What exactly is 8020?

When I have asked people if they are familiar with 8020, almost everyone’s heads nod yes. When I ask for their descriptions of 8020, I get a wide variety of responses. Let’s start with the basics.

Origin: Vilfredo Pareto, an Italian engineer, sociologist, economist, political scientist, and philosopher is credited with the original idea. In an 1896 paper he published, he noted that 20% of the Italian population owned about 80% of the land. He also found income distributions followed this same ratio. In 1941, Joseph M. Juran, one of the founders for advanced quality systems and management, discovered Vilfredo Pareto’s work and started using it for quality issues. That’s it for the quick history lesson… Let’s move into 8020’s various forms.

Basics: Its simplest form is a single-dimensional view of any data set. I have looked at individual distributions of revenues, profits, costs, and activities and found that 18% to 22% of the items or customers almost always drive about 80% of the studied item. Regardless of the industry, region, technology in use, or products/services involved, 8020 has applied. This is important to remember, when we talk about activities later. Although rare, I have seen cases where extreme concentrations will distort the numbers. For example, a small business serving a large OEM may have 1% of the customers driving 95% of the Revenue. A business using exotic and expensive alloys may have a different ratio when looking at cost distributions.

More complex forms of 8020 also exist. Illinois Tool Works (ITW), has developed a multi-dimensional operating strategy with 8020 as its backbone. For the record, I have never worked for, nor am I beholden to ITW in anyway. Over the years, I have worked with folks who learned the ITW Toolbox and I have taken advantage of many of its tactics. By far, it is my favorite 8020 strategy! I’ll talk more about it later in this blog. Let’s talk more about the basics first.

A single-dimensional use of the tool is powerful. It can help you understand and focus on core drivers and risks in your business. Let’s look at Revenue. If you were wanting to grow your business, do you think the odds of doing so are with the handful of customers driving 80% of your business or the multitudes driving 20%? As a rule, you will have more success with the 80’s, as I will call them, versus the 20’s. With the 80’s, you probably are a top choice when relevant opportunities arise. You have what’s know as mindshare with this group of customers.

When you consider risks to your business, the same idea applies. The 80’s driving your revenue are also 80% of your Accounts Receivable (AR). If you’re reliant on AR to fund your working capital, then you have some near-term risk if one of the top-5 were to experience financial problems. The same thinking applies to products. Competitors may introduce a disruptive technology that displaces some of your 80’s. My main point is there are several layers of risk related to your 80’s to consider.

I think it’s important to align your best and brightest on your 80’s to maximize growth, while you manage risks. I have witnessed an interesting phenomenon in many plants that runs counter to this thought. Look at your most thinly margined business and evaluate who on your team is spending most of their time on it. Forget the books on this look. Use an activity-based assessment. You may be surprised to see some of your top “A” players as well as a disproportionate number of others focused there. Meanwhile, your revenue and margin 80’s are somewhat ignored and neglected.

I also encourage you to involve the 80’s in your strategic planning and your product development efforts. I have included customer and supplier 80’s in key strategy sessions with great results. These meetings are always fun and exciting. I love the ownership that results from these efforts. And, the alignment throughout the supply chain tends to produce products and services that sell well in the market. At an minimum, you will increase mindshare with these key stakeholders.

Before I get more into ITW’s 8020, I want to cover one more topic that seems to elude most small to medium sized groups. Any of you who have driven or took part in cost reductions know that, regardless of size, they all take some effort. If you’re going to impact results, it’s important to focus on where it counts – the 80’s! The math gets simple. A 5% improvement on something in the 80’s is worth a great deal more than one in the 20’s. Yet, I have seen far too many examples where most of the team charters in a business deal with the 20’s.

Asset & Time Management: Small to medium plants who introduced Just-in-time (JIT) inventory policies can experience unintended results related to both asset and time management. Many banks want an ABC classification based on unit values for cycle counting purposes. When I run a Pareto based on dollars flowing through the plant for ALL items, my classifications are very different.

For this writing, I’m not going to go into any of the ideas used to identify what you should be a stock item, how much safety stock it should have, etc… I want you to consider a classification tactic that ensures 80% of your best and brightest are managing 80% of the money flowing through your plant. The adjacent table reflects typical results for studies I have conducted in plants throughout the US.

