From the course: Cost Reduction Tips - How To Cut Costs And Maximize Profits

Pareto: Where does all your money go?

From the course: Cost Reduction Tips - How To Cut Costs And Maximize Profits

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Pareto: Where does all your money go?

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- So Pareto was an Italian. The Pareto Principle is often called the 80:20 Rule or the 80:20 Principle. I think the original one he said was 80% of the money was owned by 20% of the people. Nowadays it's more like 95 and five. I think 95% of the money is owned by only 5% of the people in the world. But in his day it was 80:20, and he was the first person really to come up with this idea that if you want to save money or make more profit or change anything you want to focus on the key areas. So, for example, 80% of your profit comes from 20% of your products or 20% of your customers, so you need to focus on those. So the idea is to identify which of the key areas and then to delve efficiently into each one. So 20% of your cost categories will probably be adding 80% of your costs. So if you can work out what those 20% are, they are the ones to target. And then you focus on those. So suppose, for example, that mistakes in the factory are one of your top cost areas. You would think, "Right, I'm going to focus on those." And then within that you would do another Pareto analysis to say what are the different mistakes and how much is each one costing? And, again, you will find that 80% of your mistakes are being caused by 20% of the problems. So those 20% are the ones to hone in on. Or if materials were one of your big costs, you'll probably find when you drill into it and you do your sub-Pareto as it were, that 80% of the spend on materials is probably going on 20% of the items. So those are the ones that we would negotiate with or try to reduce or find cheaper alternatives or whatever we decide to do. Stock is another classic area where Pareto applies. So 80% of your stock costs, your money that's tied up in stock, probably comes from 20% of the items. So what are those high-value items and can you reduce the amount of stock that you're keeping of those. And, by the way, I'm going to come to how to do all this later. So how would you reduce the amount of stock? I'm going to tell you about that in a later video. And then there's time. 80% of your wasted time comes from your top 20% of your time wasters. So if you've got 10 time wasters, probably two of them will account for 80% of your wasted time. And it's the same with anything. 80% of your travel brings you only 20% of your sales. You know, whatever you analyze, you'll always find that the 80:20 Rule is there. And it's just a statistical thing. If you have a load of random numbers you'll find that 20% of them will add up to 80% of the total. It's just how life is. That is such a useful idea for choosing the main subject areas and then within each subject area choosing which bits to target.

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