Focused Operations Management

Chapter 3. The Pareto Rule, the Focusing Table, and the Focusing Matrix

The Pareto Rule

Only a few simple principles of management have the potential to make an enormous contribution through intelligent use. Among these, the Pareto rule deserves special attention and is one of the most important principles of management.

Vilfredo Pareto was an economist of Italian ancestry who lived from 1848 to 1923. He discovered that roughly 20 percent of the population possesses 80 percent of the world's wealth. This is referred to as the “20/80 rule” or the “principle of the vital few and the trivial many.”

Many phenomena in the world of management follow the Pareto rule, for example:

• 20 percent of stores in a supermarket chain account for 80 percent of the chain's profits.

• 20 percent of bank customers account for 80 percent of the bank's profits.

• 20 percent of patients in a hospital ward require 80 percent of the staff's attention.

• 20 percent of suppliers provide about 80 percent of the value of products, materials, and components.

• 20 percent of a company's projects produce about 80 percent of the contribution to profit.

• 20 percent of the inventory items constitute about 80 percent of the total inventory value.

• 20 percent of the salesforce is responsible for 80 percent of company sales.

• 20 percent of failure causes account for about 80 percent of all failures.

• 20 percent of a firm's customers generate 80 percent of the firm's revenues.

In the 1940s, the 20/80 rule was expanded to the three‐way classification ...