To Cut or Not to Cut Products
The 80/20 Rule (Pareto Principle), Simplified
I have spent the bulk of my career working in successful decentralized businesses and have been an avid practitioner of the 80/20 principle (or Pareto as it is widely recognized). In my view, it is a theory of imbalance that can be of significant use within almost every business and even your personal life.
I am often asked for 80/20 case studies that demonstrate its power; there are hundreds. But, one of my favorites goes back a few years. For many years, I worked for a global manufacturing conglomerate. In 1998, we acquired a major worldwide competitor. In the United Kingdom, this competitor had a large midland-based manufacturing centre that practically mirrored an existing UK facility. We implemented 80/20 strategies to consolidate facilities, develop segmented businesses, drive out complexity, and reduce a combined number of SKUs from approximately 70,000 to 12,000. Further, we found on-time delivery to be a significant challenge. Using 80/20, we improved OTD from months to days! This joint business continued to grow its revenues and prosper to an operating income level of greater than 20%. This is one of the countless examples in my professional career that illustrates the power of 80/20.
I would guess that you already practice 80/20 in your personal life. Perhaps, you have many acquaintances, yet seem to spend your free time enjoying the company of the same small group of friends. You probably have a wardrobe full of clothes, yet you gravitate to your ‘old favorites’ time and again. It is always the same small number of things that cause you the most headaches in life. These are all good examples of 80/20.
When you look at your business through an 80/20 lens, the data reveals information that is critical to profit and growth. Have you ever determined which product or services generate the most revenue or margin in your business? Do you and the entire enterprise understand which customers are most profitable/important to you? Have you developed specific strategies around these accounts? If not, why?
Companies must use 80/20 holistically.
In business, 80/20 applies to every aspect. A common mistake that new 80/20 practitioners make is thinking that 80/20 is a cutting practice. I have seen 80/20 newbies perform some quick analysis and slash customers, products, and resources. That mistake is costly and hard to correct. Companies must use 80/20 holistically. Whether it is business process improvement, product line simplification, account segmentation, competitor analysis, acquisition screening, supply chain management (to name a few), the correct application of 80/20 will greatly contribute to future success.
It starts with simple analysis including quartile analysis and quad analysis. What comes next is determined by the result of those analyses. No two companies are the same, but true 80/20 companies are typically more focused, less complex, and profitable.
80/20 success is determined by the commitment to strategy, cultural adoption of 80/20, and guidance from veterans of the process who have applied 80/20 successfully dozens of times. Used correctly, I have never seen 80/20 fail.
Barry is an accomplished international leader with a record of delivering sustainable profitable growth. His experience includes sales, marketing manufacturing, new product development, and distribution channel management.
Should you want to learn more, please feel free to contact us for an informal discussion.