Pareto Principle

The Pareto Principle is just that, a principle.  This principle says that, generally, 20% of

the input is responsible for 80% of the outcome.  This is also called the 80/20 rule.

In 1896, Italian economist Vilfredo Pareto reported that he discovered in Italy 80% of all the publicly-owned land in the country was owned by 20% of the population.  Inversely, he observed that 20% of the land was owned by 80% of the population.  It is reported that Pareto noticed in his garden that 20% of the peapods contained 80% of the peas.

Later, a management consultant named Joseph Juran developed the concept a little more formally.

Today, the Pareto Principle is used to note that 80% of results are produced by 20% of the company’s employees. 

This rule of thumb should only be used as just that, a rule of thumb.  It is not cast in stone, nor is it 100% accurate. 

Accuracy aside, let’s take a look at what might happen if someone acted upon the principle.

Let’s say you are in charge of a company that has 10 stores.  Your company’s total profit for the year is $100,000.  You review your data and discover that 80% of your profits came from 20% of your stores.

20% of ten stores is 2 stores.  80% of $100,000 is $80,000.  This means that you had 2 stores that produced approximately $40K each.  That would mean that your remaining stores had an average of $2,500 per store.

Some looking at the data would suggest that the company should close the stores making $2,500 in profit or less per year. 

However, remember that the Pareto Principle is a tool.  This tool should be used to help improve the company.

The proper thing to do in this situation is to analyze the data.  What do the two more profitable stores have in common with each other that is not found in the other locations or is found there but is not as prevalent?

Next, it is time for a little of that Management by Walking Around we talked about. This would be the time for senior management to get into the two more profitable stores and observe them in detail, but not mess with anything.

After observing the two more profitable stores for several days, senior management should get into each of the less profitable stores and observe.

If we remember the Iceberg of Ignorance, we will remember that the line-level employee is typically aware of 100% of the problems within a company, while top-level management is only aware of approximately 4% of the problems faced by the company.

With that in mind, each line-level employee, one at a time, should be sent from the less profitable stores to observe the most profitable stores.  At the same time, line-level employees from the most profitable stores should be sent to observe the less profitable stores.

To determine what, if anything, these line-level employees observed, top management should debrief these employees. 

Knee jerk reactions to the situation are not helpful.  Keeping accurate records and reviewing the information from those records is important.

A salesman wishing to improve his sales should review what data he may have on previous sales calls.  Immediately after any sales call, successful or not, the salesman should record all the details he can recall about the sales call.

In reading How I Raised Myself from Failure to Success in Selling, I learned that the author, Frank Bettger, learned that he closed most of the sales on the first or second call.  Sales calls after the first or second did not yield great results.  Bettger learned to concentrate on the first two sales calls and not pursue the sale any further.

Other sales people have learned that it takes at least five sales calls, in most cases, for them to close a sale.  Reviews of their call records indicate that in many cases they failed to follow through to the fifth or sixth sales calls.

The take away from this is that we really cannot know what the data is telling us without thoroughly analyzing that data in detail and asking why the results are like they are.

Once we know what the data reveals, it is up to management to determine how to act on it.

Imagine, if you will, our store scenario.  What if our data indicates that 80% of our sales and profits come from the PCBs (Packaged Carbonated Beverages)?  One might determine that since this is where most of our sales and profits come from that we should get out of all other product lines and just sell PCBs. 

Now, our manager determines that, in the PCBs, Kooky Kola has 80% of all sales and profits.  Another beverage, Fiza Cola Fit, accounts for 20% of the sales and profits for the store. 

In a world where some managers only see the data and not the big picture, our manager might determine that since most of our profits come from PCBs, we should ONLY sell PCBs.  Then, the manager might determine that since Kooky Kola accounts for most of the sales in the PCB line, the store should ONLY sell Kooky Kola. 

This means we now have a store that has one product, Kooky Kola.  Would you shop there?

Jack Welch’s Differentiation Vitality Curve is based on the Pareto Principle.  See our video about it to see how the principle is applied.

Please Visit My Child Bride Suzanne's Blog


Watch this on YouTube

I respond to all comments on this blog, ideally within 24 hours.  Please check back here for a response to your comment.  Thank you!

Please be advised that all the information in this course is provided to educate, enlighten, and broaden your views in life.  The information provided is not a substitute for medical, legal, dietary, financial/accounting, or religious professionals. Always consult a professional before you act on any of the information you find in this course.  

