Pareto Principle in SKU Analysis for Manufacturers?

The Pareto Principle is the law of the vital few.

More commonly known as the 80/20 rule, this states that roughly 20% of the causes will create 80% of the effects.

In an analysis of Stock Keeping Units (SKU) measuring Revenue, Profitability, and Customer Trends are top of the mind when determining which products or product lines to further invest in and which products or product lines to reduce resources or eliminate entirely.

Applying the Pareto Principle to your SKU analysis insists that roughly 20% of your products will produce roughly 80% of your Revenue.

Another roughly 20% of your products will produce roughly 80% of your Gross Margin. Most of each of those groups may overlap, but here may be some inconsistency with high selling low margin products vs low selling high margin products.

When attempting to optimize Inventory would you rather be overextended on low volume products, and running out of high volume products?

Absolutely not!

In a perfect world you would have the perfect amount of Inventory at any given time.

But in a realistic world I would much rather have some extra inventory of my high volume products, and be facing stockouts on my low volume products.

As Revenue and Cash constraints become more prevalent this year due to external economic factors, optimizing inventory management becomes vital to cash management.

When you are doing your SKU analysis this year, use the Pareto Principle as quick lens to double down on which SKUs are important to driving your business through difficult times.