Bernhard Burgener believes the 80:20 rule can set people up for success in every area of their lives. With an experience of 40 years, the entrepreneur knows a thing or two about business and time management. “And with every area of their lives, I mean career, relationships, business, and personal goals”, says Burgener. In addition, the Pareto principle can help individuals and organizations prioritize their efforts, tasks, resources, and money.
How do you prioritize your task every day? How do you decide what to do first, what requires your energy, and what needs more of your time? Getting through the day without prioritizing one’s tasks or efforts is a common problem that must be addressed. This is where the 80:20 rule or Pareto principle comes in. The Pareto principle is a great way to prioritize tasks for maximum productivity.
This article breaks down Bernhard Burgener’s view of the Pareto Principle, including how to use it to boost business efforts.
What is the 80:20 Rule (Pareto Principle)?
Known as the 80:20 rule, the Pareto principle holds that 80% of outcomes can be explained by 20% of causes. In other words, roughly 20% of your activities (i.e., input) will determine 80% of your results (outcomes). The Pareto Principle isn’t a mathematical law or a hard and fast rule. Instead, it is an observation that applies to many scenarios, including economics, sports, and business.
Why is it important?
Pareto Principle explains that 80% of the consequences come from just 20% of the causes. This principle emphasizes that a small percentage of effort can lead to outsized effects. Therefore, applying the principle can help people identify high-performing tasks to focus on to make a great impact.
The man behind the concept
Vilfredo Pareto was an Italian Economist who discovered in 1896 that 80% of his pea pod harvest came from 20% of his pea plants. The Economist also applied this discovery to the imbalance of wealth distribution and land ownership in Italy. He found that 20% of the people in Italy owned 80% of the country’s wealth. Pareto also applied this principle to other countries and found the same results. He then concluded that a small change in one quantity could result in an outsized change in another.
In the 1940s, Dr. Joseph Juran coined the term “Pareto Principle” after applying Pareto’s observations to his operation management. He found that 80% of business product defects were caused by 20% of the methods employed in production. So, he helped businesses improve their production quality by focusing on reducing 20% of production problems. Dr. Joseph Juran made this principle popular and emphasized the importance of focusing on the vital few to attain success.
How does the Pareto principle work?
Bernhard Burgener agrees that the best way to apply the Pareto principle, especially in businesses and economics, is by using the ABC analysis. This principle is very helpful in determining where you can focus your effort for the best returns.
Understanding Pareto (ABC) analysis
ABC or Pareto analysis is a categorical technique used to classify things according to their value and importance. This analysis can help manufacturers, inventory managers, and other individuals get insight into business management without needing a lot of resources. ABC analysis also helps with supply chain management, staff evaluation, procurement, marketing, and customer relationship management.
Today, many business owners have found that 80% of their revenue comes from 20% of their products or activities. Companies can use the Pareto analysis to determine which product or business operation will likely result in 80% returns.
This analysis works by evaluating the importance of items or inputs to determine the level of resources or money to invest in. Also, Pareto analysis helps guide decisions and manage a business effectively when done well.
Items/activities of high value are usually categorized as A, medium value as B, and slow-moving as C. With this analysis, organizations can properly forecast their returns and identify where to put their most energy/resources.
Benefits of using the Pareto principle
The 80:20 rule (Pareto Principle) can help you identify which areas of your efforts to focus on or fix. According to Bernhard Burgener, the principle can help people manage their time and set goals. How? Segmenting your tasks into small portions and identifying the parts that require the most effort!
Some benefits of using the principle include:
- Identification/segmentation of the most valuable tasks that can lead to success
- Efficient use of resources
- Effective leadership
- Perfect organization and optimization of business operations
- Increased productivity.
Disadvantages of using the 80:20 rule (Pareto principle)
As mentioned earlier, the Pareto principle isn’t a hard and fast rule, so it doesn’t work for every scenario. Also, the rule isn’t always true. For example, in a company with ten workers, 20% (2 out of 10) of such a company’s workforce may not be responsible for 80% of the company’s success.
Also, the 20% and 80% don’t measure the effort you put in but the input you are working on. According to Forbes, the best way to apply this rule is to focus on the work that brings the most impact. Therefore, knowing where 20% of your effort is best applied is important.
One downside of the 80:20 rule is that it may take time to determine the work that brings the best result. Also, depending on this rule can make people obsessed with certain tasks while losing sight of other important tasks. The best way to use this principle is to find the right balance.
How to Use the 80:20 Rule and ABC Analysis with Inventory
Inventory planners can use the 80:20 rule (Pareto Principle) to manage inventory effectively, forecast product demand, and improve supply chain management. The ABC analysis follows the Pareto principle that 20% of stock accounts for 80% of the business revenue. Here are some ways to use this analysis to manage inventory.
-
Classify Your Inventory
The first step to using ABC analysis in inventory management is to classify your inventory items into three categories ABC where:
- A is the category with items of the highest value
- B is the category of items with medium value and
- C is the category of items with the lowest values.
2. Create Rules for Inventory Classes
The most important part of the ABC analysis is knowing how to rank your items from highest to lowest. One of the best ways to identify the value of items is by multiplying the price and consumption volume at a particular period. Afterward, calculate the value of each item as a percentage of the total inventory value. Lastly, group all the items according to their percentage of the overall inventory value.
So, you can have items that account for 80-60 percent of the total inventory classified as A. items accounting for 50-30 as B, and the remaining as category C.
Monitor and Look for Opportunities to Change Classes
Inventory value may change over time.
This means an item that used to belong to category A may drop to B, and an item of C may move up to A. Always monitor your inventory and look for opportunities to recategorize your inventory items for accurate predictions.
Finding new ways to achieve productivity is important, and the 80:20 rule (Pareto principle) can be a great way to do that according to Bernhard Burgener. You can apply this rule to different areas, especially in business, to organize your tasks and determine which requires your best effort.
 to set themselves up for success.){kind=link}