The 80/20 rule that quietly runs your shop

Open any shop's sales report and sort it from best seller to worst. The shape is nearly always the same: a short fat head and a long thin tail. A handful of items do most of the work, and hundreds of others take up shelf space and sit there looking busy.

An Italian economist named Vilfredo Pareto noticed something similar about land ownership over a century ago, and the pattern turned up everywhere. Business people call it the 80/20 rule. It is a rule of thumb, not a law, and your numbers will differ. The shape is what matters.

What the shape looks like

Read the line, not the bars. It climbs steeply at first, then flattens. Wherever it crosses 80 percent is the edge of your 'A' items.

A, B and C

Stock people sort items into three groups. A items are the vital few that make up roughly the first 80 percent of value. B items are the middle band, the next 15 percent. C items are the long tail, the last 5 percent: lots of lines, very little money.

The grouping is the same whether you rank by sales or by money tied up on the shelf. Each tells you something different. Ranking by sales shows what your customers care about. Ranking by stock value shows where your cash is sitting.

Your attention is a limited stock too. Spend it where the money is.

What to do with it

• Count A items more often (cycle counting). A miscount on an expensive, fast-moving line costs more than a miscount on a box of washers.
• Keep A items well stocked and well labeled. They are where a stockout hurts most.
• Review B items now and then, and set loose reorder rules for C.
• Look hard at the C tail. Some of it is useful and rarely needed. Some of it is dead weight.

Be careful with that last one. A C item can still matter. A fuse, a gasket or a rare blade might be cheap and still be the reason a customer comes to you. The grouping tells you where to look, not what to throw away.

How to find yours

Export your items with a quantity on hand and a unit cost. Multiply the two to get each item's stock value, sort largest to smallest, and add a running total. Mark where you cross 80 percent and 95 percent. You can do this in a spreadsheet in twenty minutes, and the first time is always interesting.

A twist worth knowing

The groups are not fixed. An item that was a star last year can drift into the tail, and a quiet item can become an A item when a big customer starts ordering it. So rerun the ranking once or twice a year.

It is also worth noticing which items are in different groups depending on how you rank them. A bulky, cheap item might top the sales list and barely register by stock value. A slow, expensive one might be the opposite. The first needs good availability. The second needs careful counting, since a few missing units are real money.

Neither list is the right one. Look at both, and the gap between them is where the useful arguments start.