Pareto Analysis
Explore the benefits of Pareto analysis and how to use it in your organisation
What is Pareto analysis?
Pareto analysis is a technique used for business decision making and is often referred to as the 80/20 rule. The 80/20 rule being that 80% of the projects benefit can be achieved by just doing 20% of the work. Equally, 80% of problems can be traced to 20% of the cause. Pareto analysis is used across all industries that enable you to strategically select the problems in your organisation you wish to tackle, and to help identify which will result in the most impact.
How can Pareto analysis be applied?
Pareto analysis of the product range can be based on criteria such as profitability or sales volume that the product generates. For example, you may have a product that does not sell in high volume, but when it does, it creates a considerable amount of profit. So, should this be classified as an A item to ensure it is always made available for sale? It’s important to decide on the criteria before Pareto analysis is applied.
If the ABC analysis is undertaken on a product value basis, then the following purchasing/stocking situation may apply. The classification below is based on what it would look like in a manufacturing company:
- A items – high-value items - low stock holding with a continuing supply, for example, bulk chemicals.
- B items – medium value items - minimum/maximum or continuous review replenishment system with supplier weekly check on stock/re-order. An example could be protective paints.
- C items – low-value items - two-bin system replenishment system may suffice for items such as nuts and washers.
Pareto curve
The Pareto curve can be used to conduct an ABC analysis. By carrying out this analysis, procurement and supply professionals can be used to breakdown an organisation’s total spend based on value, so its resources are used to manage these expenditures and prioritised accordingly.
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Why would you apply Pareto analysis to a stock and manufacturing process?
Pareto analysis helps to identify critical inventory items in your product range. This will support the production planners who generate orders and helps to identify which products ranges should take priority to pass through the production lines.
Once planning your production runs, capacity planners will give priority to A classified items. This is to ensure that stock levels do not drop below a defined minimum stock holding level. This will help to support the sales team too, to enable them to secure sales with the customer and ensure that the goods are always available on time and in full.
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