When many experienced business leaders hear the term 80/20 we instantly think of the 80/20 Pareto
rule around problem solving data for process improvements. Not only is the 80/20 rule important when
determining a desired direction when sourcing improvements but we have now learned that the 80/20
can also be used to realign the operating structure of a business.
As many businesses adapt to the ever-changing customer demand and the influx of additional sales and customers it become quite apparent that we start adding many support roles and functional processes into our workplace to begin the journey of taking care of all of the additional needs that all of our customers are expecting from us on a daily basis. This is where the 80/20 principle comes into play.
It is important to first, if not already structured, to begin segmenting the overall business by either the specific products brands or groups, operating locations, or industries which your current business produces products or services. This is an important step to ensure you do not damage highly volatile customers based on a product, location or industry. Now comes the 80/20. As we begin evaluating our customer base by overall sales and revenue it is easy to identify the % of your customers that bring in 80% of the revenue for each segmented division. For example, if a segment has 1000 customers it is reasonable to suggest that your top 20% (200) customers or less may be contributing to 80%+ of the overall segmented division’s revenue. This leaves us now with the other 800 customers (80%) we are servicing that is only contributing to 20% of the overall revenue of the segmented business. As we begin to think, it should be very clear that the amount of labor and processes needed to service the other 800 customers now seems to be very overwhelming for your employees and potentially you’re top customers. This is when you look to adopt the 80/20 business strategy.
First, you begin to work on servicing and committing to your top 80% revenue customers to ensure nothing is compromised while dealing with the customers that only attribute to 20% of your overall segments revenue. The 80%ers, or A customers as like to call them, are and should be your teams top priority when it comes to service and flexibility. So what do we do now with the 20%ers? Easy, determine which products or services are necessary for the segment to continue to make or provide. The easier products or services may potentially stay if manageable but all of the products and services that are overworking your teams and making a negative impact to the overall performance metrics of the segment need to go. Yes, need to go. Next, I will discuss why you let them go and how you can quickly recover this lost income.
Once the determination has been finalized and you reach out to those customers who you will no longer be providing products for or servicing it is now time to look into the business processes that it takes to service the left over 20%ers. Opportunities are to begin a more customer facing order entry system or remove customer controlled shipping to reduce the workload on the business and free up your divisions for innovation. This is the 80/20 transformation. What is more important, servicing and driving out operational costs for the top 80%ers of the business segment revenues or continuing to go down the road servicing the 20%er. Furthermore, now that you have freed up more of your segments time by not fully servicing the 20%ers, you can now begin your Lean Six Sigma journey for your 80%ers to begin leaning the organizational processes and begin your innovation funnel to begin to drive additional 80%er into the revenue stream of your business. Just another way that Lean Sigma Pros can help.
-Aaron Powell, Consultant Lean Sigma Pros LLC
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Lean Sigma Pros LLC 2019, Founder Thomas Warren