The Pareto behind Pareto’s Law

March 11th, 2008

One of the first things anyone in the distribution business learns is the 80/20 rule, or more formally, Pareto’s Law:

·         80% of shipping volumes are generated by the top 20% of SKUs

·         20% of shipping volumes are generated by the bottom 80% of SKUs

Traditionally, this is what we call the “fast-slow” split and every distribution center grapples with how to manage these very two different sets of items.  In fact, at KOM, we like to remind people that there is a third set of items, the “hyper-fast”, that deserve special attention since these top 5% of SKUs can generate anywhere from 30 – 50% of total shipping volumes.

So who was Pareto and where did his law come from?

Vilfredo Pareto was an economist and avid gardener in Italy during the late 1800s.  He made two observations in his professional work and hobby that led him to articulate what would later become “Pareto’s Law”. 

·         As an economist studying land ownership in Italy, he observed that 80% of the land was owned by 20% of the land owners.

·         As a gardener, he observed that 80% of his peas came from 20% of the peapods he grew.

This curious coincidence led him to look for that distribution pattern elsewhere and he noticed a great many things had this logarithmic distribution.  Today, Pareto’s Law describes patterns across a whole range of disciplines, not just the supply chain.

·         Traffic engineers tell us that 80% of the traffic is generated by 20% of the vehicles.

·         Marketers tell us that 80% of a marketing campaign’s results come from 20% of the advertising spend.

·         Cooks tell us that a chicken is 80% done in the first 20% of its cooking time.

So here’s a water cooler game for distribution folks – where else in life have you seen Pareto’s law in action?

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