Pareto Analysis

What is Pareto analysis?

The Pareto analysis principle serves as the basis for ABC analysis and is often also referred to as the 80/20 or 90/10 rule. You may hear statements such as 80% of the company sales are generated from 20% of the product range, this, in essence, highlights that the 20% of products identified are critical to the companies revenue stream and under the ABC analysis this 20% of products may then be classed as “A” items, meaning they should be readily available from stock to fulfil customer demand.

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Not all items in an inventory are of the same value, therefore these items are broken down into three categories A, B and C. Class A consists of most valuable items, although these items constitute only 10% of the quantity they account for 70% – 80% of consumption value...

 

 

How can Pareto analysis be applied?

Pareto analysis of the product range can be based on criteria such as profitability or sales volume that the product generates, for example, you may have a product that does not sell in high volume, but when it does it creates a considerable amount of profit. Should this be an A classified item to ensure it is always made available for sale?

If the ABC analysis is undertaken on a product value basis, then the following purchasing/stocking situation may apply in a manufacturing company:

  • A items – high-value items = low stock holding needing continuity in supply/JIT or periodic review replenishment system (explained later). Bulk chemicals are examples here.
  • B items - medium value items = minimum/maximum or continuous review replenishment system (see later) with supplier weekly check on stock/re-order. An example could be protective paints.
  • C items - low-value items = two-bin system replenishment system may suffice for items such as nuts, washers

Why would you apply Pareto analysis to a stock and manufacturing process?

Having conducted Pareto analysis to identify critical inventory items in your product range, all products should then carry the A/B/C classification, this will support the production planners who are generating works order to identify which products ranges should take priority to pass through the production lines.

Once planning your production runs, capacity planners will give priority to A classified items to ensure that stock levels do not drop below a defined minimum stock holding level, by return, this should support the sales team to secure sales with the customer and ensure that the goods are always available on time and in full.

To find out more about this subject read the full knowledge paper: Pareto analysis

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