Do you know which products you’re great at building? Which customers account for the best parts of your business? What about which suppliers get the majority of your business? You might think you know those answers, but have you actually looked at the numbers? Digging into those statistics can help you define the 20% of your business functions that account for 80% of your success, helping you focus and increase efficiencies. That’s how the 80/20 rule can help you grow your manufacturing business.
What is the 80/20 Rule?
The 80/20 rule – also known as the Pareto principle – states that, in general, about 80% of the outcomes stem from 20% of the causes. In manufacturing, the 80/20 rule can be applied from sales to operations and everywhere in between. For example, 80% of your revenue likely comes from 20% of your products. Utilizing the 80/20 rule can help organizations focus on the actions within their business that are most meaningful to their bottom lines, optimizing growth in the most impactful ways.
Determine Your 80 to Understand Your Focus
To figure out your 80, you have to look at the numbers. In the example mentioned above, where 80% of your revenue comes from 20% of your products, you’d need to understand how much revenue is generated by product over the course of a set time period. You can use a simple spreadsheet to sort the data into revenue by product and figure out which products bring in 80% of that total revenue. Once you know your 80, you can put a plan into place to focus on those products and grow your 80.
A few other ways you can use the 80/20 rule include:
- 80% of your purchased parts spend might go to 20% of your supplier base
- 80% of your revenue could come from 20% of your customers
- 80% of your safety incidents are likely caused by 20% of the hazards
Overall, if you can zero in on the 20% that impacts your 80%, you’ll end up working smarter and not harder.
Treat Your 20 Differently
Once you understand your 80, you cannot let the remaining 20 affect that portion. That’s not to say the 20 is bad – it actually could be your biggest opportunity to grow – but it should be separated from your 80 to improve focus. Product Line Simplification (PLS) can help you treat your 20 differently:
- Outsource it to a contract manufacturing partner
- Create a separate production line focused on less-frequently ordered products or reducing frequency
- Move it towards obsolescence
Theoretically, separating your 20 can pay off by creating a new 80. For example, if you have the majority of your team focused on the 80 and only a few team members focus on improving the 20, your 20 should grow as well. Growing your 80 and your 20 separately but at the same time should positively impact your bottom line. It might even mean spinning off that 20 once it becomes more of an 80.
Complexity Blurs Importance
The 80/20 rule and focus go hand in hand. Sometimes more complex tasks get more focus, but they’re not necessarily the most important tasks. Your team could be focusing 80% of their time on the products that are only bringing in 20% of your revenue. While the team might feel busy all the time, they likely also realize they’re not getting a lot done. Simplifying their mission focuses their action on the most important tasks, improving overall efficiencies that move the company forward.
If you’re looking for additional ways to improve your manufacturing business, look no further than our eBook, Tips for Successfully Implementing Lean Manufacturing Practices. Click the button below to download your copy today.