80/20 Principle and Kaizen, Continuous Improvement, Quality Management (Continuous Improvement Firm, CIF: Decision Making Tools, Waste Elimination)

Continuous Improvement Firm: Using 80/20 Principle

Eliminating Waste and Improving Quality

Executive summary by Vadim Kotelnikov. Main source of information: The 80/20 Principle and 80/20 Revolution, Richard Koch.

"80% of the results come from 20% of the causes. A few things are important; most are not." ~ Richard Koch

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80/20 Principle and Value Creation

The 80/20 Principle asserts that there is an inbuilt imbalance between inputs and outputs, causes and consequences, and effort and result. It states that a minority of causes, inputs or effort usually lead to a majority of the result, outputs or rewards.

A few things are important; most are not.

Business is wasteful. Some resources, be they people, factories, or machines, will produce very much less value relative to their cost than will other resources:

80% of the surplus is usually generated by 20% of employees;
80% of the value created is likely to be generated in 20% of time when, through a combination of circumstances, the employee is operating at his/her highest level of effectiveness.

Any corporation can raise the level of surplus by reducing the inequality of output and reward within the firm. You can do it by identifying the parts of the firm that generate the highest surpluses and reinforcing these, giving them more power and resources; and, conversely, reducing or stopping the expenditure on non-performing resources.

80/20 Principle and Quality Improvement

The 80/20 Principle was one of the 'vital few' inputs to the quality revolution which took place between 1950 and 1990. The observation that losses are always maldistributed in such as way that a small percentage of quality characteristics always contributes a high percentage of the quality loss encouraged quality practitioners to concentrate on diagnosis of the few defects causing most of the problems. According to the 80/20 Principle, effort should be focused on dealing with the 'vital few' sources of off-quality products, rather than tackle all the problems at once. If you remedy the most critical 20% of your quality gaps, you will realize 80% of the benefits.

Case in Point Ford Electronic Manufacturing Corp.

The 80/20 Principle is used in many corporate quality management programs. In Ford Electronic Manufacturing Corporation's quality program that won the Shingo prize, just-in-time programs have been applied using the 80/20 rule (80% of the value is spread over 20% of the volume) and top-dollar usages are analyzed constantly. "Labor and overhead performance were replaced by Manufacturing Cycle Time analysis by product line, reducing product cycle time by 95%."