Practicing Pareto practically in the warehouse
Wednesday, October 28, 2015
One of the most useful rules in warehousing, as well as many other commercial activities, is the 80/20 rule. Other names for it are: "The Law of Trivial Many and Critical Few" or "Pareto's Law." The last of these definitions is used in this article.
Vilfredo Pareto was a sociologist and economist whose books were published early in the 20th century. He was a professor of political economy at the University of Lausanne in Switzerland. He taught that society, like physics, is a system of forces in equilibrium.
One of Pareto's earliest observations was the fact that 80 percent of the wealth in Italy lay in the hands of 20 percent of the population. Pareto's Law has been extended and applied to a substantial number of activities.
Pareto and inventory management
The most useful application of Pareto's Law for warehouse managers lies in the layout of the facility and the management of its inventory. It's nearly always true that 80 percent of warehouse activity is represented by 20 percent of the stock-keeping units (SKUs) in the building.
That means there is little excuse for asking the order picker to walk or ride past hundreds of slow-moving items in order to find a fast mover back in a corner of the warehouse. By storing the fast-moving items close to the warehouse doors, both the distance traveled and the time needed to pick orders are greatly reduced.
Repeated tests have shown that Pareto's Law really does work in nearly every inventory. In many cases, the rule is not 80/20 but 90/10, or an even more exaggerated concentration of activity.
In some warehouse operations, there is an overwhelming need to keep items stored in family groupings. For example, a building materials warehouse might store vinyl siding, ladders, plywood and pipe in the same area because all four of these items are typically packed in long bundles that are difficult to handle and store. By storing similarly shaped items together, there are clear gains in materials handling and storage efficiency.
Where family groupings seem necessary, the Pareto analysis should still be performed within that family. For example, within the SKUs of pipe stored in the building materials warehouse, isolate the fast-moving items.
In other inventory situations, it may not be necessary to separate by product family. In those cases, the Pareto analysis will reveal a group of fast movers that should be stored together.
Some warehousing professionals claim that concentrating on the fast movers will create congestion in order picking. Obviously this is possible, but it need not happen if the fast-moving items are laid out in such a way that they are easily accessed and stored in more than one location so order pickers are not waiting in line to get to a singular popular item.
Another fact to keep in mind is that popularity changes. A fast mover in January may be a slow mover in June, particularly if yours is an inventory of seasonal merchandise. Companies handling seasonal products may change the layout at different seasons to reflect the fact that the activity changes during the year.
In other inventories, the activity level may depend upon the age of the product. For example, automobile replacement parts have a bell-shaped demand curve. Parts for a 2015 model automobile move slowly for the first few years, since these vehicles have not yet worn to the point where parts need to be replaced.
The peak activity comes at the time when many components must be replaced because of normal wear or accidents. The demand decreases rapidly when the vehicle becomes so old that few cars of this vintage are still on the highways. Automotive specialists are usually able to accurately predict how this bell-shaped curve will function in their product line.
The world of fashion is less certain. Producers of ladies' garments know that only a few items will be hot sellers, but until a new fashion item is introduced, it is difficult to predict which garments will be in demand and which ones will die in the marketplace simply because they are not accepted by consumers.
This means that using Pareto as an inventory analysis tool is an active and constantly changing process. The roster of fast movers becomes more stable as time passes. Therefore, the Pareto analysis should be repeated on a regular and frequent basis, and the layout should be altered to reflect the changes which are discovered.
What causes errors
The 80/20 rule can be applied to many other activities besides layout and inventory management. Anyone who operates a warehouse must deal with errors, and typically these arise in either the receiving or the shipping process.
Furthermore, it is likely that about 20 percent of the employees make 80 percent of the errors, and that 80 percent of the errors will occur in 20 percent of the items stored. This happens because certain people are more error prone or some items are so poorly marked that they are often identified improperly.
By using Pareto analysis, management can discover those people and those items that cause the most errors. When the critical few are identified, it is usually easier to discover the root cause of the errors.
On the people side, the cause might be dyslexia or even illiteracy. On the item side, the problem may be the label design. When a root cause is discovered, corrective action should follow. Error-prone people should be assigned to other work, whereas mistakes and badly marked products can be labeled more effectively in the future.
