Saturday, October 30, 2010

The Pareto Principle

What is it?
The principle that 80% of effects come from 20% of causes.

How to use it?
We can use this to find the most effective causes and raise or lower the percentage.

How does it work?
Business example: Delivering the same service to all costumers is a waste since 80% of the costumers only give us 20% of the profits. Thus we should analyze our product range using this matrix:
High (1) Seek cost reduction (2) Provide high availability
Low (3) Review (4) Centralized inventory
Volume/Profit Low High
  1. Seek cost reduction either in production or logistics.
  2. Provide high availability by making sure customers can easily get their hands on your product.
  3. Review: Consider whether the product is even worth keeping as part of your product range and/or what can be done to increase volume/profit.
  4. Keep your products in one place to lower fixed costs and ship to costumers from this location.

Where does it apply?
EVERYWHERE! Look around you and try to find things where the Pareto Principle can be applied. The percentages does not have to be exactly 20 and 80, 30/70 or 10/90 is fine too. It's the principle that a majority of effects comes from a minority of causes. It applies in relationships; 80% of arguments are based on 20% of the problems, and power consumption; 80% of the electricity used in your apartment comes from 20% of your little gadgets, bits and bobs (Usually computer/TV).

Feel free to copy these notes for personal usage, but don't leave without making comment