Do you have a frugal recipe?  Please e-mail it to me.
Help us reach 1,000 YouTube subscribers. Please watch some of our videos. If you like them, please subscribe. Also, please share our YouTube information with your friends.  We thank you so much for all your help. 


Please subscribe to My YouTube Channel. Thanks!

Disclaimer
The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances. Please Visit McClendon Enterprises

R.C. Cola

R. C. Cola

Shortly after Suzanne and I began to work for my father full time he said to me that he

really would like to start selling R. C. Cola.  He had grown up with R. C. Cola and loved it as a boy. He had seen in around but the sales people never came to his store so he did not have an opportunity to start carrying it. He told me that if I could get in touch with the route salesman to have him stop by the store that he would like to talk to him about carrying the R.C. brand of drinks.

A few weeks later I ran into the R.C. route salesman and one of the stores in town. Back then the salesman did everything. They drove a truck load of product around, checked the inventory for each store and then immediately delivered what they thought that store needed for the next week. It works differently now and not as well, I might add.

I told the route salesman that before he left town for the day we would like to talk to him at Western Auto about selling his product. He said he would stop by on his way out of town. He never stopped.

Several months later I encountered a different route salesman in town and told him the same thing. The man said he was new to the route and R.C. and had not set up new accounts yet but he would stop by the store and see what he could do.

Well, he did actually stop by the store and my father asked him about the price of soft drinks. At that time we sold Coke products out of a machine that never worked and that was it.  The sales man told him what he could sell him a case or two for.

My father then asked the salesman what the least price we could sell two liter drinks for would be. The sales man told him that we would have to buy 300 cases of two liters, and that each week we would have to buy enough two liters to build back up to 300 cases and if we did we could sell them at 69¢ each. My father told him to set him up. Then my father asked him what was the least we could sell canned drinks for. The salesman told him we would have to buy 300 cases of those as well and buy back up to 300 cases each week and then we could sell a six pack for about $1. My father told him to go ahead.

The route salesman brought in those cases of soda and we built a display and put up signs and went to selling the soft drinks.

Meanwhile back at the R.C. warehouse the route salesman has been chewed out by his district manager because of how they were going to have to eventually buy back all those soft drinks from us. The district manager told his salesman that that was the stupidest mistake that he had ever had a new salesman make and that when they did have to buy them back that the total cost was going to come out of his commission.

My father loved to sell. He could sell ice to an Eskimo if he wanted to. He wanted to sell R.C. so everyone that came in the store was told about the R.C. price. We sold out of the R.C. drinks in less than two days.

That next week the route salesman with his district manager came to the store at the end of his day. They salesman had been listening all day to how the district manager was going to have to go in and explain to us about what a mistake was made and that the company would like to apologize to us for the hassle.

When the salesman came in the store he looked like he had lost his last friend. He was dragging lower than the ears on a Bassett Hound. The first words out of the district manager’s mouth were “Where are all my drinks?” I told him, “We sold them!” He said well what about the drinks in the back room, why aren’t they out here?” I told him that we did not put anything in the back room. I went on to tell him that Bruce was upset with R.C. because we ran out of drinks in less than two days and we did not know how to get in touch with them to get more drinks.

My father had a special way of dealing with “know it all district managers.” He hated them. He made it plain with this district manager that we would continue to sell the product as long as this salesman were on the route and that the district manager left the salesman alone. By the time Bruce was finished the district manager had a change of heart and apologized to the route salesman and then arranged for us to get a brand new R.C. drink machine and that they would pay to install an outdoor outlet for the machine so that it could be outside the store on the sidewalk.

Learn from this story what you will. I think the important points were:

1. The original route salesman, the one that did not come to the store, let a lot of business pass by that should have been easy to get.

2. The new salesman approached the new business in an honest straightforward way and got what became the best stop on all the routes in the district manager’s district.

3. District Mangers and other supervisors need to observe and actually see what the facts are before they try to correct the actions of their people.

4. Just because a mom and pop place is a mom and pop place does not mean that it can’t be very profitable for all concerned.

Visit My Child Bride, Suzanne’s Blog

Watch this on YouTube. 

If you like this post, please follow us. 

Disclaimer
The opinions or advice listed in this blog or website should be used as a place to start only. It is not a substitute for the use of a professional.
Please be sure to consult your attorney and/or accountant with any specific questions.
There is no one right answer to any business question that will cover all circumstances. Please Visit McClendon Enterprises