When warehouse damage is analyzed, it is common for a similar concentration of occurrences to be discovered. Some products are more susceptible to damage, and the Pareto analysis will allow management to highlight those items that pose an unusual risk of mishap.
Some workers are more likely to have accidents. When a Pareto analysis has been completed, the accident-prone worker can be assigned to safer work or counseled regarding recent performance. Damage-prone products might benefit from improved packaging or a new and safer method of storing and shipping these items.
Carrier damage can be handled in a similar manner. However, in this case the Pareto analysis might turn the spotlight on the transportation company that shipped or delivered the damaged merchandise. When management discovers a concentration of damage in a few carriers, corrective action might include warning or eliminating certain carriers causing substantial damage.
Damage analysis should also include a survey of customers. On occasion, 80 percent of the product damage occurs with 20 percent of the customers receiving the freight. When the spotlight is turned on these critical few, some surprising facts may be revealed.
In one situation, a receiving manager was falsely claiming that damages that occurred within the warehouse were caused by inbound transportation. The receiving manager returned these damaged products to the inbound railroad, thus forcing carriers to pay for damage they had not caused.
The Pareto analysis had allowed the spotlight to be turned on one dishonest receiving manager, and then careful examination of the serial numbers of damaged products proved the fact that he was actually returning items different from those that had been on the inbound shipment to his distribution center.
On occasion, isolation of transportation damage may reveal the motor carrier must travel on rough pavements, or that a rail carrier always has damage in the same switching yard. Using this type of analysis makes it much easier to discover the root cause of the problem.
Pareto and human resources
The 80/20 rule may be used with those disciplinary problems that are part of managing people. An examination of tardiness and absenteeism will reveal such problems are concentrated with the critical few. When you recognize which employees represent the major source of the problem, corrective action is easier.
On-the-job injuries are a similar opportunity. When accident-prone people are identified, you sometimes also find other behavioral problems such as substance abuse.
When you highlight the few people who cause the greatest warehouse discipline problems, special attention can be given to either helping these people improve or encouraging them to change careers.
Pareto and profits
As marketing practices and cost accounting become more sophisticated, we can discover that some customers are more desirable than others, because they are easier to work with or because they generate more profits.
The Pareto analysis works here as well. If management learns one or more problem accounts generate a high percentage of the complaints and also produce a subnormal profit, a sensible reaction might be to stop selling to those difficult customers.
On the opposite extreme, some marketing managers fail to recognize those customers who are far more attractive than others, and then not give sufficient attention to giving the best possible service to preferred accounts. Without a continuing analysis of profit and growth, it is difficult to know which customers are most attractive.
The same principles also apply to suppliers. In our competitive marketplace, you should never have a supplier who cannot be replaced by another with a similar product. When an 80/20 analysis reveals that problems are concentrated with a few suppliers, turning the spotlight on those companies permits management to either correct the problem or find a substitute resource.
In this article, we offered several ways to use Pareto to turn the spotlight on problems or to concentrate efforts on improving those products, companies or people that are more desirable than the average.
By concentrating in the areas where greatest results can be achieved, warehouses can achieve maximum results with minimal effort. The key to doing this lies in the analysis necessary to discover which 20 percent represents the 80 percent opportunity.
- How COVID-19 might affect the commercial real estate market
- Understanding the costs of warehousing
- Steel-toe or composite-toe work shoes: Which should you choose?
- Why and how to prepare a warehouse operations manual
- How to implement a 5S system at your facility
- Knight shines bright in trucking industry
- The critical importance of warehouse floors
- Studies: Long hours, shift work can be detrimental to health
- How 3D architectural rendering services can boost your design business
- US employers add 4.8 million jobs in June; jobless rate drops to 11.1%
- Customer communication guides small business reopenings amid COVID-19
- Study: ED clinicians hesitant to prescribe buprenorphine for treating opioid dependency
- How employers are helping employees reduce student loan debt
See your work in future editions
Your content, Your Expertise,
Your Industry Needs YOUR Expert Voice & We've got the platform you needFind Out How