The 80/20 Principle by Richard Koch is one of the most influential books in my library. The premise of the book, and the 80/20 principle, is that 20% of causes create 80% of effects. 20% of your actions create 80% of the results.
In other words, 20% of what you do matters a great deal, and 80% matters not at all.
The key is to identify which 20% of your efforts make a difference, and double-down on those activities.
The best part of 80/20 is that it is simple. With a few basic steps, you can identify massive opportunities for financial improvement in your beer business.
First, some quick background on what 80/20 is, and how it can be applied in your beer business.
The 80/20 rule, also known as the Pareto principle is the law of the vital few. This economic law says that for many events, roughly 80% of the effects come from 20% of the causes.
VIlfredo Pareto, an Italian economist, came up with this concept while studying the distribution of income and wealth among the population. For example, he found that 80% of the land was owned by 20% of the landowners, 80% of wealth was held by only 20% of the people, and so on. Wherever the 80/20 rule was applied it held true.
And that leads us to your beer business. The 80/20 rule works for landowners and wealth distribution, and it also works for your beer inventory portfolio.
Apply 80/20 Thinking to your Portfolio
Take this simple challenge. Run a report of your sales by SKU for the year to date, and sort them high to low. The 80/20 principle says that 20% of your SKUs will account for 80% of your sales. My guess is that this is true for your business.It is also possible that 10% or less of your SKUs account for 80% or more of your sales.
This begs the question – why are you carrying so many SKUs that do little to nothing for your sales and bottom line?
When we were in the wine business, we had over 2,000 SKUs in our warehouse. We would regularly run the 80/20 analysis and found that 5% of our wine SKUs made up 90% of our sales. Therefore, we were carrying about 1800 SKUs to make up less than 10% of our volume.
This was costing us tens of thousands of dollars a year in un-necessary inventory carrying costs.
Apply the 80/20 analysis to your inventory portfolio. Run sales reports by supplier, brand and SKU. Sort each one from high to low and do the math on how many of each one makes up 80% or more of the total sales.
80% of total supplier sales come from just 20% of that supplier’s brands. 80% of those same brand sales come from 20% of SKUs. The percentages may vary, but the unequal relationship between sales and products does not.
Take Action on the 80/20 Results
80/20 will identify huge opportunities to save money in your beer business. The question is: are you going to do anything with that information?
Running sales reports and identifying under-performing suppliers, brands and SKUs is just the first step. There’s a lot that goes into dropping a brand, and it’s not always an easy decision. However, it is a decision that needs to be made so that you can improve the financial results in your beer business.
To help make these tough decisions, take a look at the SKU Reduction Guide on the Beer Business Finance Resource page. The guide provides a blueprint to help reduce SKUs and improve inventory efficiency.
The 80/20 analysis will identify products that need to be dropped. The SKU Reduction Guide helps you take action, and reduce under-performing products.
Wrap Up + Action Items
The 80/20 principle can be applied to many aspects of your business: customers, suppliers, brands, SKUs, and even employees! The concept is simple and easy to apply, so long as you know where to start.
Run a sales report of SKUs and sort them high to low. Do the math and determine how many of your SKUs make up 80% of sales. Chances are, 20% or less of your SKUs make up 80% or more of your sales. Use this template as an example.
Read the SKU Reduction Guide and create a plan to take action on results of the 80/20 analysis.
Apply the lessons today so that you can save money on SKU carrying costs, improve the efficiency of your portfolio and your operations.