ABC Curve, Pareto Principle, Pareto Analysis or even the 80/20 Rule. Regardless of the name, this is a tool (usually in column chart form), which aims to group and order various occurrences to identify problems in companies. The understanding is simple: 80% of consequences stem from 20% of causes.
Every manager has gone through times when he had to deal with many demands, problems and solutions seemed either distant, or too complex for the moment.
Workload, responsibilities and charges are high right now. Agility and assertiveness are required at all times. And to be honest, any mistake could mean a big problem down the road.
In the midst of chaos, you need to be calm. But, more than that, organization, discipline, focus and making use of tools that really help in the management are necessary.
In this sense, the ABC curve exists to provide time and fundamental discipline to deal with demand and understand the casual relationship within companies.
We’ll talk better in this article about what Pareto Analysis is. We will cover its concept, origin, application, characteristics and benefits.
Stay with us.
What is the ABC curve?
The Pareto Principle is a scheme that groups and orders the frequency of certain occurrences within a company. It is usually done in graphic form – but this is not mandatory.
It’s called the 80/20 Rule because of its conception that 80% of problems are generally caused by 20% of the factors.
This method exists to demonstrate to people that it is possible to direct time and effort, in an organized way, on really big issues.
The same goes for actions already done. Instead of spending hours and hours on end with repeated activities, it is possible to focus on some specific actions.
In other words, it serves to make everyday work more strategic, aimed at what really makes a difference to generate better results.
One of the names of this tool, the ABC curve, is due to the methodology used.
The following separation occurs to understand the origin of the 80% of the problems and the 20% on the origin within the factors:
- Class A – the greatest importance, value or quantity of the analysis, which corresponds to 20% of the total;
- Class B – importance, value or intermediate quantity, which corresponds to 30% of the total;
- Class C – of lesser importance, value or quantity, which corresponds to 50% of the total.
If it wasn’t clear, we’ll explain it better. So, how about a little history?
The Origin of Pareto Analysis
At this point you may be wondering why this name, “Pareto Diagram”.
The baptism is due to a tribute paid to the Italian economist Vilfredo Pareto.
He was responsible for developing this principle in 1892.
His conception came from the observation made about the pods in his garden. 20% of them contained 80% of the total peas.
From there, he developed his method and applied it to the economy of his country, Italy.
He managed to prove the concentration of income and social inequality present on Italian soil.
His analysis ended up showing that 80% of the country’s wealth was held by only 20% of the population and that this was the cause of the main national economic problems.
Since then, ABC analysis has been applied in many spheres of society, but especially in the economy and within companies to identify defections.
It is common for organizations to use this tool to have an ever-increasing quality control.
Now it’s a little easier to understand those numbers mentioned above, right?
Benefits and applications of the Pareto Principle for companies
The ABC curve is widely used by companies that want greater quality control over their products, services and also customer service.
But, above all, its clearest and most evident benefit is that it is an extremely important aid for assertive decision-making, based on data and information.
When managers have a complete picture of the problems the company has, it is necessary to prioritize which solutions will occur first.
Also because, in this way, it is much easier to avoid possible crises due to the creation of more assertive combat strategies.
Therefore, knowing which actions make sense for the goals and objectives to be achieved, it is much easier to focus time, efforts and resources on what really eliminates the problem effectively.
Another common use of the Pareto Diagram is in the search for causes and effects, existing within quality management, to find causes that end up generating the greatest number of effects.
However, other sectors of companies can and should benefit from this practice. After all, identifying what really harms the company at different levels is something every manager wants, right?
Listing the points, ranking importance and concentrating efforts on actions that are most effective is undoubtedly good practice.
The Pareto Diagram aligned with the company’s strategies
When companies find it difficult to retain their customers, it is common to think and implement new marketing strategies both to keep those who are already in the company and to attract customers.
However, the solution can be at home, in the correction of processes – which will avoid unnecessary expenditure of money.
Therefore, it is common to see the ABC curve being applied to identify the best customers, suppliers and failures throughout the sales process, for example.
Of course, this must be a joint construction, with everyone involved.
And it’s important, too, to have the proper sales metrics right now to be clear on where management is failing.
If you want to better understand which are the most promising opportunities, how about segmenting your clientele?
Create a list of your best customers.
Then, order from those who consume the most to those who consume the least and, from there, create segmentations to attract this persona.
How to make the ABC curve? See the step by step and apply to your company
If it’s not clear, it needs to be now. The purpose of the analysis is, from the entire universe of data and information, to find which specific ones represent a greater and decisive impact on the whole.
That said, we went on.
It is quite common to develop the Pareto Principle in spreadsheets, as it is a form of organization that basically everyone is used to.
To do this, we have separated a basic step by step.
- Identify and define what will be covered in Rule 80/20. Expenses, costs, sales, inventory… what?
- In a column on the spreadsheet, put the value. In the other, the description, side by side, of this value;
- At the end of the column, use the sum formula and calculate the total value of all the values raised;
- Place another column next to the values in the column. This one will be called: Pareto.
Once this is done, in the Pareto column you will calculate the percentage that each value represents in your business as a whole.
Let’s say that your account with rent from the company’s headquarters is worth R$4,250 thousand. The total amount – that is, the sum of all expenses – is R$ 450,500.00 thousand.
With these numbers in place, make the following calculation:
4250 / 450500 = 0.0094 x 100 = 0.94% of total expenses.
0.94%… we can conclude that, therefore, after reading what the ABC curve is, that this is not an exactly relevant item to analyze.
This percentage is very unrepresentative in relation to all expenses and should not be, at first, the result of in-depth analysis.
Now take the other values and see which ones represent a bigger slice and focus on them. They are the focus of the issue.
The ABC curve in the quality control of companies
With fixed expenses, it’s easier to apply the Pareto Principle, isn’t it? Just, for example, take the slips to be paid and analyze them.
But, and when this method is applied in the administrative management of companies, to manage a specific issue?
Let’s think about a problem that organizations may face, and poor customer service is one of them.
Then list the other possible problems: expensive product? Lack of information for customers? Does it take time to proceed with the processes?
You need to have channels initially so that you can receive these feedbacks and a practical way to bring them all together.
In descending order, record one by one of these occurrences. If the bad service has occurred in greater quantity, then it is he who will be at the top of the list.
The calculation you already know how to do, right?
Get your hands dirty, identify real problems and improve processes.
This is the way to grow in a healthy, sustainable way, generate more value for customers and, of course, sell more and better.
So, how can we help you?
Enjoy and read two articles that will help you manage your business better on a daily basis.
The first of the importance of BPM, Business Process Management for any business.
The second addresses how the OKR methodology helps companies improve their results and processes.