An 80/20 primer

The main thing is keeping the main things the main things

THE FABRICATOR® FEBRUARY 2014

February 28, 2014

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The 80/20 management method seeks to maximize results—such as sales or profits—by systematically deploying available resources only to the drivers that have the most impact. It sounds straightforward, but columnist Dick Kallage explains why this management approach is sometimes hard to execute.

Dick Kallage is principal of KDC & Associates Ltd., rkallage@kdcconsultants.com

In previous columns I referred to the fact that the key to real improvement is finding out exactly what needs to be improved. This is easy to state but, in practice, not exactly easy to do. That’s because there can be multiple apparent causes for some performance deficiency, or various drivers for a given goal or aspiration. Further, these causes or drivers can be interrelated. And, finally, but most importantly, often the causes or drivers that we think are problems are actually symptoms or facades, not root or core to actual improvement.

A simple example in personal life is consistent back pain. We could probably fill a volume with core or root causes, from repetitive muscle strain to life-threatening medical conditions. But to fix it, we must somehow get to the real cause and execute a solution. Otherwise, we end up going years living on temporary “solutions” that really aren’t solutions at all, and finding that, as expected, things aren’t getting better. There’s no improvement.

A related issue that confounds improvement initiatives is that once you uncover the root causes, they may entail many elements, and the sheer number of them can be intimidating. I know of no company, large or small, that can simultaneously attack every item shown to be at the root of some persistent problem.

Consider a common challenge facing almost every company, and certainly those involved in custom production: improving on-time delivery (OTD). This metric, by the way, is one the majority of fabricators struggle with; the last three financial and operational benchmarking surveys conducted by the Fabricators & Manufacturers Association International® indicate average OTD performance to be in the mid-80 percent range.

When examining the drivers of poor OTD, I find more than 20 that are either certain or likely root causes. A highly detailed examination would yield even more. No custom fabricator on earth has the spare resources to address every one of these simultaneously.

Which should you address first? Which have the most impact? Which are structural and ongoing? Which are temporal? Which are interrelated? And which are solvable within a reasonable time period and at an affordable cost?

You can see why the OTD problem is so “sticky.” Many find it very difficult to address effectively and, in doing so, apply the wrong prescriptions. These “solutions,” like those for back pain, prove to be temporary at best. I could say the same about uptime/downtime problems and many others.

Enter 80/20

In the current context, 80/20 refers to a management method that seeks to maximize some results—like sales or profits—by systematically deploying available resources only to the drivers that have the most impact. Basically, it’s a disciplined approach to getting the most bang for the buck.

Sounds pretty obvious, right? Well, the theory is, but the practice is not. It requires complete understanding and strict discipline, but when done properly and consistently, the 80/20 approach yields outsized results and is one of the most effective tools for improvement.

Before entering the world of 80/20, you should understand the thinking behind it. 80/20 assumes a world that is basically nonlinear. Specifically, it takes as axiomatic (self-evident truths that can be assumed) the following:

  • Resources are scarce. No one and certainly no organization has all the resources necessary to improve everything that needs improvement.
  • For every system, process, and activity, we can find the drivers or root causes of performance and order their impact according to results and economics.
  • For most systems, processes, and activities, certain inputs or conditions have a larger effect than others on output. Certain customers are more important to profitability than others. Certain processes are more important to your value propositions than others. Certain maladies are more damaging than others. Certain activities are more economical or critical to success than others. Certain things cost a lot but yield little in economic performance.
  • In finding and ordering the drivers, we can maximize results by focusing only on the most important of them with available resources. We can either ignore the others or dispose of them where possible. Basically, we get the most gain by focusing on, in 80/20 parlance, “the important few and ignoring the trivial many.”

The result is something that looks like an 80/20 distribution of results and drivers or causes: 20 percent of customers drive 80 percent of profits; 80 percent of the problems we have with a process are the result of 20 percent of the identified causes; 80 percent of the discipline problems are caused by 20 percent of the workforce—and so on.

Let’s examine these axioms. Virtually all of them ring true. So the theory is sound, at least from an experience standpoint. It’s not something that requires an entire rearrangement of your brain—like quantum mechanics or the federal government’s definition of “saving money” by spending more of it. It’s what’s known as an experience-based theory. It passes the sanity test.

But is it always true? For every result, are there always a few (of the many) drivers or causes that have much more impact than others? No—the theory is not always true for every result examined. In some cases it doesn’t apply. If a company has one product and thousands of customers, it is highly unlikely that 80 percent of its profits are being generated by 20 percent of its customers. But for many companies, it is a practical and a practicable management discipline for maximizing results.

Are the relationships always on the order of 80/20? Not really. 80/20 is more a figure of speech, describing incongruence between the size of input and resulting output. In real life this mismatch can be 90/10, 65/35—the ratios abound, but they still indicate opportunities to improve results by focusing on a relatively few things.

So what are the real-life results of 80/20? I know one multinational manufacturing company—one of the most successful on earth, with billions in sales and hundreds of divisions—that is managed solely by the 80/20 process. It’s not a management technique. It’s a religion.

From an improvement perspective, the famous Pareto analysis is simply the ordering of causes that affect results. This is one of the prime techniques for determining what to improve and estimating the gains that would result. Practical Lean, a form of lean methodology that I was instrumental in developing over the past 20 years, is actually 80/20 applied to traditional lean thinking. It was designed for and is highly effective for small, high-mix operations.

When 80/20 Fails

80/20 is proven and solid. But does it always work? Some companies adopt the 80/20 methodology for improvement and, unfortunately, experience no benefit. Does this mean that the approach is invalid, or doesn’t work in some circumstances? Or is it too complicated to actually put in practice? Well, no.

I started this primer by stating that the theory is easy and almost obvious, but the practice is not. It requires discipline to execute and an understanding of where and how to apply it. If misapplied, 80/20 can actually make things worse.

Where 80/20 has failed, I have found that serious mistakes were made in application, reflecting either a poor understanding of how to use it or a lack of discipline in its use. This lack of discipline is often reflected in wasting improvement resources by working on “causes” that are only symptoms, or attacking the “trivial many” under the guise of low-hanging fruit, or simply because one meaningless cause just made some decision-maker mad.

I’ll cover the subtleties of 80/20 in future columns. As far as the discipline required for 80/20 goes, you must put up with the annoyances of the “trivial many” in order to laser-focus on what is truly important. If you can’t handle that, 80/20 is not for you.



KDC & Associates Ltd.

Dick Kallage

Consultant
KDC & Associates Ltd.
522 S. Northwest Highway, Suite UL-8
Barrington, IL, IL 60010
Phone: 847-525-6109

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