How do we Know what is the 20% in Pareto?

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How do we Know what is the 20% in Pareto?
Michael D. Moore, Member
Some may feel this is obvious, but my experience has shown that many managers and executives may not know what is actually in the 20%. This is not a given. If you are an "unconscious competent" you may really not know what your 20% activities are in producing results.
The first step is to clearly understand what it is you do or what should be done (the 20%) that produces the 80% of results.

Finding the 20% in the Pareto Principle
@Michael D. Moore: I agree. The Pareto Principle looks very interesting andI have tried to check through my work on how to really assess the 20%, but my concern is the ability to identify or assess the 20% in terms of work.
I am looking for further information on how to identify the 20%.

You can Find the 20% Through Sobetsu
kenji hachiya, Member
It is true, as a trainer, when I teach the 80:20 principle that most of trainees find difficulties in defining items belong to critical 20%.
That’s why when I teach Pareto, I will also explain Sobetsu (stratification), which is one of among 7 QC tools. Sobetsu is just about seeing things from different points of view, but it will help trainee to find what items belong to critical 20%.
Also, I teach MECE (Editor: Mutually Exclusive and Collectively Exhaustive) so that the trainees will not conduct duplicated nor redundant stratification.

How to Discern the 20% Most Valuable Customers
hamza fellah, Member
To succeed in identifying the 20% best customers, the manager should have in hands all information on turnover, costs of customer acquisition and loyalty, purchasing frequency and purchased quantities specific to each client in a well-defined period of time. All this allows to calculate the life time value of each customer.
Once life time value calculated we proceed to a customer ranking on the basis of their different values. Now you have your 20%.

Stratification | Sobetsu
kenji hachiya, Member
Regarding Sobetsu (stratification) which helps better applying Pareto, here’s some more information:
In short, Stratification is a technique used in combination with other data analysis tools. When data from a variety of sources or categories have been lumped together, the meaning of the data can be impossible to see. This technique separates the data so that patterns can be seen.

- Before collecting data.
- When data come from several sources or conditions, such as shifts, days of the week, suppliers or population groups.
- When data analysis may require separating different sources or conditions.

- Before collecting data, consider which information about the sources of the data might have an effect on the results. Set up the data collection so that you collect that information as well.
- When plotting or graphing the collected data on a scatter diagram, control chart, histogram or other analysis tool, use different marks or colors to distinguish data from various sources. Data that are distinguished in this way are said to be “stratified” (grouped, layered).
- Analyze the subsets of stratified data separately. For example, on a scatter diagram where data are stratified into data from source 1 and data from source 2, draw quadrants, count points and determine the critical value only for the data from source 1, then only for the data from source 2.

To Find the 20%, You Need to Understand your Goals
Kurt Ludikovsky, Member
@hamza fellah brings the topic to the point: the Pareto Principle is not a method to magically solve your problems. If you don't understand your business you won't get useful results. It just helps you in getting some focus:
If we talk about customers:
- 20% of your customer accrue for 80% of your revenue
- 80% for only 20%.
- Losing half of your top customers will degrade your revenue by up to 40-50%.
- Losing half of the 80% will maybe only reduce your revenue by 10%. But that might make the difference of making profit or not…
So Pareto helps you prioritize some actions, and help you decide on delegation.

Find the 20% That Produce 80% of the Results by Martian VA Analysis
Javier Elenes, Member
In order to Find the 20% of people, materials, or machines that contribute to produce value I used a Martian VA Analysis:
- Take a piece of paper and draw a big T
- Walk trough your plant (or office)
- For every activity that is adding value make a mark at the left column
- For every activity that is NOT adding value make a mark in the right column.
- Typically you will have 2 marks in the left column for 8 in the right column.
Now focus on the activities that are adding value to improve them and eliminate all the activities at the right column that are not adding value anyway.

Pareto 20/80, Just one Support Tool for Decision-making
hamza fellah, Member
@Kurt Ludikovsky: I totally agree with you, it's true that what you said is a crucial point that I forgot to specify. Effectively my point was nothing but a means to measure a firm’s customer capital, and also a method to follow to obtain information that may prove to be important for the success of a strategy, and achievement of goals set either oriented sales or client retention.
But a company must always use such data in a none-exhaustive manner. Merely focusing on the 20% of customers and keep going this way can be fatal as you pointed out. For example, the right use of information should be combined with maintaining good relations with its clientele (because it shouldn’t be careless about the human factor).
So that’s why I said earlier on that an implementation of a customer relationship management strategy is needed for a proper use of the Pareto principle.


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