The Pareto Principle

Jul 1, 2022 | Industry

By Carlos Barboza

“If you don’t design your own life plan, chances are you’ll fall into someone else’s plan. And guess what they have planned for you? Not much.” 

Jim Rohn

In 2012, I bought a small salvage yard with only 2.5 acres located in Orlando, Florida. I changed the name to ECO Green Auto Parts and I had no idea how to run it. It took me three years to realize that running this type of business is not only buying cars, processing and scrap; it’s more than that.

So, I asked myself: How can I operate ECO Green Auto Parts more easily?

I started to compare each department (retail, ecommerce, export, scrap, cores, etc.) and after analyzing the income data produced by the sale year after year of used parts, I realized that 15 percent of the sales consistently produced 85 percent of the total sales income during all those years.

That’s when the “80/20 rule” came into play, known as the Pareto Principle. Established by Vilfredo Pareto, an Italian engineer, sociologist, economist and philosopher, who at the end of the 19th century looked for patterns of wealth in Italian society and discovered that 80 percent of wealth was concentrated in 20 percent of the population, and that this pattern was also present in previous centuries. The study was based on land ownership, a valid measure as an indication of wealth at the time.

This finding was very important in giving Eco Green Auto Parts a leap in quality, as it allowed me to know where we should concentrate our efforts in terms of product quality, marketing, labor, equipment, storage and sales. Let’s look at some other examples of the Pareto Principle:

In business:

  • 20 percent of customers produce 80 percent of revenue.
  • 80 percent of defective products in a factory are caused by 20 percent of the causes.
  • Of all customer complaints, 80 percent is concentrated in 20 percent of them.
  • 80 percent of the sales impact is produced by 20 percent of the advertising channels used.

In our daily life:

  • 20 percent of the food we eat produces 80 percent of body fat.
  • 20 percent of drivers cause 80 percent of car accidents.

When we carry out a project, normally 20 percent of our dedicated time produces 80 percent of the results.

The Pareto Principle is widely applied in different fields, from economics to sociology, and also in our personal lives. How can the Pareto Principle be useful to us? It can be used as an empirical approach based on results measurement, which causes us to focus on efforts that produce important results, and not waste resources or energy on efforts with poor results.

Getting back to our industry: What were the results for ECO Green Auto Parts? After establishing consistency in my goals, I was able to achieve the following:

  • Money: The income of the company quadrupled after giving priority to the merchandise that sells the most, among them: engines, transmissions, body parts. The 80-20 rule suggests that 20 percent of your products contribute 80 percent of your profits, sales, or growth. Whatever it is, the goal would be to find ways to increase the sales, production, and distribution of your top money-making products. Results? Simple, net income growth.
  • Customer: Focus your attention on the 20 percent of your clients that produces 80 percent of your income. Results? Better problem-solving skills.
  • Facility: Keep organized 20 percent of the physical space where 80 percent of your productivity is generated. Results? Being able to create the maximum amount of impact with least amount of work.
  • Labor: Even 20 percent of labor contributes 80 percent of your company’s success. So, leaders’ focus must be on getting all labor to perform as competently or efficiently as those high-level performers. Results? Greater productivity.
  • Simplicity: Keep your methods or processes simple, i.e., 20 percent of your methods or processes should be solid. Plus, you can save time on work tasks and get more done in a shorter span of time. Results? Clearer priorities.
  • Flexibility: Be open to frequent changes, your focus might turn toward analyzing the methods and processes used in your company and finding out which procedures the company needs to overhaul or modify to allow a higher percentage of success in your business. Results? Improved decision-making skills
  • Efficiency: Resources such as time, money, supplies, and efforts are less likely to be wasted in areas where it will have least output. Results? Efficient use of energy.

Please keep in mind that this method is not to create a perfect plan, but when used correctly, the Pareto Principle can help prioritize tasks, optimize resources, and improve overall efficiency. It provides a useful framework for understanding complex systems and identifying key areas for improvement.

A couple of years ago, I read a phrase from Jim Rohn that I’d like to share with you: “If you don’t design your own life plan, chances are you’ll fall into someone else’s plan. And guess what they have planned for you? Not much.”

Enjoy the journey. 

Carlos Barboza is the owner of Eco Green Auto Parts, Orlando FL. Their website is https://ecogautoparts.com and they can be found on Facebook @ecogreenautoparts.

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