Principle and Value Creation
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
A few things are important; most are not.
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
Principle and Quality Improvement
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
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%."