The Pareto principle states that for many outcomes, roughly 80% of consequences come from 20% of causes. Other names for this principle are the 80/20 rule, the law of the vital few, or the principle of factor sparsity
Quite simply the Pareto rule is to concentrate 80% of your spend time and effort in 20% of your suppliers, or if you are able to be even more efficient aim for 90% of your spend in the top 10 suppliers.
Procurement helps an organisation aggregate the spend to help create efficiencies.
The first step is to pull a spend report
Review the category management opportunities
Execute the pre- sourcing steps
Undertake Sourcing
Make sure its strategic
Carry out Contract Management
A mini example of how the Pareto rules might be applied
Case Study: Reducing Supplier Lead Times
Company X, a manufacturing firm, noticed that delays in supplier lead times were impacting their production schedules and causing disruptions in their supply chain. To address this issue, they conducted a Pareto analysis to identify the key suppliers causing the most significant delays.
Data Collection: Company X collected data on supplier lead times over the past year, including information on delivery delays, order quantities, and frequency of orders.
Pareto Analysis: After collecting the data, they conducted a Pareto analysis to identify the suppliers responsible for the majority of the delays. They found that out of their 20 suppliers, only 4 were causing 80% of the delays in lead times.
Focus on Key Suppliers: With this insight, Company X decided to focus their efforts on the top 4 suppliers identified by the Pareto analysis.
Collaborative Improvement Initiatives: Company X initiated discussions with these key suppliers to understand the root causes of the delays. They found that communication gaps, quality issues, and capacity constraints were the primary reasons for the delays.
Implementing Solutions: Company X worked collaboratively with these suppliers to implement solutions. This included setting up regular communication channels, providing forecasts well in advance, conducting joint quality improvement initiatives, and exploring options for increasing production capacity.
Monitoring and Evaluation: Company X monitored the impact of these initiatives by tracking lead times regularly. They found that by addressing the issues with the top 4 suppliers, they were able to significantly reduce lead times and improve the reliability of their supply chain.
Continuous Improvement: Company X continued to monitor supplier performance and sought feedback from both internal stakeholders and suppliers to identify further areas for improvement.
By applying the Pareto principle to their procurement process, Company X was able to efficiently allocate their resources and focus their efforts on the suppliers that had the most significant impact on their supply chain performance, ultimately leading to improvements in lead times and operational efficiency.