The vital few and trivial many

In the early 1900s, Italian economist Vilfredo Pareto developed a mathematical formula to describe the uneven distribution of income and wealth in Switzerland.

Carl Hughes

His study showed that 80 percent of the country’s wealth was held by just 20 percent of the families. As he expanded his studies to other time periods and countries, he discovered the same 80/20 pattern.

The Pareto Principle became the 80/20 rule when researchers later discovered similar statistical ratios in other societies. For example, Joseph Juran studied dozens of U.S. manufacturing companies and found that often 20 percent of a company’s inventory created 80 percent of its sales and profits. The remaining 80 percent of inventory types were insignificant to the results even though the company treated them with the same attention as the 20 percent.

Juran characterized the finding as “the vital few – and the trivial many.” His work encouraged manufacturers to focus on the part of their production process that made them the most money. This 80/20 rule later became a staple management tool in the fields of management sciences that developed after World War II.

Other common observations of the rule are that 20 percent of customers create 80 percent of revenues and profits; 20 percent of a project consumes 80 percent of the time and resources; 80 percent of complaints are caused by 20 percent of the customers; and that 20 percent of any meeting results in 80 percent of its value.

Key lessons

In its most basic application, the rule says if you can identify beforehand that 80 percent of a particular effort produces 20 percent of the results, management should shift resources and tasks to focus on the 20 percent that matters most.

Secondly, an inverse relationship may exist when 80 percent of the effort produces only 20 percent of the results. This identifies areas of diminishing marginal benefit where each additional contribution of effort and investment create incrementally less and less value to the organization.

It is important to remind managers that not all effort, activity and investment yield the same results. Things are not evenly distributed, and some contribute more than others (equal effort does not create equal output). Ignoring this can create debilitating inefficiencies in organizations.

Finally, the 80/20 rule does not apply to all sales, inventories or customers. The rule is not a law of nature or science, but rather a statistical observation. It can often be where 30 percent of the effort can produce 70 percent of the results and so forth.

The first lesson for retail propane management is to understand that all of our efforts don’t yield the same results. Here are specific areas where this rule may apply to your business:

• Customer complaints – What percentage of your customers do the complaints come from? Do we sometimes overreact to the entire customer base because of the few complaints that may not represent the whole?
• Marketing efforts – Do we pour more of our resources into the most profitable efforts or spread energies evenly among our customer base?
• Projects – Are your projects prioritized, with those that have the greatest impact getting the most resources and attention? Or do you spread resources evenly over all projects regardless of their potential?
• Management time – Does 20 percent of your key time create 80 percent of your value to the company?
• Profits – Some marketers’ focus on gallons is so intense that 20 percent of their volume generates 80 percent of the profits. For them, 80 percent of their volume is the “trivial many” that takes a disproportionate amount of effort, energy and investment.

The 80/20 rule is the statistical proof that managers must know not only to do things right, but also to do the right things.

Carl Hughes is senior vice president of business development for Inergy LP. He can be reached at
Chughes@InergyServices.com
or 816-842-8181.