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The 80/20 Rule in Operations Management and Inventory Management

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Operations management in eCommerce refers to what goes on behind the scenes to make an eCommerce company successful. A big part of operations management is inventory management, which is an essential part of running a profitable business. 

Effectively managing your inventory means having a good grasp on what items are in your inventory and how they should be stocked going forward. The 80-20 rule in inventory management can give insight into what products are in demand and which are delivering the most profitability.

What is the 80/20 Inventory Rule?

The Pareto Principle is a well-known concept that states that approximately 80 percent of results come from 20 percent of causes. There are many possible applications of this principle in the business world. 

In eCommerce inventory management, the 80/20 rule shows that 20 percent of a company’s inventory generates 80 percent of sales. If you apply this rule to your current inventory, the next step is to determine what products are in the 20 percent that are generating most of the sales or profits. Shelves should be stocked with these products at all times. 

Deciding What to Do with Lower Performing Inventory

Clearly, eCommerce businesses need to increase the on-hand stock of items that fall in the 20 percent range of what is considered high-performing inventory. At the same time, decisions have to be made about how to manage inventory that may not be performing as well.

For products that aren’t in the 20 percent that are most profitable, consider those that are in the middle of the range and think about what needs to change to make these items more appealing to clients. Those that have been identified as the least effective performers may need better marketing or may need to be replaced with different products.

What Are Some 80/20 Rule Examples?

There are many examples of ways the 80-20 ratio may be applicable in the business world and in everyday life. Consider a few of them:

  • Staff – 20 percent of a company’s staff is generating 80 percent of the profits.
  • Clients – 80 percent of sales come from 20 percent of clients.
  • Wealth – 20 percent of the population possesses 80 percent of the wealth.
  • Complaints – 20 percent of your clients are responsible for 80 percent of complaints against your company. 
  • Accomplishments – 80 percent of your accomplishments happen during 20 percent of your invested time.
  • Web content – 80 percent of your web traffic is driven by 20 percent of your web content.
  • Projects – 20 percent of your work projects produce 80 percent of your stress.
  • Effort – 20 percent of effort leads to 80 percent of results.

The main thing to be learned from the 80/20 rule is to look for the smallest things that are producing the biggest results. Work toward eliminating the 80 percent that’s not producing the results you’re looking for, or look at what changes could make a difference.

Applying the 80/20 Rule to Operations Management Decisions

Decisions must be made in operations management that affect the future results of a company. Using the 80/20 rule can provide important insights into many aspects of your eCommerce business. It’s a powerful guideline that can help managers identify where success and profitability are coming from and what strategies may need to be revised. 

Analyze data and trends to find out the top 20 percent of categories such as best-selling products and sales that are improving. Are the items that are the top sellers the same as the items that are delivering the most profitability? Consider what items in the bottom 20 percent could be discontinued without creating a lot of client dissatisfaction.

Better Inventory Planning with the 80/20 Rule

When the 80/20 rule is applied to inventory, the insights gained can help you to fine-tune your inventory planning strategies and better align your decisions with the desires of your clients. This knowledge helps you to have a better idea of what items should be kept in stock.

Keep in mind that the 80/20 rule is a guideline but it’s not a guarantee. New products and services shouldn’t be discarded too quickly. Products that haven’t made it into the top 20 percent may still have the potential to generate profits somewhere down the line with the proper marketing on social media or other sources. 

Continuous Monitoring 

Using the 80/20 rule provides reliable timely data that can be used to improve profitability and reduce costs. Eliminating products that are selling poorly can reduce inventory held in warehouses and the costs associated with them.

Applying the 80/20 rule to operations and inventory decisions in eCommerce isn’t something that should be applied only once. Continuously monitor what products are boosting profits and what changes might lead to better results. Work to identify the 20 percent of business resources that are producing 80 percent of your results and focus most of your efforts on optimizing that 20 percent.

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About ShipHero

ShipHero is a US-based, leading solution provider in the fast growing eCommerce fulfillment space. ShipHero served over $5 billion of eCommerce orders in 2020 and is growing rapidly. ShipHero provides warehouse management software for brands that operate their own warehouses as well as outsourced fulfillment as a service from ShipHero owned and operated North American warehouses. Some notable customers include Universal Music Group, Glossier and Canadian Tire. ShipHero is a Shopify Plus partner and more than 10% of Shopify Plus stores globally use ShipHero.

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