The Pareto Principle at Play in Procurement

Many procurement professionals use the Pareto Principle as a convenient way to segment data into manageable groups, but do we really understand the implications of the distribution principle? I recently did some reading on it to learn some more. One of the things I did not know about the principle is that it was incorrectly attributed to early 20th century economist Vilfredo Pareto because he observed that 20 percent of the landowners in Italy owned 80 percent of the land. (He also noted that 20 percent of the pea plants in his garden produced 80 percent of the peas.)

Giving credit where it’s due

It seems that the real credit for the principle is due to Dr. Joseph M Juran, a quality engineer, who in the 1940 applied the principle to his field of study (and also named the principle after Pareto). He wrote of "the vital few and the trivial many". When you think of how we use the principle in procurement the idea is a little scary. Is there really such a thing as ‘trivial’ when you are talking about players in your supply chain or dollars of spend under management? Especially, since we'd be talking about the majority of either.

Don’t overlook the ‘trivial many’

It is one thing to use the 80/20 rule when you are preparing a report, or putting together a table or chart for a presentation - because sometimes listing all of the suppliers is just too many lines to be readable. But using the principle as a supply-base management strategy is too risky these days.

What if one of those "trivial many" doesn't come through with a delivery or meet a service level? Are they still trivial? Raking and sorting are fine, but it is harder to split a list of suppliers into those who need to be monitored to prevent business continuity issues using this approach. The idea makes me think of an article I read a year or so about bees disappearing. I'm sure you've read it at some point - the story has come up a number of times. Because of changing conditions in the environment, certain types of bees are dying out. And while that may seem trivial enough (unless you are a bee) the ramifications of their extinction would be disastrous to the rest of the food chain.

Obviously we are all very busy, and responsible for many more things than we have the time to thoroughly and thoughtfully manage, but every once in a while it is important to stop and make sure an important member of your supply chain doesn't get overlooked because they statistically fall off the table.

GEP has helped dozens of leading companies turn their tail-spend into an operational advantage. Learn more about GEP’s tail-spend management services.

Kelly has a unique perspective on procurement from her experience on both sides of the negotiation desk. She has led projects involving members of procurement, supplier and purchasing teams. She has practical skills in strategic sourcing program design and management, opportunity assessment, knowledge management, and custom taxonomy design and implementation. She also has direct sourcing experience in a number of product and service categories including: Inventory Fuel, Location-Based Services, Corrugated, and Corporate Purchasing Cards. Kelly has her MBA as well as an MS in Library and Information Science.