What is the 80/20 rule, and why is it important in controlling inventor

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readerofbooks eNotes educator| Certified Educator

This is a great question. The 80/20 rule is also called the Pareto principle, named after the Italian economist Vilfredo Pareto, who made an observation about Italy that 20% of the people owned 80% of the land (1906).

Based on this insight, Jospeh M. Juran applied it to business in various ways. For example, 80% of your problems will come from 20% of your customers. In keeping with this principle, 80% of your profits will come from 20% of your customers as well. This number in business seems to up all the time.

When it comes to inventory, this can be a very helpful principle as well. If you have a store, generally speaking 80% of your profits will come from 20% of your products. So, you might want to have a broad array of things you are selling, as customers like to see variety.

However, when it comes to inventory, you do not need to keep a huge inventory of things in stock that people will not buy. So, you can use the Pareto principle again. You only need to have large amount of inventory only for that top-selling product, namely the 20%. For the rest of your products, you can be inventory light.