Pareto Rule
The Pareto Rule states that the most important results for any outcome, roughly 80 percent of its causes come from just 20 percent of its causes. Other names for the rule are the law of large numbers, the 80/20 rule or the principal of factor density. It is a famous management principle which has been around for more than one hundred years and is used in all areas of life including management. Most businesses use some variation of this rule to determine the allocation of resources in all areas of production and business operations. For example, in a supply chain management situation, this principle can be used to measure efficiencies at the beginning of a supply chain and throughout the supply chain as a whole.
The Pareto Principle has a simple explanation, for every action, there is an opposite or contrary reaction. In supply chain management, this means that if you take the initial output, say a product in the manufacture stage, and you add an additional ingredient, say a packaging material, then you now have two products, but now the amount of material needed to manufacture the product has increased, or decreased, depending on what you added. Therefore, one of the consequences comes about from the fact that now the amount of resources has increased, and the amount of potential output has also increased. This increase in potential output is what the Pareto Principle measures. From this example it is easy to see how the Pareto Principle can be applied to a supply chain management system or any other type of management system.
The Pareto rule is also used in business. It is called the principle of division of labor, because when people who do different tasks perform their tasks in order, then they produce according to their abilities, and so divide up the available work, and everyone gets what they need. Obviously the Pareto rule can be used in business in many different ways, and it provides a great insight into how organizations manage their resources. Using the Pareto rule in management can lead to getting more done, and achieve more goals.
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