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The Pareto Principle at Play in Procurement
This week's Wiki-Wednesday topic is the Pareto Principle - also known as the 80/20 rule. Many of us use it all of the time, but do we really understand the implications of the distribution principle? I'm sure I hadn't fully thought about it until reading up for this weeks' posting. Other things I did not know about the primciple are that it was incorrectly attributed to early 20th century economist Vilfredo Pareto because he observed that 20 percent of the landowners in Italy owned 80% of the land. (He also noted that 20% of the pea plants in his garden produced 80% of the peas...)
It seems that the real credit for the principle is due to Dr. Joseph M. Juran, a quality engineer, who in the 1940's applied the principle his field of study (and also named the principle after Pareto). He wrote of "the vital few and the trivial many".
When you think of how we use the principle in procurement (did you like all of the "P's" I managed to squeeze into the title of my post by the way?) The idea is a little scary. Is there really such a thing as trivial when you are talking about players in your supply chain or dollars of spend under management? Especially since we'd be talking about the majority of either.
It is one thing to use the 80/20 rule when you are preparing a report, or putting together a table or chart for a presentation - because sometimes listing all of the suppliers is just too many lines to be readable. But using the principle as a supply base management strategy is too risky these days.
What if one of those "trivial many" doesn't come through with a delivery or meet a service level? Are they still trivial? Raking and sorting are fine, but it is harder to split a list of suppliers into those who need to be monitored to prevent business continuity issues using this approach. The idea makes me think of an article I read a year or so about bees disappearing. I'm sure you've read it at some point - the story has come up a number of times. Because of changing conditions in the environment, certain types of bees are dying out. And while that may seem trivial enough (unless you are a bee) the ramifications of their extinction would be disastrous to the rest of the food chain.
Obviously we are all very busy, and responsible for many more things than we have the time to thoroughly and thoughtfully manage, but every once in a while it is important to stop and make sure an important member of your supply chain doesn't get overlooked because they statistically fall off the table.