Using the 80-20 Rule for Warehouse Management

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Using the 80-20 Rule for Warehouse Management

Most warehouse people would have heard of the 80-20 rule. Vilfredo Pareto, an Italian economist, once noted that 20% of the pea pods in his garden contained 80% of the peas. From this he developed the 80-20 rule. He then used this to show that 20% of the people in Italy owned 80% of the land. Experts in other fields also observed that this principle applied to their areas of expertise as well. Today it's recognised that this principle has a broader application beyond economics and garden peas.

80-20 rule for warehouse management

 

What does 80-20 mean?

In general terms, it means that in a population of people or things that have some common characteristic, 20% of the population will exhibit 80% of that characteristic. In your warehouse for example, 20% of your SKUs use up 80% of the available space while the remaining 80% of your SKUs use up the remaining 20% of the warehouse space.
 
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How does 80-20 apply to warehouse management?

This rule applies to virtually every aspect of warehouse management, from the basic elements (the 20 percent) of design and layout to the most sophisticated and complex (the 80 percent) inventory control and retrieval. The 20-80 rule applies to all six steps in the production process: receiving merchandise, put-away, storage, picking, packing, and shipping. 

Optimising pick operation

The 80-20 rule can also be used to optimise your picking operation by noting that 20% of your SKUs account for 80% of your orders. Therefore, this top 20% should be grouped together and positioned close to the packing station. They should also be placed on shelves at a convenient height for the pickers.

Improving supply chain flow

In the majority of cases, 20% of the product will account for 80% of the warehouse space. By identifying this group of items, managers can improve the layout of the entire warehouse by making room for the most essential inventory in an efficient way.
 
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Prioritising customers

Sometimes a warehouse or distribution center may not have the resources to fulfill all the orders on time. In this case, you should give top priority to the 20% of the customers who are responsible for 80% of your revenue generation.

Order and inventory management

This rule also provides guidance to the inventory manager on which SKUs he should focus the most attention. He should make great efforts to ensure that the 20% of SKUs that are responsible for 80% of revenue generation are always in stock. He might want to avoid ordering these SKUs from the 20% of his suppliers who are responsible for 80% of the late vendor shipments.
 
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As you can see, the 80-20 rule has wide application in warehouse management. It tells you where to place your focus. However, care must be exercised when using it. If you only have a few customers, suppliers, or SKUs, the 80-20 rule can't be used because the "sample size" you are working with is too small. This rule works best when you are dealing with large quantities of orders, customers, SKUs, suppliers, and so forth.
 
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