Page 30 - Logistics News - September October 2023

T HE P A R E T O P R INC IP L E

The Pareto Principle

in the warehouse

Contributed by Fortna, www.fortna.com

The Pareto Principle, or the 80/20 rule, has helped distribution organisations better understand
inventory needs, optimise resource allocations and determine the automation solutions needed to

grow and scale operations.

n 1896, a French economist, Vilfredo Pareto, published a Classifying inventory
textbook that contained a concept he named the Pareto Another step to take before using the Pareto Principle
IDistribution, which examined the distribution of wealth in is classifying inventory. This step can help gain critical
Paris, France. Over a hundred years later, this concept has insights into demand, value and velocity. A broad spectrum
been adapted to modern times and is better known as the of factors can be used in the classification, such as item
Pareto Principle or the 80/20 rule. It is a statistical model priority, storage needs and cost per order.
that suggests that 80 percent of all outcomes come from
20 percent of the effort. Inventory classification types:
• ABC classification. This method assigns a value or an
Across the distribution landscape, this principle can importance level to SKUs, with the most valuable inventory
be applied to many segments, including inventory, order as A, the next level as B and the least valuable as C.
fulfilment and the allocation of resources. Here, we will • XYZ classification. Like the ABC method, this system
examine how the principle relates to warehouse processes classifies inventory into three tiers based on their demand
and design, the operational data needed and how to apply variability, with the X tier being the most variable demand,
the principle to optimise inventory and operations. Y being the next level and Z being the least variable
demand.
Gathering data • FSN classification. This classification method values
Before applying the Pareto Principle, gathering and the rate at which SKUs are consumed. They are placed
analysing warehouse performance data is essential. in three categories: fast-moving (F), slow-moving (S) and
Warehouse-driven key performance indicators (KPIs) to non-moving (N).
consider include: • HML classification. This method places its emphasis on
• Order fulfilment time. the monetary cost of the SKU: high value (H), medium
• Order accuracy rate. value (M) and low value (L).
• SKU velocity.
• Inventory turns. The Pareto Principle lends itself to any inventory
• Stockouts. classification method; however, it will be up to the operation
• Delivery lead times. to set the priorities and objectives that are the best fit.

Knowing these KPIs will allow an organisation to analyse Applying the Pareto Principle to drive
data, make data-backed business decisions and assist productivity
in conducting a Pareto Principle analysis. A warehouse In our example, we will use the FSN inventory classification
management system (WMS) or warehouse execution to determine the SKUs that fall into each category, then
system (WES) can help analyse and visualise real-time data, leverage the operational KPIs to recognise the top 20
anticipate fluctuations in demand and identify inventory percent of total SKUs. By prioritising these fast-moving
trends. SKUs and understanding their demand patterns and

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