THE PARETO PRINCIPLE: ITS USE AND ABUSE
Vilfredo Pareto was a late nineteenth-century economist/sociologist who first noted and re- ported his observation that about 80 percent of wealth was concentrated in about 20 percent of a population. This is the basis for what we now call the Pareto Principle. J. M. Juran, one of the foremost practitioners of statistical quality control, claims credit for giving the Pareto principle its name. Juran's Pareto Principle is sometimes known as the Rule of 80/20. Robert E. Sanders has been Marketing Communications Manager for Rogers Corporation for the last 15 years. He spent the previous 10 years with Rogers in sales and product management. Rogers Corporation is a diversified manufacturing company marketing a variety of materials and components to electronic OEM's and to other selected industrial markets. Mr. Sanders graduated from Swarthmore College with a BA in Economics, magna cum laude and Phi Beta Kappa. He also has a MA degree in Economics from the University of Virginia. He served as an adjunct faculty person at the Quinebaug Valley Community College (CT) for several years in the business department, and also served on the Steering Committe of the Connecticut Economic Development Corporation. Mr. Sanders currently is treasurer and member of the board of the Connecticut University Technical Industrial Park. Vol. 3 No. 2 Summer 1988
Since that first reported observation by Pareto, many other sociological, economic, political, and natural phenomena have been observed empiri- cally to follow a similar pattern. Examples come to mind readily. For example, 80 percent of auto accidents are caused by 20 percent of drivers. Eighty percent of off-spec materials are accounted for by 20 percent of the manufacturing steps. Twenty percent of our population accounts for 80 percent of household moves. One might go on almost indefinitely. The Rule Applied to Statistical Quality Control
Such observations having been made, and the phenomenon having been given a name and been elevated to the status of a "Rule", there is a strong inclination to try to find a use for it. In quality assurance, practitioners like Juran and Dr. Deming have found the principle extremely valuable in identifying problems and ranking these problems from the most important —those 20 percent which cause 80 percent of quality problems —to the many problems of lesser import, which account for only 20 percent of quality problems. Once one has identified the few problems that account for 80 percent of discrepant quality, one can concentrate efforts on seeking solutions for those few problems rather than attempting to tackle the whole gamut of problems at once. Obviously this application of the Rule makes eminent sense, and its impact on quality can hardly be overestimated. A Sales Manager's Dream?
There are also a number of potential applica- tions for this Rule in marketing. Look at the sales force. We find, for example, that 20 percent of our salespeople are generating 73 percent of our sales; we find that 16 percent of our products are accounting for 85 percent of sales; also, 22 percent of our customers are producing 77 percent of our sales. Such a distribution is not atypical. Looking further at our sales force, we find that Black has 100 active accounts. Twenty of these accounts produce about 80 percent of Black's sales. Green covers 100 counties, and we find that 80 percent of her customers are concentrated in only 24 counties. White sells 30 different products. Six account for 81 percent of White's sales. This situation is also typical. All of us in marketing positions have observed this kind of phenomenon in a host of ways. Given that we know all of this, what sort of action is called for? How can we use this information to improve sales and marketing performance? Other things being equal, we would probably advise Black to concentrate his efforts on the 20 accounts that are giving him the...
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