hours on a website, spend 30 minutes and create 6 different template layouts.
  • Rather than spending 3 hours to read 3 articles in detail (which may not be relevant to you), spend 5 minutes glancing through 12 articles (1 hour) and then spend an hour each on the two best ones (2 hours).

These techniques may or may not make sense – the point is to realize you have the option to focus on the important 20%.

Lastly, don’t think the Pareto Principle means only do 80% of the work needed. It may be true that 80% of a bridge is built in the first 20% of the time, but you still need the rest of the bridge in order for it to work. It may be true that 80% of the Mona Lisa was painted in the first 20% of the time, but it wouldn’t be the masterpiece it is without all the details. The Pareto Principle is an observation, not a law of nature.

When you are seeking top quality, you need all 100%. When you are trying to optimize your bang for the buck, focusing on the critical 20% is a time-saver. See what activities generate the most results and give them your appropriate attention.

Simple Example: I use this principle every day. It sets all my priorities, so I’m not “spinning my wheels” knowing what to do next. When I scan my e-mails, I only look for those 20% that are 80% of all e-mails I receive, and concentrate on those e-mails first.

This 80/20 principle can be used by any one for anything in any type of business or personal endeavor.

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Adam Robinson
Adam Robinson oversees the overall marketing strategy for Thomasholmes including website development, social media and content marketing, trade show marketing, email campaigns, and webinar marketing. Mr. Robinson works with the business development department to create messaging that attracts the right decision makers, gaining inbound leads and increasing brand awareness all while shortening sales cycles, the time it takes to gain sales appointments and set proper sales and execution expectations.
Adam Robinson

Adam Robinson

Adam Robinson

Adam Robinson
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  • Marty McMullen

    The 80/20 rule can be applied almost everywhere. When I took the time to figure out which customers were in the top 20%, then focused production to make sure they were serviced first, it really made a difference in our bottom line. The lower 80% never changed their ordering habits due to the “shift” in priorities, however, the upper 20% ordered more.

    • It sure is one of the business truisms. Thanks for your comment, Marty.

  • Virgilio L. Leyretana, Sr.

    Your article is refreshingly enlightening. although it is intriguing why workers efficiency and productivity remains a nagging phenomenon to administrators and managers.

    • Thank you for your feedback and nice words, Virgilio! We think workers will always have trouble sorting out priority, initially. However, with great tools, leadership, and a focus on getting things done, folks can get taught!

  • Kris

    It is very good approach to Pareto rule – In real business environment however the sum must be 100% – please see example below – it is a segmentation of SKU set – in this case 20,8% of SKUs generates 80% of sales (segment A), additional 25% of SKUs gives 95% of sales and so on

    Segm. SKUCount Sales
    A 1 782 73 615 152,29
    B 2 190 13 806 265,31
    C 4 575 4 602 733,38
    Total 8 547 92 024 150,98

    Segm. SKUCount% Sales%
    A 20,8% 80,0%
    B 25,6% 15,0%
    C 53,5% 5,0%
    Total 100,0% 100,0%

  • Michael Kusuplos

    Adam: Your article, in my mind, was one easy way to understand what the Pareto Rule is all about. Will be using your writing as hand out when describing Pareto’s thinking to others. Thanks for posting this.

  • I agree with and appreciate the points made in this article however, I take exception to one of the points. The author states that 20% of the customers provide 80% of profits – so let’s assume his calculation is accurate for this discussion… He goes on to say that you should spend time on the 20% of customers that bring about 80% of the business, and I opine that the 20 and 80 percent is constantly changing. The customer buying in low volume today may be your biggest customer in two years. Likewise your largest volume customer may go elsewhere for product tomorrow, or be out of business. For optimum business opportunities, the Pareto principle is great for 80% of a manufacturing business, but the 20% of an operation that depends on renewed income should be left to the illogical math, magic and wizardry known as Business Development.

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  • Several years ago I wrote a piece about the origin of the 80-20 rule, which is frequently attributed to Pareto and his “Pareto Principle.” Pareto’s observations were very specific to wealth distributions and guided by his socio-economic views. Generalization of this observation in a scientific fashion and applying it to manufacturing, reliability and engineering management should be attributed to Joseph Juran. This is an edited version of that article

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