The Eighty –Twenty Rule Rocks

Learn about how to employ the 80-20 rule for the success of your business.

Many operations experts have long promoted that 80% of sales are made up of 20% of your products. However suppliers continue to proliferate styles, colors, sizes, models and features to presumably serve more customers and provide more features. There is even a book, “The Long Tail,” which promotes a theory that the internet provides a great opportunity to offer consumers almost unlimited variety and flexibility.

The flexibility rule is a myth and the 80-20 rule rocks in business, marketing and our personal lives. A Harvard Business Review article analyzed numerous business examples and found that virtually all products seldom increased profits by increasing offerings with little real impact. We waste time, money, inventory dollars and frequently add confusion by adding complexity.

The tough economy has produced a great opportunity to reduce proliferation of products that just aren’t producing. The selection of bands, products and colors in cosmetics is simply nuts and confuses the customer more than it helps. It took a crisis for GM to realize it did not need duplicate Buick, Pontiac and Oldsmobile products, models, dealers and advertising to basically sell the same car.   Have we really lost anything in the last few years without the endless proliferation of credit card offerings that no one needed?  No one wants to admit that much of the success of Costco is focusing on the best price for the things that sell rather than proliferating SKUs.

There are various ways to reduce SKUs, increase productivity and increase sales. These are all based on the premise of being in-stock on key items and maintaining low inventory on low volume items. While this applies to most businesses, it is not applicable to businesses that are based on serving diverse needs like parts suppliers or retailers featuring selection or niche markets. Some examples are below:

  • Several years ago when I was head of a leading moderate price dress shirt company, we simply halved our SKUs by consolidating sleeve length. We used to make separate 33 and 34 inch lengths and consolidated them into a 33/34 length which was actually a 34 inch length.  The results were spectacular. Returns went down because people didn’t really know their size and bought them too small.  Sales went up because we and the retailers were more in stock. Retailers also used some of the inventory reduction to buy more styles and colors which further increased sales and of course we reduced inventory and markdowns at all stages of the logistics chain.
  • Nordstrom’s has taken this one step further by consolidating all of their on-line and in-store inventory in one system. The stores stock all the key items, sizes and colors but allow the customers to order online or from other stores with 1-2 day delivery if they are out of stock.