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Pareto Principle In Logistics And Supply Chain.
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Logistics and Supply Chain are industries that operate continuously with very high intensity. And there are many factors that need to be paid attention to, for the whole system to operate smoothly and efficiently. We can use KPIs to control the quality of each stage, but can we control all the stages, which can be complicated altogether, including information distribution and finance, and reverse logistics? The answer is yes. In this article, we will understand the application of the Pareto Principle In Logistics And Supply Chain.
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Concept of Pareto Principle
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Pareto Principle is also known as the 80/20 rule. The Pareto principle says that in many events, about 80% of the outputs are caused by 20% of the inputs. Corporate governance thinker Joseph M. Juran proposed this rule and named it after the Italian economist Vilfredo Pareto, who observed that 80% of the land in Italy was owned by 20% of the population.
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Typically, the Pareto rule will show that a small portion of the population will grasp the majority of the world’s assets.
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Pareto Principle is also identified in other forms:
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20% input generates 80% of results
20% of workers produce 80% of products
20% of customers contribute 80% of revenue
20% cause of 80% of accidents
20% of goods generate 80% of inventory
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So:
20% of workers produce 80% of products: Focus on encouraging those employees.
20% are causes of 80% of accidents: Focus on addressing these causes first.
20% of customers contribute 80% of revenue: Focus on serving those customers.
And so forth.
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The bottom line is, you’ll focus on solving only 20% of the work but making a difference, instead of spending resources to handle 80% of other jobs. In general, it will contribute to a significant increase in “performance”.
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Note:
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– 20% of customers can contribute 10% of revenue. Or 50%, or 80%, or 99%, or even 100%. Remember, the 80/20 rule is a number that symbolizes the typical allocation.
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– At the same time, it is not necessary to always be exactly 20% and 80%. The bottom line is that most things are not fairly divided – some things will result in more.
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Pareto Principle In Logistics And Supply Chain
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1. The Importance of Customers
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If there are 20% or less of customers bringing great revenue to your company. This number can be based on reliability, loyalty, numbers. Can you adjust your marketing, sales and logistics model based on those numbers? Or use the Pareto principle to raise the level of service to customers? Of course, yes, you can use Pareto as a tool to find out, your business must focus on which areas maintain both the goal and cut costs.
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2. Business priorities
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After identifying the company’s targets and priorities, we have the opportunity to improve the overall performance of the company by changing our operational objectives, based on key KPI parameters and decisions, such as:
- On-time delivery
- Make an accurate application
- The frequency of customer returns
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Pareto Principle In Logistics And Supply Chain
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3. Transportation, distribution or warehouse costs
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Pareto’s principle suggests that 80% of logistics costs come from 20% of customers. The reasons may vary from case to case. It may be due to location, traffic flow, or unloading at the destination. This shows that we must consider all methods of cutting costs on this route.
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Along with the above suggestion, there will be 20% of inventory causing 80% of operating costs. In general, we must contact customers in that 20% group, both positive and negative, to find out their unique needs, thereby introducing lower-cost options but keeping the level of service with customers.
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