Pareto and the job shop

After 10 years and two recessions, Vilfredo Pareto’s principle has had a rocky history with the job shop. The Italian economist discovered that roughly 80 percent of the effects come from 20 percent of the causes. In business, this has come to mean that 20 percent of customers provide companies with 80 percent of sales.

For years the 80/20 rule has helped companies grow. Some job shop managers found that if they focused on that 20 percent of work orders that produced 80 percent of revenue, they could develop standard procedures and base lean manufacturing and other improvement initiatives on the work that drove so much revenue.

But the Great Recession revealed the 80/20 rule’s inherent danger. On the sales end, the rule may lead to limiting the number of customers and the industries they come from. A shop may have only several major customers from one or two industries, and it’s easy to understand why. Having a few major, reliable customers makes it easier to run and grow a business. A small number of customers limits the variety of work on the floor, which in turn makes it a little easier to standardize and drive manufacturing efficiency. For sales reps, a few large accounts also can be more profitable than going after numerous small orders.

The recession forced many job shop managers out of their comfort zones. To survive, they had to take on myriad small orders from various industries, each having different demands and expectations. When businesses closely tied to only a few sectors--like automotive--started stumbling, people questioned the nature of the Pareto Principle: For job shops, is the 80/20 rule good practice or just an unfortunate habit worth breaking?



I think the 80/20 rule still applies in job shops, but the recession made it clear that for some, the rule required one subtlety: finding commonality among diversity.

Here’s what I mean. During the downturn shop managers looked for jobs large and small (usually small) anywhere they could--and the work may not have fallen neatly into their established niches. Companies accustomed to cutting panels for industrial machinery, for example, now were bringing in obscure, small-part prototype jobs. It was work, and there wasn’t much of it to go around.  There was limited demand and tremendous metal fabrication capacity, so to survive shops had to bid competitively and deliver promptly. They had to juggle many small, disparate jobs, and they couldn’t afford inefficiency. Processes set up for certain work--that 20 percent--had to be optimized for various work. They thrived by discovering how parts from different companies and industries resembled one another, and then setting up manufacturing processes that optimized those similarities.

In the long run, perfecting this art--finding commonality among variation--may be a key to success for high-mix, low-volume manufacturers. As large orders start to flow in once again, it may be very easy for people to slide back into the comfort zone, living off the seemingly consistent work of a few large customers. Those few customers may keep the business growing, at least until the next downturn.

After two recessions during the past decade--downturns that have been brutal for many job shops--slightly augmenting the 80/20 rule verbiage may be in order: For high-mix, low-volume manufacturing, 20 percent of the types of work orders bring in 80 percent of sales. That “20 percent” shouldn’t come from just a few customers but instead a broad range of companies from different industries--and (ideally) they should be demanding products that resemble each other in certain ways, be it similar material or products that flow through the plant in similar ways.

A shop salesperson has become business’s ultimate puzzle master. He must find many customers from many industries that demand components meeting a few sets of criteria--work requiring certain geometric and material attributes that allow for efficient part flow.

Shops that master this may hedge serious risk--and the world economy is full of it. Consider news this week about China finally surpassing Japan as the world’s second-largest economy. A blogger at Time magazine pointed out that both Japan and China practice state capitalism, in which the government supports dramatic and often unsustainable growth in certain sectors, such as manufacturing. But in both countries, the practice of pouring money into manufacturing has produced an unbalanced system full of workers who produce and save much more than they consume.

The global economy is full of uncertainties like these. But the job shop can diversify. They can serve various OEMs and suppliers who sell to various industries in various countries. That variety gives these shops some serious shock absorbers that, ultimately, may make for a more enjoyable ride.