Vilfredo Pareto (1848-1923), an Italian economist and sociologist, made the observation that a large proportion of national wealth tended to be under the control of a relatively small number of individuals. Pareto concluded that in any series of elements to be controlled a selected small factor in terms of number of elements (20%) almost always accounts for a larger factor in terms of effort (80%). Pareto subsequently developed this observation into a more defined 80:20 rule.
The Pareto principle serves as the basis for materials management value segmentation and in this context is more commonly referred to as ABC analysis. It is based on the concept that approximately 80 percent of the total value of stock items will be accounted for by approximately 20 percent of the items. In other words, just a few stock items account for a very large proportion of total stock value; these are the key items over which management control should be exercised.
Now the question that arises is how you will identify what stock value is attached to the stored materials. Well the answer is simple – Asprova. It has features that will display the usage value of each item, which will elevate the ABC analysis concept one stage further into three stock categories used extensively in stock control.
- Category A items: The ‘vital few’. Small in number but high in usage value.
- Category B items: ‘Normal items’. Medium in number, medium usage value.
- Category C items: The ‘trivial many’. High in number, low usage value.
In the purchasing context the Pareto principle can be interpreted as 80% of spends being directed towards just 20% of the suppliers. This elementary form of segmentation can then be used to separate the critical few suppliers from the trivial many. In other words, more purchasing effort and energy needs to be focused on the category ‘A’ suppliers and the materials that are purchased from them.
Whilst the remaining items in other classifications cannot be neglected, appropriate ‘low maintenance’ replenishment controls should be considered. An example of low maintenance controls would be the use of Vendor Managed Inventory (VMI), a system by which responsibility for managing the stock is placed in the hands of the supplier, thereby minimizing the purchasing effort.
The powerful tools in Asprova will allow you to keep the entire stock at your fingertips. More precisely, our detailed production scheduling and visualization functions enable superior control of the critical category ‘A’ items. It ensures that the stock level of this particular class of items remain optimized the whole time through elimination of excessive buildup and/or abundant consumption, thereby reducing overall cost and improving customer service by avoiding stockouts.
Photo credit © MIKI Yoshihito