When Italian Economist Vilfredo Pareto realised that 20% of the pea plants he grew in his vegetable garden produced 80% of the peas, an economic theory was born. Today, the principle is applied to numerous disciplines and found to be true more often than not. A warehouse is often criticized as the costliest part of a Supply Chain, so it seems logical that if the effort can be applied to the areas likely to render the greatest results, efficiencies can be created relatively quickly. Adopting an integrated strategic approach and assessing your warehouse can create a smart, streamlined and efficient system that is designed for today, with tomorrow in mind.
Within a warehouse, it is likely that 80% of all orders contain 20% of all SKU’s (stock keeping units). Such products could be considered high volume or fast-moving, and as such tremendous efficiencies can be gained from grouping them in a particular area in your warehouse. This creation of a “warehouse within a warehouse” can cut the distance pickers need to move to fulfil orders and thereby improve the time taken to fulfil an order.
In terms of space utilisation, based on the Pareto Principle - 20% of SKU’s can take up 80% of available space. Innovative usage of space, such as vertical high-density storage for fast moving items can dramatically increase floor space. Solutions such as vertical lift modules can store what was previously kept within 80sqm in only 14sqm. Opening space within a warehouse offers two options; either a smaller warehouse is required overall or increasing the ability to carry more inventory to enable an organisational growth strategy.
Warehouse operations may experience bottlenecks during peak times, but by integrating the 80/20 principle into a warehouse management system, the operation can flag those orders placed by the 20% of customers that generate 80% of revenue. Once order sequencing is applied, organisations benefit from guaranteed order fulfilment and service delivery levels to clients. Furthermore, the inventory management system can be set up to ensure that the 80% of SKU’s most likely to be ordered by the 80% revenue generating 20% of customers are always available.
The principle can further be applied to negotiations. The 20% of transporters carrying 80% of volume, or the 20% of suppliers providing 80% of inventory are likely to be more open to price or service level negotiations. By critically understanding the drivers of supply and network volume, a warehouse can inform strategic decisions in both the inbound, and outbound processes in the Supply Chain. You can read more about our supply chain solutions HERE.
In theory, the Pareto Principle is universal, however in a warehouse is dealing with small volumes or limited SKU’s the sample size may not be large enough for the 80/20 split to be accurate. It is therefore critical to utilise warehouse data to accurately analyse and test the principle before applying broad decisions based on the high-level theory. An experienced Supply Chain partner can not only easily identify areas within the warehouse where the Pareto Principle is true but can highlight those areas where it is not. The ultimate goal is to be able to direct efforts to the areas within an operation where such efforts will be most rewarded in the pursuit of warehouse optimisation.