For the items you decide to stock, consider treating “A” items on as close to a true JIT approach as is possible. I like to white-knuckle “A” items. Remember, this group represents 80% of the money going through your business. In sharp contrast, consider stocking up to 6 months’ worth of “C” items. How much time do you want your team wasting time on 5% of the money? You may unintentionally be focusing 55% of your team’s time every week working on 5% of the money! Production planning, buying, inventory control, material handling, accounts payable… all spending time on transactions that may not even be worth $5.00. For “B” items, consider stocking 2 to 3 months’ worth on the shelf.

In every case I have done this, we have cut out thousands of transactions. Vendor Managed Inventories (VMI) for many of the “C” items provides another way to reduce investment and management time. Even in a high-mix, project-based business, I have seen turns improve from low 3’s to over 10 by adopting this approach.

You can use this same tactic for any activity-intense aspect of your business with like results.

Multi-Dimensioned 8020: Last and not least, let’s talk more about ITW’s 8020. I mentioned that it is multi-dimensional. If you’re familiar with customer/product or industry/technology matrices used during an environmental assessment in strategic planning, then you already know something about ITW’s approach.

Set up a spreadsheet with your customers down the vertical axis and the products they buy across the horizontal axis. Use revenue dollars for the data points. Sort total revenue by customer in descending order and sort total product revenue in descending order. Once you’ve sorted the data, then place heavy borders through the data where 80% occurs for both customers and products. You will see 4 quadrants:

Now you can see 2 dimensions at once using this approach. You can also include other items for cross-comparisons between the quads:

1. Margin %’s
2. % Total Margin $’s
3. % of Customer & Product Counts
4. Commission %’s
5. % Total Commission $’s

What you decide on for the 2 top-level dimensions and what you cross-compare is only limited by your available data and your imagination.
Once you are happy with the how you’ve decided to slice things up, it’s time to look at future strategy. You approach each Quad a bit differently. For simplicity’s sake, I’ll use the same customer/product matrix and offer you some typical tactics I have used for each Quad:

Quad 1 – This is your core. Align your best and brightest with this Quad. Actively engage the related customers in councils to gain their help growing the business and managing risks. Make sure your product development efforts for products in this Quad stay ahead of your competitor’s and are well-aligned with market needs. I like to use Lean tools like Kaizen & Setup Reduction events to develop agile and high-velocity products in this Quad. Even minor improvements for products in this Quad produce solid improvements to margins and working capital.

Quad 2 – Over the course of years, a quilt of product designs were developed to satisfy needs that rarely occur. Since this Quad also involves your customer 80’s, you may want to engage them to up feature product 80’s to include what these outliers provide. It may be time to obsolete items that are rarely in demand. I like to use Design For Manufacturing & Assembly (DFMA) to develop configurable products for items in this Quad. At a minimum, you should make sure that remaining 20’s are done easily and profitably.

Quad 3 – This is really channel management. For example, if you are dealing with multi-line rep firms, you may be on the 2nd page of their line card. For this Quad, I have set up action plans, made rep changes, etc. Finally, ask yourself if you are achieving acceptable market share and if the cost to keep it is worth it.

Quad 4 – Although I always start with a Quad 1 focus, if the costs and distractions in Quad 4 are too burdensome, I’ll go to work in Quad 4 simultaneously. At 4% of Revenue, you’re not putting much at risk!

Summary: This is quick summary of the basic tactics within an 8020 deployment that I thought you might find informative and useful. My teams all became familiar with my question, “Is that an 80?” There are far too many possibilities to cover in a brief blog, so I may not have talked about something you are seeing in your business. There have been dozens of books published on this topic. Do a quick book search on Amazon for “80/20 Principle” and you will find over 100 of them.

As you explore some of these ideas in your own facilities, I hope to hear from you. If you have questions, feel free to reach out to me by email or through the Contact Me button or page. Please post your own success stories in response so other readers will benefit from your experiences.

Thanks & Good Wishes for a successful 2018! Stay tuned for new postings on 8020 and Lean!

Mike