Pareto Analysis Step by Step
What Is a Pareto Analysis?
Pareto Principle (80/20 Rule) & Pareto Analysis Guide
What Is Pareto Analysis?
A Pareto analysis is a mathematical model used in business to determine the cost-to-sale (CPS) ratio of a given sales offer. For example, if you offer fifty units for sale and this offers a margin of five percent, your sales will vary between five and ten percent. Your profit will fall between zero and two percent depending on how well the supply chain management, logistics, and production work together.
In most cases, the supply chain manager makes the decision to change the pricing strategy in order to maximize the overall profit from the overall sale. However, there are many cases where the supplier does not have the same incentive to change their price because they receive continued payments from the customer. In these situations, it is the role of the strategic analyst to show the company how to optimize their profit by changing their supply chain strategies so that the overall cost to the company per unit goes down, while the sales increases. There are many factors to consider in this type of analysis. Some of these factors include the customer's behavior, their buying preferences, the economy, competition, cost effectiveness, customer service, and even supply chain practices.
If a company chooses to use the traditional supply-chain purchasing method, it is important to conduct a Pareto analysis that demonstrates the profitability of the company's current products as well as their future products. Therefore, it is necessary to analyze the current products by their sales per item and their cost per unit compared to the long-term average sales and cost per item. This information will allow the strategic management team to determine the optimal replacement strategy for the inventory. In addition to this, the strategic management team should also examine the relationship between the replenishment system, the inventory, and the production process to understand how they affect each other.