Pareto Analysis for Supply Chain
Using the 80:20 Rule to Prioritize
Pareto Analysis is a technique for prioritizing problem-solving work so
that the first piece of work you do resolved the greatest number of problems.
It's based on the Pareto Principle (also known as the 80/20 Rule):
The idea that 80%
of value/issues may be caused by as few as 20% of activities/causes.
This rule is applied in industry and business in many
ways. For example, in Supply Chain:
- 20% of the product families represent
80% of the inventory
- 20% of the suppliers represent 80% of the global amount of purchase
- 20% of the defects cause 80% of the problems
- 20% of articles generate 80% of the sales turnover
- 20% of your customers generate 80% of the revenue
Pareto
Analysis can be used almost everywhere and anywhere and Supply Chain
professionals can really benefit from its application. Used correctly this
technique helps companies to focus and improve performance.
The following are just 2
examples of how you can use Pareto in the supply chain:
1. Improving your supplier delivery schedule adherence: Pareto is an excellent tool
when analyzing supplier performance and deciding on your management strategy –
which suppliers to focus on and what route causes to eradicate.
2. Cost Savings initiatives: Using Pareto techniques to
analyse cost drivers within your organization can help you focus on the key
contributory factors such as Suppliers, Parts or Bill of material elements
allowing you to focus your improvement activities on the parts that matter.
How can you apply
Pareto Analysis?
To use Pareto Analysis, identify and list problems and their causes.
Then score each problem and group them together by their cause. Then add up the
score for each group. Finally, work on finding a solution to the cause of the
problems in group with the highest score.
Pareto Analysis not only shows you the most important problem to solve,
it also gives you a score showing how severe the problem is.
The steps are as follows:
Step 1: Identify and List Problems
Firstly, write a list of all of the problems that you need to resolve. Where possible, talk to clients and team members to get their input, and draw on surveys, helpdesk logs and suchlike, where these are available.
Step 2: Identify the Root Cause of Each Problem
For each problem, identify its fundamental cause. (Techniques such as Brainstorming, the 5 Whys, Cause and Effect Analysis, and Root Cause Analysis will help with this.)
Step 3: Score Problems
Now you need to score each problem. The scoring method you use depends on the sort of problem you're trying to solve. For example, if you're trying to improve customer satisfaction, you might score them on the basis of the number of complaints eliminated by solving the problem.
Step 4: Group Problems Together by Root Cause
Next, group problems together by cause. For example, if three of your problems are caused by lack of staff, put these in the same group.
Step 5: Add up the Scores for Each Group
You can now add up the scores for each cause group. The group with the top score is your highest priority, and the group with the lowest score is your lowest priority.
Step 6: Take Action
Now you need to deal with the causes of your problems, dealing with your top-priority problem, or group of problems, first. Keep in mind that low scoring problems may not even be worth bothering with - solving these problems may cost you more than the solutions are worth.
Firstly, write a list of all of the problems that you need to resolve. Where possible, talk to clients and team members to get their input, and draw on surveys, helpdesk logs and suchlike, where these are available.
Step 2: Identify the Root Cause of Each Problem
For each problem, identify its fundamental cause. (Techniques such as Brainstorming, the 5 Whys, Cause and Effect Analysis, and Root Cause Analysis will help with this.)
Step 3: Score Problems
Now you need to score each problem. The scoring method you use depends on the sort of problem you're trying to solve. For example, if you're trying to improve customer satisfaction, you might score them on the basis of the number of complaints eliminated by solving the problem.
Step 4: Group Problems Together by Root Cause
Next, group problems together by cause. For example, if three of your problems are caused by lack of staff, put these in the same group.
Step 5: Add up the Scores for Each Group
You can now add up the scores for each cause group. The group with the top score is your highest priority, and the group with the lowest score is your lowest priority.
Step 6: Take Action
Now you need to deal with the causes of your problems, dealing with your top-priority problem, or group of problems, first. Keep in mind that low scoring problems may not even be worth bothering with - solving these problems may cost you more than the solutions are worth.
References:
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