The Pareto principle and its use in a production company.
Is it possible to change only a few key factors so that the overall production efficiency in the enterprise is dramatically improved? There are many theoretical premises, but also empirical evidence that it is indeed feasible. It is enough to achieve the Pareto principle observed at the end of the 19th century – the following article explains what the Pareto rule is and how to apply it to achieve tangible benefits.
How does the Pareto principle work?
The way the principle works is Straight, and it reads as follows: 80% of the results are responsible for 20% of efforts. Translating this idea into the area of the company’s operation – one-fifth of the most important factors should be given special attention, because their improvement will have a key impact on improving the company’s overall results.
The Pareto principle can be heard in lectures on economic theory and management, but also in the offices of Financial Controllers and managers of enterprises. The Pareto rule is so popular because it is reflected in reality in the form of statistical data series, as well as the experiences of people connected with business.
Where is the Pareto principle?
Examples of this principle may be as follows:
- 20% of products bring 80% of revenues,
- 20% of employees generate 80% of revenues,
- 20% of the article allows you to understand 80% of its content,
- 20% of customers report 80% of product complaints,
- 20% of errors in the IT system are responsible for 80% of IT problems,
- 20% of customers buy 80% of the company’s products,
- 20% of suppliers supply 80% of materials….
Examples of the Pareto principle in practice are almost infinite. They concern virtually all areas of the company’s operations, including production, as well as macroeconomic, IT and many others.
Advantages and disadvantages of implementing the Pareto rule.
The Pareto principle has many pluses. First of all, understanding its sense is very simple, and the way it works can be represented by one sentence. Its implementation helps in effective setting of priorities and general improvement of work organization in the whole enterprise. First of all, the application of the Pareto principle often brings tangible benefits, eg in the form of increased production efficiency.
However, you must remember about its limitations. The Pareto principle should be treated as a practical concept of thought, not as a golden equation describing all phenomena. All you need to do is, for example, check the amount of revenue generated in a given company by 20% of the largest customers. It is highly probable that they generate, for example, 74% or 86% of revenues. In any case, in most cases this value will oscillate around 80%.
One should also be aware that despite the simplicity of the Pareto principle, its implementation requires considerable knowledge and experience. This is particularly important in the case of developed companies that produce on a large scale. Hoping that the Pareto principle will actually turn out to be a good idea, when implementing it, it is worth considering the involvement of someone who can do it.
Entrepreneurs should also avoid uncritical focus on this principle. It is worth focusing on 20% of the most important factors, but you should never neglect the others. For example, concentration only on the production of 20% of the best-selling goods can not be done at the expense of neglecting the remaining 80% of products. Among them, there may be a product that, although it currently sells poorly, it has enormous potential and in a few months it may turn out to be the company’s future.
Skilful balancing of how it is worth following the Pareto principle is another factor that encourages the use of specialists who have experience in this matter.
How to apply the Pareto principle in production?
Just like practically all modern methods of production management, the Pareto principle is based on aggregated statistical data. As a result, objective conclusions can be drawn instead of subjective judgments.
When implementing the Pareto principle, it is first necessary to ensure that production data is collected, stored and properly processed. Importantly, data collection should take place all the time, to ensure that the Pareto principle is applied on the basis of the real situation in the company. It is possible that after some time, for example, a product that was rarely produced early is becoming the most important thing in a given company. According to the Pareto principle, he should be given much more attention.
The data that is collected should be as wide as possible. Therefore, you should also collect information such as the frequency of failures and the time of retooling of individual machines, the volume of production of individual goods, etc.
When a suitable database is prepared, it is possible to start their practical analysis in accordance with the Pareto principle. It is usually very helpful here to get the opinion of someone who already has the right experience. Effective implementation of the Pareto principle may turn, for example, by reducing the level of waste, increasing production and facilitating its planning.
It is worth applying the Pareto principle, but you have to do it wisely
The implementation of the Pareto principle in practice can be a milestone for the development of a production-based business. In the end, this is based on minimizing the effort, and hence the cost, and maximizing efficiency, and thus revenue.
However, one must be aware that the implementation of the Pareto principle in a production company is a big challenge requiring the passage of several stages. The sensible use of this principle is only possible when professionals experience it. It is also absolutely necessary to have the right IT facilities. Without an adapted system that correctly gathers data, the implementation of the Pareto principle is simply impossible.
Assistance in this area is provided by the OptiMES Team, which specializes in supporting activities that increase production efficiency. Write to firstname.lastname@example.org, or call 517 827 436 for more information.