“80/20 Rule” Upgrades¹

For high “Return on Management Effort” (ROME), we focus on the “vital few” that can make the big difference. In 1906,Vilfredo Pareto, an Italian Economist, discovered that 20% of the population (cause) owned 80% of the land (effect). This “power law” observation was popularized as the “80/20 rule” by quality guru, Joseph Juran. Other “power laws” are: frequency of word usage (1/80); internet content contributors (1/90); size of earthquakes; etc.

How can we improve on 80/20 thinking? If 80/20 gets us into the right ball park, what rules will get us to the best, net-profit-improvement sections and then to the best, net-profit seat in the section? Don’t we want to pursue highest return, lowest-risk, lowest-investment opportunities first?

Net-Profit Contribution Power Laws:

Distributors that have cost-models for determining the net-profit contribution for each “line item” can roll up this “quantum profit data”² to find the following relationships in increasingly useful order:

• 20% of the customers generate close to 80% of the sales (Pareto’s only application)
• 30% of the customers generate around 70% of the margin dollars (least extreme ratio)
• 20% of the customers generate 140% of the net-profits (top 10% => 100% & 1=>35)
• Bottom 1% customers lose (20%) of the 140% peak internal profit total (fix these ones!)
• 5% of the SKUs generate over 500% of the peak internal profits (Why? How? Sell more?)³

Amplify/Acutate Net Profit Rules With Additional, Leverage Factors:

• 4% of customers within mature industries are perpetual innovators that will generate 80% of the future growth in that industry. Much of this “growth” is not “new demand”, but stolen share from non-innovating, only-reactively-adapting competitors. Partner the profitable, “gazelle accounts” to grow profitable sales.
• Any distribution branch can offer “perfect service guaranteed” plus heroic extra efforts from all employees for aboutten, best, profit-growth-potential accounts. (Do it!)⁴
• The few, super-loser accounts can have good – sales, margin and margin percentage – stats, but kill us (and them) with excessive service/buying activity costs. These relationships can be transformed into win-win ones.⁵
• If management does “audits” of key accounts to insure that every aspect of the inter-business replenishment process and people are fine-tuned 10’s, guess what? There will be plenty of “tweaks” that will yield big results for both companies. No one has been responsible for optimizing the inter-business-process; be the first! Then, summarize the refinement opportunities for each customer and offer to make all upgrades happen at our expense along with a new “perfect service guarantee”?⁶
• The best 10% of your sales force can help new, upside things happen at key accounts (with management and total-team help) better than the bottom 50%. Don’t let coasters sit on key account potential and waste total-team efforts. What is the one most promising account renewal, reassignment opportunity you can find? Try it!

Net-Profit, Power-Law-Management Results:

A profit-center (branch) can:

• Turn big losers into winners and gain 20%+ more volume, because the customers would be so grateful for the big improvements in supply-chain savings and up-time effectiveness.
• Get 20% + more volume from best accounts “where we are getting all of the business”.
• Get bigger, average order sizes with best incremental margin flow-through to profits due to:
  1. Better-tuned replenished systems;
  2. More thorough penetration selling of core items for which..
  3. Fill-rates were increased for the most profitable SKUs
• Grow net profits 2X+ faster than sales which would grow 2X+ faster than current trends.

Stop everyone from “working harder” at reactive adaptions and fine-tuning whatever they have been doing. Focus instead on narrowly and intensively experimenting where net-profit growth can best happen.

“5-5-5 ROME” Program At Every Branch; Learn More:

For every location, identify and track the progress of the: 5 most profitable customers; 5 most profitable, future-growth gazelles; and 5 biggest losing accounts. Provide some training on how to take each category of customer to the next level⁷. To get really good at all of this, put a hold on October 20-21^st for the “Advanced Profit- Improvement Conference” in Chicago. Learn more about power-law management tactics from both successful distributors and experts.

For more immediate enlightenment (and results), request a demo on Waypoint Analytics’ “quantum profit management service”.

Bruce Merrifield

[email protected]