Another workday comes to an end in the division materiel management center. Lieutenant Will Support, the assistant class IX (repair parts) manager, packs his things to head home. As he rises from his chair, he is ambushed by Major Less Minute, who announces, "The DISCOM [division support command] commander wants to know the class IX budget expenditures for the past year-give me an answer first thing tomorrow morning." For some lieutenants, such a task would be almost impossible. Lieutenant Support, however, remembers the Pareto principle, or 80-20 rule, which states that 20 percent of the repair parts normally account for 80 percent of the total inventory value. He feels confident that an 80 percent solution will be sufficient.
Lieutenant Support recalls the steps for ABC analysis according to the Pareto principle (see chart below). He obtains data from the integrated logistics analysis program, extracting the top 25 cost drivers, their national stock numbers (NSN's), and their total number of demands for the year. He then builds a spreadsheet based on the steps for ABC analysis. Lieutenant Support discovers that 9 out of the top 25 NSN's (36 percent) account for over 75 percent of the total annual dollar expenditures. In just minutes, he has an answer for the DISCOM commander.
Pareto Background
In 1950, in The Quality Control Handbook, J.M. Juran first recognized the applicability of the Pareto principle to many fields. While studying quality defects in manufacturing, Juran found that, when he listed all of the possible defects by order of frequency, relatively few accounted for the bulk of the defects. This observation led to his coining the phrase, "the rule of the vital few and the trivial many." This phenomenon was similar to the social and economic theories of Italian economist Vilfredo Pareto at the turn of the century. Pareto observed an unequal distribution of wealth and power in a relatively small number of the total population. While Vilfredo Pareto's research was social and economic in nature, Juran applied the same universal theory to the management arena-now generalized as "the 80-20 rule." As a credit to Pareto's work, Juran named his research the Pareto principle.
The 80-20 rule proposes that usually 20 percent of the study population accounts for 80 percent of the measure under consideration. This universal rule is an effective management tool that produces valuable information in simple terms.
The Logistician and Pareto
The current Army focus is on maintaining readiness while rapidly changing the force structure and preparing for the 21st century. Reductions in inventory, decreases in repair times, and increases in mission requirements push managers to continually search for proven management tools. The following scenarios highlight the universal qualities of the Pareto principle that logisticians can apply in everyday situations.
A warehouse example. Denials are a constant concern for most warehouses. A denial occurs when a part is on hand according to documentation but cannot be located. The logistician begins causative research, recording the reasons for each denial's occurrence. As the study proceeds, a Pareto chart is developed to identify the reasons for denials and their frequency. The chart reveals that "keypunch error" is the explanation for the greatest number of denials. This justifies establishment of a training program on the correct procedures for entering automated receipt documents. Regardless of current procedures, personnel experience and training, or type of equipment used, Pareto analysis reveals systemic problems, their causes, and effects.
A transportation example. The transportation company commander for a main support battalion of a heavy division DISCOM is responsible for the division's direct support transportation assets. With over 100 vehicles to maintain, it is difficult to intensely manage every vehicle in the entire fleet. By performing a mission analysis, the commander finds that a mere 15 percent of the fleet (the M911 heavy equipment transporters that move Bradley fighting vehicles and M1 tanks to gunnery) performs as much as 90 percent of mission support. With this information, the commander can "work smarter and not harder" in focusing unit supply and maintenance activities on the critical vehicles of the fleet.
A class IX example. Major engine assemblies and components of combat systems and major end items normally fall into groups A and B (see chart below). These items are managed at the warehouse supervisor level in the DISCOM. Knowledge of items in groups A and B helps supervisors make decisions on security of parts, stockage quantities, reorder points, and requisition tracking. However, there is a tendency to neglect low-cost parts that, for no other reason, would be in group C. Some group C candidates may complement a group A or B item, which increases their importance far more than their cost (for example, some nuts and bolts associated with a major component). Although many of these low-cost parts are easily fabricated, a more proactive management system minimizes the distractions and increases the productivity of the fabrication section.
Pervasive Pareto
Managers and logisticians alike recognize the Pareto principle as a viable technique to identify problems, prioritize issues, and help optimize systems. The Pareto principle is a tool that can effectively communicate the bottom line at any level, from section leaders to DISCOM commanders. It has application from the micro to the macro level.
The Pareto principle does, however, have its limits. Concentrating on the 20 percent that are the "vital few" today will allow decisions to be made today. As logisticians know, the automated environment of the logistics world requires intense daily management. A caveat to logisticians: The Pareto principle does not have a "magic" breakpoint at the 80-20 line but is simply a rule of thumb. Additionally, all 80 percent of the "trivial many" should not be disregarded. When taking action based on the Pareto principle, it should be remembered that some of today's "trivial many" may be part of tomorrow's "vital few."
In the meantime, logisticians should add the Pareto principle to their box of management tools. They should become accustomed to thinking with the whole system in mind, across functional boundaries, and not just in their own discipline or field. The Pareto analysis is a communication tool that can emphasize disparity, provoke a decision, and trigger action. Most importantly, the Pareto principle can help mold logistics processes into flexible and efficient systems ready to support the 21st century force.
Captain Vincent R. Lindenmeyer is a student in the Army Logistics Management College's Combined Logistics Officer Advanced Course. An Ordnance Corps officer, Captain Lindenmeyer has a bachelor's degree in systems engineering from the United States Military Academy and a master's degree in logistics management from the University of Central Texas in Killeen.